File Nos. 33-50174
811-7060
=========================================================++=====================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 7 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 12 [X]
(Check appropriate box or boxes.)
COVA VARIABLE ANNUITY ACCOUNT FIVE
___________________________________
(Exact Name of Registrant)
COVA FINANCIAL LIFE INSURANCE COMPANY
______________________________________
(Name of Depositor)
4100 Newport Place Drive, Suite 840, Newport Beach, CA 92600
_____________________________________________________ _____
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (800) 831-5433
______________
Name and Address of Agent for Service
Lorry J. Stensrud, President
Cova Financial Life Insurance Company
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
(800) 831-5433
Copies to:
Judith A. Hasenauer and Frances S. Cook
Blazzard, Grodd & Hasenauer, P.C. First Vice President and Associate
943 Post Road East Counsel
P.O. Box 5108 Cova Financial Life Insurance
Westport, CT 06881 Company
(203) 226-7866 One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
It is proposed that this filing will become effective:
__X__ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on (date) pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following:
_____ This Post-Effective Amendment designates a new date for a
previously filed Post-Effective Amendment.
Title of Securities Registered:
Individual Variable Annuity Contracts
EXPLANATORY NOTE
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This Registration Statement contains fourteen Portfolios of Cova Series Trust;
one Portfolio of Lord Abbett Series Fund, Inc.; one Portfolio of General
American Capital Company; three Portfolios of AIM Variable Insurance Funds; two
Portfolios of Variable Insurance Products Fund, one Portfolio of Variable
Insurance Products Fund II; two Portfolios of Variable Insurance Products Fund
III; seven Portfolios of MFS Variable Insurance Trust; two Portfolios of
Alliance Variable Products Series Fund, Inc.; four Portfolios of Investors Fund
Series; one Portfolio of Liberty Variable Investment Trust; and five Portfolios
of Oppenheimer Variable Account Funds. Different versions of the Prospectus will
be created from this Registration Statement. The only difference between the
versions of the Prospectuses created from this Registration Statement will be
the underlying funds available. The distribution system for each version of the
Prospectus is different. These Prospectuses will be filed with the Commission
pursuant to Rule 497 under the Securities Act of 1933. The Registrant undertakes
to update the Explanatory Note, as needed, each time a Post-Effective Amendment
is filed.
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CROSS REFERENCE SHEET
(required by Rule 495)
Item No. Location
- -------- --------------------------------
PART A
Item 1. Cover Page . . . . . . . . . . . . . . Cover Page
Item 2. Definitions . . . . . . . . . . . . . Index of Special Terms
Item 3. Synopsis . . . . . . . . . . . . . . . Profile
Item 4. Condensed Financial Information . . . Appendix A
Item 5. General Description of Registrant,
Depositor, and Portfolio Companies . . Other Information - Cova; The
Separate Account;
Investment Options
Item 6. Deductions and Expenses. . . . . . . . Expenses
Item 7. General Description of Variable
Annuity Contracts. . . . . . . . . . . The Fixed and Variable Annuity
Item 8. Annuity Period . . . . . . . . . . . . Income Phase
Item 9. Death Benefit. . . . . . . . . . . . . Death Benefit
Item 10. Purchases and Contract Value . . . . . Purchase
Item 11. Redemptions. . . . . . . . . . . . . . Access to Your Money
Item 12. Taxes. . . . . . . . . . . . . . . . . Taxes
Item 13. Legal Proceedings. . . . . . . . . . . None
Item 14. Table of Contents of the Statement of
Additional Information . . . . . . . . Table of Contents of the
Statement of Additional
Information
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CROSS REFERENCE SHEET
(required by Rule 495)
Item No. Location
- -------- -----------------------
PART B
Item 15. Cover Page . . . . . . . . . . . . . . Cover Page
Item 16. Table of Contents. . . . . . . . . . . Table of Contents
Item 17. General Information and History. . . . Company
Item 18. Services . . . . . . . . . . . . . . . Not Applicable
Item 19. Purchase of Securities Being Offered . Not Applicable
Item 20. Underwriters . . . . . . . . . . . . . Distribution
Item 21. Calculation of Performance Data. . . . Performance Information
Item 22. Annuity Payments . . . . . . . . . . . Annuity Provisions
Item 23. Financial Statements . . . . . . . . . Financial Statements
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PART C
Information required to be included in Part C is set forth under the appropriate
Item so numbered in Part C to this Registration Statement.
PART A
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 44 investment choices - a fixed account which offers an
interest rate which is guaranteed by Cova, and 43 investment portfolios listed
below. You can put your money in the fixed account and/or any of these
investment portfolios (except as noted).
AIM VARIABLE INSURANCE FUNDS, INC.:
MANAGED BY A I M ADVISORS, INC.
AIM V.I. Capital Appreciation
AIM V.I. International Equity
AIM V.I. Value
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.:
MANAGED BY ALLIANCE CAPITAL MANAGEMENT L.P.
Premier Growth
Real Estate Investment
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)
Mid-Cap Value
Large Cap Research
Developing Growth
Lord Abbett Growth and Income
GENERAL AMERICAN CAPITAL COMPANY:
MANAGED BY CONNING ASSET MANAGEMENT COMPANY
Money Market
INVESTORS FUND SERIES:
MANAGED BY SCUDDER KEMPER INVESTMENTS, INC.
Kemper Small Cap Value
Kemper Government Securities
Kemper Small Cap Growth
MANAGED BY DREMAN VALUE MANAGEMENT, L.L.C.
Kemper-Dreman High Return Equity
LIBERTY VARIABLE INVESTMENT TRUST:
MANAGED BY NEWPORT FUND MANAGEMENT INC.
Newport Tiger, Variable Series
LORD ABBETT SERIES FUND, INC.:
MANAGED BY LORD, ABBETT & CO.
Growth and Income
MFS VARIABLE INSURANCE TRUST
MANAGED BY MASSACHUSETTS FINANCIAL SERVICES COMPANY
MFS Emerging Growth
MFS Research
MFS Growth With Income
MFS High Income
MFS World Governments
MFS/Foreign & Colonial Emerging Markets Equity
MFS Bond
OPPENHEIMER VARIABLE ACCOUNT FUNDS:
MANAGED BY OPPENHEIMERFUNDS, INC.
Oppenheimer High Income
Oppenheimer Bond
Oppenheimer Growth
Oppenheimer Growth & Income
Oppenheimer Strategic Bond
VARIABLE INSURANCE PRODUCTS FUND:
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
VIP Growth
VIP Equity-Income
VARIABLE INSURANCE PRODUCTS FUND II:
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
VIP II Contrafund
VARIABLE INSURANCE PRODUCTS FUND III:
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
VIP III Growth & Income
VIP III Growth Opportunities
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 __, 1998.
The SAI has been filed with the Securities and Exchange Commission (SEC)
and is legally a part of the prospectus. The SEC maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated by reference,
and other information regarding registrants that file electronically with the
SEC. The Table of Contents of the SAI is on Page __ of this prospectus.
For a free copy of the SAI, call us at (800) 523-1661 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 __, 1998
TABLE OF CONTENTS
PAGE
INDEX OF SPECIAL TERMS
SUMMARY
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
AIM Variable Insurance Funds, Inc.
Alliance Variable Products Series Fund, Inc.
Cova Series Trust
General American Capital Company
Investors Fund Series
Liberty Variable Investment Trust
Lord Abbett Series Fund, Inc.
MFS Variable Insurance Trust
Oppenheimer Variable Account Funds
Variable Insurance Products Fund
Variable Insurance Products Fund II
Variable Insurance Products Fund III
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
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
SUMMARY
THE SECTIONS IN THIS SUMMARY CORRESPOND TO SECTIONS IN THIS PROSPECTUS WHICH
DISCUSS THE TOPICS IN MORE DETAIL.
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 43 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. 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 43 investment portfolios which are listed 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 (except as noted)
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. 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 $500 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:
AIM VARIABLE INSURANCE FUNDS INC.:
MANAGED BY A I M ADVISORS, INC.
AIM V.I. Capital Appreciation
AIM V.I. International Equity
AIM V.I. Value
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.:
MANAGED BY ALLIANCE CAPITAL MANAGEMENT L.P.
Premier Growth Portfolio
Real Estate Investment Portfolio
COVA SERIES TRUST:
MANAGED BY J.P. MORGAN
INVESTMENT MANAGEMENT INC.:
Select Equity
Small Cap Stock
International Equity
Quality Bond
Large Cap Stock
MANAGED BY LORD, ABBETT & CO.:
Bond Debenture (a "high yield" portfolio under
California insurance regulations)
Mid-Cap Value
Large Cap Research
Developing Growth
Lord Abbett Growth and Income
MANAGED BY VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.:
VKAC Growth and Income
Money Market
Quality Income
Stock Index
GENERAL AMERICAN CAPITAL
COMPANY:
MANAGED BY CONNING
ASSET MANAGEMENT COMPANY
Money Market
INVESTORS FUND SERIES:
MANAGED BY SCUDDER KEMPER INVESTMENTS, INC.
Kemper Small Cap Value
Kemper Government Securities
Kemper Small Cap Growth
MANAGED BY DREMAN VALUE MANAGEMENT, L.L.C.
Kemper-Dreman High Return Equity
LORD ABBETT SERIES FUND, INC.:
MANAGED BY LORD, ABBETT & CO.:
Growth and Income
LIBERTY VARIABLE INVESTMENT TRUST:
MANAGED BY NEWPORT FUND MANAGEMENT INC.
Newport Tiger, Variable Series
MFS VARIABLE INSURANCE TRUST:
MANAGED BY MASSACHUSETTS FINANCIAL SERVICES COMPANY
MFS Emerging Growth
MFS Research
MFS Growth With Income
MFS High Income
MFS World Governments
MFS/Foreign & Colonial Emerging Markets Equity
MFS Bond
OPPENHEIMER VARIABLE ACCOUNT FUNDS:
MANAGED BY OPPENHEIMERFUNDS, INC.
Oppenheimer High Income
Oppenheimer Bond
Oppenheimer Growth
Oppenheimer Growth & Income
Oppenheimer Strategic Bond
VARIABLE INSURANCE PRODUCTS FUND:
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
VIP Growth
VIP Equity-Income
VARIABLE INSURANCE PRODUCTS FUND II:
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
VIP II Contrafund
VARIABLE INSURANCE PRODUCTS FUND III:
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
VIP III Growth Opportunities
VIP III Growth & Income
(VIP, VIP II and VIP III refer to Variable Insurance Products Fund,
Variable Insurance Products Fund II and Variable Insurance Products
Fund III, respectively.)
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 fee from your contract. During the
accumulation phase, 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.
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,
if applicable, which ranges from 0%-4% depending upon the state.
There are also investment charges which currently range from .11% to 1.50% of
the average daily value of the investment portfolio depending upon the
investment portfolio.
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 provides
performance information in Appendix B and the SAI. Past performance is not a
guarantee of future results.
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.
10. OTHER INFORMATION.
Free Look. If you cancel the contract within 10 days after receiving it
(or, in the state of California, 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 reserve the right to
put your money in the Money Market Fund 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.
You can arrange to 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
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)
Mortality and Expense Risk Premium 1.25%
Administrative Expense Charge .15%
_____
TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES 1.40%
INVESTMENT PORTFOLIO EXPENSES
(as a percentage of the average daily net assets of an investment portfolio)
<TABLE>
<CAPTION>
Other Expenses
(after expense
reimbursement for Total Annual
Management 12b-1 certain Portfolios) Portfolio
Fees Fees Expenses
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COVA SERIES TRUST(a)
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)
Mid-Cap Value(b) 1.00% -- .10% 1.10%
Large Cap Research(b) 1.00% -- .10% 1.10%
Developing Growth(b) .90% -- .10% 1.00%
Lord Abbett Growth and Income(c) .65% -- .10% .75%
Managed By Van Kampen American
Capital Investment Advisory Corp.
VKAC Growth and Income .60% -- .10% .70%
Money Market(d) .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(e) .50% .15% .02% .67%
GENERAL AMERICAN CAPITAL COMPANY
Managed by Conning Asset
Management Company
Money Market .125% -- .08% .205%
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
VARIABLE INSURANCE PRODUCTS FUND III
Managed by Fidelity Management &
Research Company
VIP III Growth Opportunities(f) .61% -- .16% .77%
VIP Growth(f) .61% -- .08% .69%
VIP III Growth & Income .50% -- .50% 1.00%
VIP Equity-Income(f) .51% -- .07% .58%
VIP II Contrafund(f) .61% -- .13% .74%
AIM VARIABLE INSURANCE FUNDS, INC.
Managed by A I M Advisors, Inc.
AIM V.I. Capital Appreciation (g) .63% -- .05% .68%
AIM V.I. International Equity (g) .75% -- .18% .93%
AIM V.I. Value (g) .62% -- .08% .70%
MFS VARIABLE INSURANCE TRUST
Managed by Massachusetts Financial Services
Company
MFS Emerging Growth .75% -- .12% .87%
MFS Research .75% -- .13% .88%
MFS Growth With Income(h) .75% -- .25% 1.00%
MFS High Income(h) .75% -- .25% 1.00%
MFS World Governments(h) .75% -- .25% 1.00%
MFS/Foreign & Colonial Emerging
Markets Equity(h) 1.25% -- .25% 1.50%
MFS Bond (h) .60% -- .40% 1.00%
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Managed by Alliance Capital Management L.P.
Premier Growth (i) 1.00% -- .08% 1.08%
Real Estate Investment (j)(k) 0% -- .95% .95%
INVESTORS FUND SERIES
Managed by Scudder Kemper Investments, Inc.
Kemper Small Cap Value .75% -- .09% .84%
Kemper Government Securities .55% -- .09% .64%
Kemper Small Cap Growth .65% -- .06% .71%
Managed by Dreman Value Management, L.L.C.
Kemper-Dreman High Return Equity (l) .75% -- .12% .87%
LIBERTY VARIABLE INVESTMENT TRUST
Managed by Newport Fund Management Inc.
Newport Tiger, Variable Series .90% -- .37% 1.27%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Managed by OppenheimerFunds, Inc.
Oppenheimer High Income .75% -- .07% .82%
Oppenheimer Bond .73% -- .05% .78%
Oppenheimer Growth .73% -- .02% .75%
Oppenheimer Growth & Income .75% -- .08% .83%
Oppenheimer Strategic Bond .75% -- .08% .83%
<FN>
(a) 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, 1997 would have been .70% for the Quality Income
Portfolio , .68% for the Money Market Portfolio, .69% for the Stock Index
Portfolio, .88% for the VKAC Growth and Income Portfolio, 1.00% for the Select
Equity Portfolio, 1.39% for the Small Cap Stock Portfolio, 1.53% for the
International Equity Portfolio, 1.08% for the Quality Bond Portfolio, 1.08%
for the Large Cap Stock Portfolio, 1.07% for the Bond Debenture Portfolio,
8.41% for the Mid-Cap Value Portfolio, 10.04% for the Large Cap Research
Portfolio and 9.00% for the Developing Growth Portfolio.
(b) Annualized. The Portfolio commenced regular investment operations on
August 20, 1997.
(c) Estimated. The Portfolio has not commenced investment operations yet.
(d) 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.
(e) 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. For the year ending December 31, 1998, the
12b-1 plan fees are estimated to be .15%. The examples below for this Portfolio
reflect the estimated 12b-1 fees.
(f) A portion of the brokerage commissions that certain funds pay was used
to reduce fund expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses presented in
the table would have been .56% for VIP Equity-Income Portfolio, .67% for VIP
Growth Portfolio,.71% for VIP II Contrafund Portfolio and .76% for VIP III
Growth Opportunities Portfolio.
(g) A I M Advisors, Inc. ("AIM") may from time to time voluntarily
waive or reduce its respective fees. Effective May 1, 1998, the Funds reimburse
A I M in an amount up to 0.25% of the average net asset value of each
Fund, for expenses incurred in providing or assuring that participating
insurance companies provide, certain administrative services. Currently
the fee only applies to the average net asset value of each Fund in excess
of the net asset value of each fund as calculated on April 30, 1998.
(h) The adviser has agreed to bear expenses for the Series, subject to
reimbursement by the Series, so that the Series' "Other Expenses" do not
exceed .25% (.40% with respect to the MFS Bond Series) annually. Absent such
reimbursement, "Total Annual Portfolio Expenses" would be: 1.10% for the MFS
Growth With Income Series; 1.15% for the MFS High Income Series and the MFS
World Governments Series; 3.58% for the MFS Bond Series and are estimated to
be 5.92% for the MFS/Foreign & Colonial Emerging Markets Equity Series.
(i) The adviser to the Fund discontinued the expense reimbursement with
respect to the Premier Growth Portfolio effective May 1, 1998.
(j) The expenses shown with respect to the Real Estate Investment Portfolio
are net of voluntary reimbursements. Expenses have been capped at .95% annually
and the adviser to the Fund intends to continue such reimbursements for the
foreseeable future. The estimated expenses for the Real Estate Investment
Portfolio, before reimbursement, are: .90% management fees and 1.41% for other
expenses.
(k) Annualized.
(l) Other Expenses have been estimated for the first year.
</FN>
</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> <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 (a) $169.99 (a) $266.24
(b) $23.80 (b) $ 73.16 (b) $124.99 (b) $266.24
Large Cap Stock (a) $72.80 (a) $115.15 (a) $164.95 (b) $256.13
(b) $22.80 (b) $ 70.15 (b) $119.95 (b) $256.13
Small Cap Stock (a) $74.80 (a) $121.17 (a) $175.00 (a) $276.23
(b) $24.80 (b) $ 76.17 (b) $130.00 (b) $276.23
International Equity (a) $74.80 (a) $121.17 (a) $175.00 (a) $276.23
(b) $24.80 (b) $ 76.17 (b) $130.00 (b) $276.23
Quality Bond (a) $71.79 (a) $112.12 (a) $159.89 (a) $245.92
(b) $21.79 (b) $ 67.12 (b) $114.89 (b) $245.92
Managed by Lord, Abbett & Co.
Bond Debenture (a "high yield"
portfolio under California (a) $73.80 (a) $118.16 (a) $169.99 (a) $266.24
insurance regulations) (b) $23.80 (b) $ 73.16 (b) $124.99 (b) $266.24
Mid-Cap Value (a) $76.30 (a) $125.66
(b) $26.30 (a) $ 80.66
Large Cap Research (a) $76.30 (a) $125.66
(b) $26.30 (b) $ 80.66
Developing Growth (a) $75.30 (a) $122.67
(b) $25.30 (b) $ 77.67
Lord Abbett Growth and Income (a) $72.80 (a) $115.15
(b) $22.80 (b) $ 70.15
Managed By Van Kampen American
Capital Investment Advisory Corp.
VKAC Growth and 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) $71.99 (a) $112.73 (a) $160.90 (a) $247.97
(b) $21.99 (b) $ 67.73 (b) $115.90 (b) $247.97
GENERAL AMERICAN CAPITAL COMPANY
Managed by Conning Asset
Management Company
Money Market (a) $67.31 (a) $ 98.54 (a) $137.02 (a) $199.08
(b) $17.31 (b) $ 53.54 (b) $ 92.02 (b) $199.08
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
VARIABLE INSURANCE PRODUCTS FUND III
Managed by Fidelity Management &
Research Company
VIP III Growth Opportunities (a) $73.00 (a) $115.75
(b) $23.00 (b) $ 70.75
VIP Growth (a) $72.19 (a) $113.33
(b) $22.19 (b) $ 68.33
VIP III Growth & Income (a) $75.30 (a) $122.67
(b) $25.30 (b) $ 77.67
VIP Equity-Income (a) $71.09 (a) $110.00
(b) $21.09 (b) $ 65.00
VIP II Contrafund (a) $72.69 (a) $114.84
(b) $22.69 (b) $ 69.84
AIM VARIABLE INSURANCE FUNDS, INC.
Managed by A I M Advisors, Inc.
AIM V.I. Capital Appreciation (a) $72.09 (a) $113.03
(b) $22.09 (b) $ 68.03
AIM V.I. International Equity (a) $74.60 (a) $120.57
(b) $24.60 (b) $ 75.57
AIM V.I. Value (a) $72.29 (a) $113.63
(b) $22.29 (b) $ 68.63
MFS VARIABLE INSURANCE TRUST
Managed by Massachusetts Financial
Services Company
MFS Emerging Growth (a) $74.00 (a) $118.76
(b) $24.00 (b) $ 73.76
MFS Research (a) $74.10 (a) $119.07
(b) $24.10 (b) $ 74.07
MFS Growth With Income (a) $75.30 (a) $122.67
(b) $25.30 (b) $ 77.67
MFS High Income (a) $75.30 (a) $122.67
(b) $25.30 (b) $ 77.67
MFS World Governments (a) $75.30 (a) $122.67
(b) $25.30 (b) $ 77.67
MFS/Foreign & Colonial Emerging
Markets Equity (a) $80.29 (a) $137.54
(b) $30.29 (b) $ 92.54
MFS Bond (a) $75.30 (a) $122.67
(b) $25.30 (a) $ 77.67
ALLIANCE VARIABLE PRODUCTS SERIES FUND,
INC.
Managed by Alliance Capital
Management L.P.
Premier Growth (a)$76.10 (a)$125.06
(b)$26.10 (b)$ 80.06
Real Estate Investment (a)$74.80 (a)$121.17
(b)$24.80 (b)$ 76.17
INVESTORS FUND SERIES
Managed by Scudder Kemper
Investments, Inc.
Kemper Small Cap Value (a)$73.70 (a)$117.86
(b)$23.70 (b)$ 72.86
Kemper Government Securities (a)$71.69 (a)$111.82
(b)$21.69 (b)$ 66.82
Kemper Small Cap Growth (a)$72.39 (a)$113.94
(b)$22.39 (b)$ 68.94
Managed by Dreman Value Management, L.L.C.
Kemper-Dreman High Return Equity(a)$74.00 (a)$118.76
(b)$24.00 (b)$ 73.76
LIBERTY VARIABLE INVESTMENT TRUST
Managed by Newport Fund Management Inc.
Newport Tiger, Variable Series (a)$78.00 (a)$130.73
(b)$28.00 (b)$ 85.73
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Managed by OppenheimerFunds, Inc.
Oppenheimer High Income (a)$73.50 (a)$117.26
(b)$23.50 (b)$ 72.26
Oppenheimer Bond (a)$73.10 (a)$116.05
(b)$23.10 (b)$ 71.05
Oppenheimer Growth (a)$72.80 (a)$115.15
(b)$22.80 (b)$ 70.15
Oppenheimer Growth & Income (a)$73.60 (a)$117.56
(b)$23.60 (b)$ 72.56
Oppenheimer Strategic Bond (a)$73.60 (a)$117.56
(b)$23.60 (b)$ 72.56
</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 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. During the accumulation phase, 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. Premium taxes are not reflected. Premium taxes may apply depending on
the state where you live.
6. The assumed average contract size is $30,000.
7. 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 the
investment portfolios and, 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. 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 or any other annuity
option acceptable to Cova. 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 $500 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, in the state of California, 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 reserve the right to put your purchase payment in the Money
Market Fund of General American Capital Company for 15 days before we allocate
your first purchase payment to the investment portfolio(s) you have selected.
Currently, Cova directly allocates your purchase payment to the investment
portfolios and/or fixed account you select.
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 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 43 investment portfolios which are listed 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 Investment Advisory Corporation (Cova
Advisory), which is an affiliate 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 PORTFOLIOS:
Bond Debenture Portfolio (a "high yield" portfolio under California
insurance regulations)
Mid-Cap Value Portfolio
Large Cap Research Portfolio
Developing Growth Portfolio
Lord Abbett Growth and Income Portfolio
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. The following portfolio
managed by Lord, Abbett & Co. is available under the contract:
Growth and Income Portfolio
GENERAL AMERICAN CAPITAL COMPANY
General American Capital Company is a mutual fund with multiple portfolios. Each
portfolio is managed by Conning Asset Management Company. The following
portfolio is available under the contract:
Money Market Fund
VARIABLE INSURANCE PRODUCTS
VARIABLE INSURANCE PRODUCTS II
VARIABLE INSURANCE PRODUCTS FUND III
Variable Insurance Products Fund, Variable Insurance Products Fund II and
Variable Insurance Products Fund III are each a mutual fund with multiple
portfolios managed by Fidelity Management & Research Company. The
following portfolios are available under the contract:
Variable Insurance Products Fund:
VIP Growth Portfolio
VIP Equity-Income Portfolio
Variable Insurance Products Fund II:
VIP II Contrafund Portfolio
Variable Insurance Products Fund III:
VIP III Growth Opportunities Portfolio
VIP III Growth & Income Portfolio
AIM VARIABLE INSURANCE FUNDS, INC.
AIM Variable Insurance Funds, Inc. is a mutual fund with multiple portfolios. A
I M Advisors, Inc. is the investment adviser to each portfolio. The following
portfolios are available under the contract:
AIM V.I. Capital Appreciation Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
MFS VARIABLE INSURANCE TRUST
MFS Variable Insurance Trust is a mutual fund with multiple portfolios.
Massachusetts Financial Services Company is the investment adviser to each
portfolio. The following portfolios are available under the contract:
MFS Emerging Growth Series
MFS Research Series
MFS Growth With Income Series
MFS High Income Series
MFS World Governments Series
MFS/Foreign & Colonial Emerging Markets Equity Series
MFS Bond Series
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Alliance Variable Products Series Fund, Inc. is a mutual fund with multiple
portfolios. Alliance Capital Management L.P. is the investment adviser to
each portfolio. The following portfolios are available under the contract:
Premier Growth Portfolio
Real Estate Investment Portfolio
INVESTORS FUND SERIES
Investors Fund Series is a mutual fund with multiple portfolios. Scudder Kemper
Investments, Inc. (Scudder Kemper) is the investment manager for the Kemper
Government Securities Portfolio, the Kemper Small Cap Growth Portfolio and the
Kemper Small Cap Value Portfolio. Scudder Kemper, as investment manager, has
retained Dreman Value Management, L.L.C. to serve as sub-adviser for the Kemper-
Dreman High Return Equity Portfolio. The following portfolios are available
under the contract:
Kemper Small Cap Value Portfolio
Kemper Government Securities Portfolio
Kemper Small Cap Growth Portfolio
Kemper-Dreman High Return Equity Portfolio
LIBERTY VARIABLE INVESTMENT TRUST
Liberty Variable Investment Trust is a mutual fund with multiple portfolios.
Liberty Advisory Services Corp. (LASC) is the investment manager to the
Trust. LASC has engaged Newport Fund Management, Inc. as sub-adviser to
provide investment advice for the Newport Tiger, Variable Series. The
following portfolio is available under the contract:
Newport Tiger, Variable Series (a portfolio investing in equity securities of
companies located in certain countries of Asia).
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Variable Account Funds is a mutual fund with multiple portfolios.
OppenheimerFunds, Inc. is the investment adviser to each portfolio. The
following portfolios are available under the contract:
Oppenheimer High Income Fund
Oppenheimer Bond Fund
Oppenheimer Growth Fund
Oppenheimer Growth & Income Fund
Oppenheimer Strategic Bond Fund
Shares of the investment portfolios may be offered in connection with certain
variable annuity contracts and variable life insurance policies of various life
insurance companies which may or may not be affiliated with Cova. Certain
investment portfolios may also be sold directly to qualified plans. The funds do
not believe that offering their shares in this manner will be disadvantageous to
you.
Cova may enter into certain arrangements under which it is reimbursed by the
investment portfolios' advisors, distributors and/or affiliates for the
administrative services which it provides to the portfolios.
TRANSFERS
You can transfer money among the fixed account and the investment
portfolios.
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.
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.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a set
amount each month from the Money Market Fund 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 Dollar Cost Averaging
Program is available only during the accumulation phase.
The minimum amount which can be transferred each month is $500. You must have at
least $6,000 in the Money Market Fund or the fixed account, (or the amount
required to complete your program, if less) in order to participate in the
Dollar Cost Averaging Program.
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.
The Automatic Rebalancing Program is available only during the accumulation
phase. 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 21 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 when Cova becomes 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 cannot be increased.
Cova will not deduct this charge during the accumulation phase 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,
becomes 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 (confinement must begin after
the first contract anniversary) 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.
When you make a withdrawal, the amount of the death benefit may be reduced. See
Section 9. Death Benefits.
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.
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.
For periods starting prior to the date the contracts were first offered, the
performance will be based on the historical performance of the corresponding
investment portfolios for the periods commencing from the date on which the
particular investment portfolio was made available through the Separate Account.
In addition, for certain investment portfolios performance may be shown for the
period commencing from the inception date of the investment portfolio. These
figures should not be interpreted to reflect actual historical performance of
the Separate Account.
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. It is
divided into various parts, depending upon the type of performance information
shown. 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.
Beginning May 1, 1998, at the time you buy the contract, you can select Death
Benefit Option A or B. If no option is chosen on the forms provided by Cova
Option A will be your death benefit. If at the time you buy your contract, the
endorsements for Death Benefit Options A and B are not approved in your state,
Death Benefit Option D will be your death benefit until the death benefit
endorsements are approved. When both death benefit endorsements are approved,
you will be given an opportunity to choose between Option A or B. You will
have 60 days to make this selection. If you fail to make an election during
this time, your death benefit will automatically be enhanced to Death Benefit
Option B.
If you bought your contract before May 1, 1998, you will have a one time
election for a 60 day period, to choose Death Benefit Option B or C on your next
contract anniversary after May 1, 1998 (or for a 60 day period after both
endorsements are approved in your state). If you fail to make an election during
the 60 day period, your death benefit will automatically be enhanced to Death
Benefit Option B. If on May 1, 1998, you or the Joint Owner are age 80 or older,
you will be unaffected by the changes in death benefits. Death Benefit Option D
will continue to be your death benefit.
The death benefits are described below. If you have a Joint Owner, the death
benefit is determined based on the age of the oldest Joint Owner and the death
benefit is payable on the death of the first Joint Owner.
DEATH BENEFIT OPTION A:
Prior to you, or your joint owner, reaching age 80, the death benefit will be
the greatest of:
1 . Total 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 greatest adjusted contract value (GACV) (as explained below).
The GACV is evaluated at each contract anniversary prior to the date of your or
your joint owner's death, and on each day a purchase payment or withdrawal is
made. On the contract anniversary, if the current contract value is greater than
the GACV, the GACV will be increased to the current value of your contract. If a
purchase payment is made, the amount of the purchase payment will increase the
GACV. If a withdrawal is made, the GACV will be reduced by the sum of the amount
withdrawn (and any associated withdrawal charges) divided by the value of your
contract immediately before the withdrawal multiplied by the GACV immediately
prior to the withdrawal. The following example describes the effect of a
withdrawal on the GACV:
Example:
Assumed facts for example:
$ 10,000 current GACV
$ 8,000 contract value
$ $2,100 partial withdrawal ($ 2,000 withdrawal + $100 withdrawal charge)
New GACV = $10,000 - [($2,100 - $8,000) X $10,000]
which results in the current GACV of $10,000 being reduced by $2,625
The new GACV is $7,375.
After you, or your joint owner, reaches age 80, the death benefit will be the
greatest of:
1. Total purchase payments made, 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 greatest adjusted contract value (GACV) (as explained below).
The GACV is evaluated at each contract anniversary on or before your, or your
joint owner's, 80th birthday, and on each day a purchase payment or withdrawal
is made. On the contract anniversary on or before your, or your joint owner's,
80th birthday, if the current contract value is greater than the GACV, the GACV
will be increased to the current value of your contract. If a purchase payment
is made, the amount of the purchase payment will increase the GACV. If a
withdrawal is made, the example above explains the effect of a withdrawal on the
GACV.
DEATH BENEFIT OPTION B:
Prior to you, or your joint owner, reaching age 80, the death benefit will be
the greatest of:
1. Total purchase payments, less any withdrawals (and any withdrawal charges
paid on the withdrawals) accumulated at an annual rate of 4% 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 greatest of the values of your contract resulting from taking the
contract value on any five (5) year contract anniversary prior to your, or your
joint owner' death, plus any payments you made subsequent to that contract
anniversary, less any withdrawals (and any withdrawal charges paid on the
withdrawals) subsequent to that contract anniversary.
After you, or your joint owner, reaches age 80, the death benefit will be the
greatest of:
1. Total purchase payments made on or before your, or your joint owner's, 80th
birthday, less any withdrawals (and any withdrawal charges paid on the
withdrawals) accumulated at an annual rate of 4% until you, or your joint
owner, reach age 80 plus any subsequent purchase payments, less any
subsequent 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 greatest of the values of the contract resulting from taking the contract
value on any prior five (5) year contract anniversary on or before your or your
joint owner's 80th birthday, plus any purchase payments made after that contract
anniversary, less any withdrawals (and any withdrawal charges paid on the
withdrawals) made after that contract anniversary.
DEATH BENEFIT OPTION C:
Prior to you, or your joint owner, reaching age 80, the death benefit will be
the greatest of:
1. Total 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 greatest adjusted contract value (GACV) (as explained below).
The GACV is initially the death benefit determined as of the day Cova receives
notice that you have elected this death benefit option. This figure is based on
your existing death benefit as defined in your contract, Option D (not as
defined in the endorsement for this option). The GACV is then evaluated at each
subsequent contract anniversary prior to your or your joint owner's death and on
each subsequent day a purchase payment or withdrawal is made. On the contract
anniversary, if the current contract value is greater than the GACV, the GACV
will be increased to the current value of your contract. If a purchase payment
is made, the amount of the purchase payment will increase the GACV. If a
withdrawal is made, the GACV will be reduced by the amount withdrawn (and any
associated withdrawal charges) divided by the value of your contract immediately
before the withdrawal multiplied by the GACV immediately prior to the
withdrawal. The example above under Death Benefit Option A explains the effect
of a withdrawal on the GACV under this death benefit option.
After you, or your joint owner, reaches age 80, the death benefit will be the
greatest of:
1. Total purchase payments made, 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 greatest adjusted contract value (GACV) (as explained below).
The GACV is initially the death benefit determined as of the day Cova receives
notice that you have elected this death benefit option. This figure is based on
your existing death benefit as defined in your contract, Option D (not as
defined in the endorsement for this option). The GACV is then evaluated at each
subsequent contract anniversary on or before your, or your joint owner's, 80th
birthday, and on each subsequent day a purchase payment or withdrawal is made.
On the contract anniversary on or before your, or your joint owner's, 80th
birthday, if the current contract value is greater than the GACV, the GACV will
be increased to the current value of your contract. If a purchase payment is
made, the amount of the purchase payment will increase the GACV. If a withdrawal
is made, the GACV will be reduced by the sum of the amount withdrawn (and any
associated withdrawal charges) divided by the value of your contract immediately
before the withdrawal, multiplied by the GACV immediately prior to the
withdrawal. The example above under Death Benefit Option A explains the effect
of a withdrawal on the GACV under this death benefit option.
DEATH BENEFIT OPTION D
In certain states, the Death Benefit Options described above may not be
available, in which case you will have Death Benefit Option D. When your state
approves the endorsements for Option A or C and Option B, your death benefit
will change (see the section above for details).
Prior to you, or your joint owner, reaching age 80, the death benefit will be
the greater of:
1. Total purchase payments, less any withdrawals (and any withdrawal charges
paid on the withdrawals) accumulated at an annual rate of 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 any withdrawals (and any withdrawal charges
paid on the withdrawals) accumulated at an annual rate of 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).
CHECK YOUR CONTRACT AND APPLICABLE ENDORSEMENT FOR YOUR DEATH BENEFIT.
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.
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 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
Calculation of Performance Information
Federal 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. 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>
Year or Period from Commencement
Period Ended Year or Period of Operations
12/31/97) ended 12/31/96 through 12/31/95
<S> <C> <C> <C>
COVA SERIES TRUST
Managed by Van Kampen American
Capital Investment Advisory Corp.
Quality Income Sub-Account
Beginning of Period $15.54 $ 15.33 $ 14.42
End of Period $16.72 15.54 15.33
Number of Accum. Units Outstanding 43,729 19,237 8,702
Money Market Sub-Account
Beginning of Period $11.88 $ 11.42 $ 11.13
End of Period $12.38 11.88 11.42
Number of Accum. Units Outstanding 29,951 27,094 28,509
VKAC Growth and Income Sub-Account
Beginning of Period $17.01 $ 14.61 $ 13.05
End of Period $20.98 17.01 14.61
Number of Accum. Units Outstanding 80,080 40,350 7,197
Stock Index Sub-Account
Beginning of Period $19.04 $ 15.77 $ 14.13
End of Period $24.96 19.04 15.77
Number of Accum. Units Outstanding 69,602 50,426 13,384
Managed by Lord Abbett & Co.
Bond Debenture Sub-Account
Beginning of Period $11.30 $ 10.15 *
End of Period $12.88 11.30
Number of Accum. Units Outstanding 347,400 39,545
Mid-Cap Value Sub-Account
Beginning of Period $10.05 * *
End of Period $10.47 * *
Number of Accum. Units Outstanding 8,510
Developing Growth Sub-Account
Beginning of Period $10.83 * *
End of Period $10.53 * *
Number of Accum. Units Outstanding 6,039
Managed by J.P. Morgan Investment
Management Inc.
Select Equity Sub-Account
Beginning of Period $10.84 $ 10.15 *
End of Period $14.05 10.84
Number of Accum. Units Outstanding 700,550 185,509
Small Cap Stock Sub-Account
Beginning of Period $11.31 $ 10.91 *
End of Period $13.49 11.31
Number of Accum. Units Outstanding 487,580 113,118
International Equity Sub-Account
Beginning of Period $10.97 $ 10.10 *
End of Period $11.46 10.97
Number of Accum. Units Outstanding 554,105 124,032
Quality Bond Sub-Account
Beginning of Period $10.37 $ 9.95 *
End of Period $11.16 10.37
Number of Accum. Units Outstanding 234,643 64,534
Large Cap Stock Sub-Account
Beginning of Period $11.34 $ 10.16 *
End of Period $14.89 11.34
Number of Accum. Units Outstanding 686,677 126,231
LORD ABBETT SERIES FUND, INC.
Growth and Income Sub-Account
Beginning of Period $25.09 $ 21.31 $ 19.54
End of Period $30.84 25.09 21.31
Number of Accum. Units Outstanding 791,310 375,304 125,555
GENERAL AMERICAN CAPITAL COMPANY
Money Market Sub-Account
Beginning of Period $10.63
End of Period $10.67
Number of Accum. Units Outstanding 14,091
<FN>
* The Cova Series Trust Money Market Portfolio started regular investment
operations on June 19, 1995; the VKAC Growth and Income Portfolio started
regular investment operations on July 19, 1995; the Stock Index Portfolio and
the Lord Abbett Series Fund, Inc. Growth and Income Portfolio started regular
investment operations on July 20, 1995; and the Quality Bond Portfolio started
regular investment operations on August 16, 1995. The accumulation unit values
shown above for the beginning of the period for the Select Equity, Small Cap
Stock, Large Cap Stock, International Equity, Quality Bond and Bond Debenture
Portfolios reflect the date these investment portfolios were first offered for
sale to the public which were as follows: 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; and November 7, 1997 for the
Developing Growth and Mid-Cap Value Portfolios. The accumulation unit values for
the beginning of the period for the General American Capital Company Money Market
Sub-Account reflect the date they were first offered for sale under the Contracts
on December 4, 1997. The Separate Account had not invested in the following
Portfolios which are advised by Lord, Abbett & Co. as of December 31, 1997: Large
Cap Research and Lord Abbett Growth and Income and had not invested in the
investment portfolios managed by Fidelity Management & Research Company, A I M
Advisors, Inc., and Massachusetts Financial Services Company as of December 31,
1997.
</FN>
</TABLE>
APPENDIX B
PERFORMANCE INFORMATION
Future performance will vary and the results shown are not necessarily
representative of future results.
PART 1
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 following portfolios of Cova Series Trust: Bond
Debenture, Mid-Cap Value, Large Cap Research and Developing Growth. Lord,
Abbett & Co. is the investment adviser for Lord Abbett Series Fund, Inc. Growth
and Income Portfolio. Conning Asset Management Company is the adviser for
General American Capital Company Money Market Fund. All of these portfolios
began operations before May 1, 1998. As a result, performance information is
available for the accumulation unit values investing in these portfolios.
Column A presents performance figures for the accumulation units which
reflect the insurance charges as well as the fees and expenses of the
investment portfolio. Column B 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. The inception dates shown below reflect the
dates the Separate Account first invested in the Portfolio.
PART 1 COVA SERIES TRUST
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
<S> <C> <C>
Accumulation Unit Performance
Column A Column B
Separate Account (reflects insurance (reflects all
Inception Date charges and portfolio charges and
in Portfolio expenses) portfolio expenses)
---------------- ------------------------ ---------------------------
since since
Portfolio 1 yr inception 1 yr inception
- ----------------- -------------------------- ---------------------------
VKAC GROWTH AND
INCOME 7/19/95 23.34% 21.33% 18.05% 19.59%
MONEY MARKET 6/19/95 4.17% 4.25% (1.00)% 2.32%
QUALITY INCOME 8/16/95 7.57% 6.40% 2.34% 4.30%
STOCK INDEX 7/20/95 31.13% 26.13% 25.78% 24.42%
SELECT EQUITY 5/15/96 29.67% 22.08% 24.47% 19.23%
SMALL CAP STOCK 5/15/96 19.31% 13.94% 14.12% 10.98%
INTERNATIONAL
EQUITY 5/14/96 4.52% 8.07% (0.64)% 5.07%
QUALITY BOND 5/20/96 7.58% 7.32% 2.43% 4.28%
LARGE CAP STOCK 5/16/96 31.36% 26.51% 26.15% 23.69%
BOND DEBENTURE 5/20/96 14.05% 15.91% 8.87% 12.97%
</TABLE>
PART 1 LORD ABBETT SERIES FUND, INC.
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
<S> <C> <C>
Accumulation Unit Performance
Column A Column B
Separate Account (reflects insurance (reflects all
Inception Date charges and portfolio charges and
in Portfolio expenses) portfolio expenses)
---------------- ------------------------ ---------------------------
since since
Portfolio 1 yr inception 1 yr inception
- ----------------- -------------------------- ---------------------------
GROWTH AND INCOME 7/20/95 22.91% 20.45% 17.48% 18.53%
</TABLE>
PART 1 GENERAL AMERICAN CAPITAL COMPANY MONEY MARKET FUND
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
<S> <C> <C>
Accumulation Unit Performance
Column A Column B
Separate Account (reflects insurance (reflects all
Inception Date charges and portfolio charges and
in Portfolio expenses) portfolio expenses)
---------------- ------------------------ ---------------------------
since since
Portfolio inception inception
- ----------------- -------------------------- ---------------------------
MONEY MARKET 12/4/97 .34% (4.81)%
</TABLE>
PART 2
Shares of the General American Capital Company Money Market Fund were made
available under the contract on May 1, 1997. Shares of the Portfolios of
Variable Insurance Products Fund, Variable Insurance Products Fund II, Variable
Insurance Products Fund III, AIM Variable Insurance Funds, Inc. and MFS Variable
Insurance Trust were offered under the contract on December 30, 1997. Shares of
the Select Equity, Small Cap Stock, International Equity, Quality Bond, Large
Cap Stock & Bond Debenture Portfolios of Cova Series Trust were offered under
the contracts on May 1, 1996 and shares of the Mid-Cap Value, Large Cap Research
and Developing Growth Portfolios of Cova Series Trust were offered under the
contract on November 15, 1997. However, certain Portfolios have been in
existence for a longer time and therefore have an investment performance
history. In order to show how the historical performance of the Portfolios
affect accumulation unit values, we have developed performance information.
The chart below shows the investment performance of the Portfolios and the
accumulation units performance calculated by assuming that accumulation units
were invested in the Portfolios for the same periods.
The performance figures in Column A for the Portfolios reflect the 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 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 Portfolio, and assumes that you make a
withdrawal at the end of the period and therefore the withdrawal charge is
reflected.
PART 2 COVA SERIES TRUST
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance charges (reflects all charges
and portfolio expenses) and portfolio expenses)
------------------ ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Portfolio
inception since since since
Portfolio date 1 yr inception 1 yr inception 1 yr inception
- -------------- ---------- ----- --------- ---- --------- ---- ---------
Select Equity 5/1/96 31.55% 23.74% 29.67% 21.97% 24.48% 19.33%
Small Cap Stock 5/1/96 20.89% 17.72% 19.31% 16.10% 14.12% 13.38%
International Equity 5/1/96 5.96% 8.67% 4.52% 7.14% (0.64)% 4.31%
Quality Bond 5/1/96 9.06% 8.87% 7.58% 7.42% 2.43% 4.60%
Large Cap Stock 5/1/96 33.25% 28.66% 31.36% 26.87% 26.15% 24.29%
Bond Debenture 5/1/96 15.63% 17.28% 14.05% 15.69% 8.87% 12.97%
Mid-Cap Value 8/20/97 4.90% 4.68% (0.54)%
Large Cap Research 8/20/97 (0.74)% (1.00)% (6.21)%
Developing Growth 8/20/97 5.52% 5.28% 0.06%
</TABLE>
PART 2 GENERAL AMERICAN CAPITAL COMPANY MONEY MARKET FUND
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
Portfolio portfolio expenses) portfolio expenses)
inception
Portfolio date 1 yr 5 yrs 10 yrs 1 yr 5 yrs 10 yrs 1 yr 5 yrs 10 yrs
- ---------------- --------- --------- ------ ------------ ------- --------- ------------- ------- --------- ------
Money Market 10/1/87 5.71% 4.89% 5.99% 4.31% 3.49% 4.59% (0.79)% (1.11)% 4.49%
</TABLE>
PART 2 LORD ABBETT SERIES FUND, INC.
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
Portfolio portfolio expenses) portfolio expenses)
inception Since Since Since
Portfolio date 1 yr 5 yrs inception 1 yr 5 yrs inception 1 yr 5 yrs inception
- ---------------- --------- --------- ------ ------------ ------- --------- ---------- ------- --------- -------
Growth and Income 12/11/89 24.30% 17.90% 16.60% 22.91% 16.28% 14.99% 17.48% 15.25% 14.59%
</TABLE>
PART 2 VARIABLE INSURANCE PRODUCTS FUND
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
Portfolio portfolio expenses) portfolio expenses)
inception
Portfolio date 1 yr 5 yrs 10 yrs 1 yr 5 yrs 10 yrs 1 yr 5 yrs 10 yrs
- ---------------- --------- --------- ------ ------------ ------- --------- ------------- ------- --------- -------
VIP Growth 10/9/86 23.45% 18.00% 17.18% 22.05% 16.60% 15.78% 16.95% 12.00% 15.68%
VIP Equity-Income 10/9/86 28.05% 20.15% 16.72% 26.65% 18.75% 15.32% 21.55% 14.15% 15.22%
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND II
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
Portfolio portfolio expenses) portfolio expenses)
inception Performance Performance
Portfolio date 1 yr since inception 1 yr 10 yrs 1 yr since Inception
- ---------------- --------- ----------------- --------------- ------- ------------- ----- ----------------
VIP II Contrafund 1/3/95 24.08% 28.14% 22.68% 26.74% 17.58% 22.14%
</TABLE>
PART 2 VARIABLE INSURANCE PRODUCTS FUND III
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
Portfolio portfolio expenses) portfolio expenses)
inception Performance Since Performance
Portfolio date 1 yr since inception 1 yr inception 1 yr since Inception
- ---------------- --------- ----------------- --------------- ------- ------- ------- ----------------
VIP III Growth
Opportunities 1/3/95 29.95% 26.81% 28.55% 25.41% 23.45% 20.81%
VIP III Growth
& Income 12/31/96 30.10% 28.70% 28.70% 27.30% 23.60% 22.70%
</TABLE>
PART 2 AIM VARIABLE INSURANCE FUNDS, INC.
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
Portfolio portfolio expenses) portfolio expenses)
inception Performance Since Performance
Portfolio date 1 yr since inception 1 yr inception 1 yr since Inception
- ---------------- --------- ----------------- --------------- ------- ------------- ------- ----------------
AIM V.I. Capital
Appreciation 5/5/93 13.51% 18.65% 12.11% 17.25% 7.01% 12.65%
AIM V.I.
International
Equity 5/5/93 6.94% 12.91% 5.54% 11.51% 0.44% 6.91%
AIM V.I.
Value 5/5/93 23.69% 19.76% 22.29% 18.36% 17.19% 13.76%
</TABLE>
PART 2 MFS VARIABLE INSURANCE TRUST
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
Portfolio portfolio expenses) portfolio expenses)
inception Performance Since Performance
Portfolio date 1 yr since inception 1 yr inception 1 yr since Inception
- -------------- --------- ----------------- --------------- ------- ------------- ------- --------------
MFS Emerging Growth 7/24/95 21.90% 23.53% 20.50% 22.13% 15.40% 17.53%
MFS Research 7/26/95 20.26% 22.13% 18.86% 20.73% 13.76% 16.13%
MFS Growth With Income 10/9/95 29.78% 27.61% 28.38% 26.21% 23.28% 21.61%
MFS High Income 7/26/95 13.67% 12.66% 12.22% 11.26% 7.12% 6.66%
MFS World Governments 6/14/94 (1.13)% 4.92% (2.53)% 3.52% (7.63)% (1.08)%
MFS Bond 10/24/95 10.14% 6.94% 8.74% 5.54% 3.64% 0.94%
</TABLE>
PART 2 ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
portfolio expenses) portfolio expenses)
Portfolio 10 yrs 10 yrs 10 yrs
Inception or since or since or since
Portfolio Date 1 yr 5 yrs inception 1 yr 5 yrs inception 1 yr 5 yrs inception
- --------------- --------- ------ ------ ---------- ------ ----- --------- ----- ------- ----------
Premier Growth 6/26/92 33.86% 21.06% 21.72% 32.46% 19.66% 20.32% 27.36% 15.06% 20.22%
Real Estate Investment 1/9/97 -- -- 23.40% -- -- 22.00% -- -- 16.90%
</TABLE>
PART 2 LIBERTY VARIABLE INVESTMENT TRUST
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
portfolio expenses) portfolio expenses)
Portfolio 10 yrs 10 yrs 10 yrs
Inception or since or since or since
Portfolio Date 1 yr 5 yrs inception 1 yr 5 yrs inception 1 yr 5 yrs inception
- --------------- --------- ------ ------ ---------- ------ ----- --------- ----- ------- ----------
Newport Tiger, Variable
Series 5/1/95 (31.14)% -- (4.47)% (32.54)% -- (5.87)% (37.64)% -- (10.47)%
</TABLE>
PART 2 INVESTORS FUND SERIES
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
portfolio expenses) portfolio expenses)
Portfolio 10 yrs 10 yrs 10 yrs
Inception or since or since or since
Portfolio Date 1 yr 5 yrs inception 1 yr 5 yrs inception 1 yr 5 yrs inception
- --------------- --------- ------ ------ ---------- ------ ----- --------- ----- ------- ----------
Kemper Small Cap Value 5/1/96 21.73% -- 13.74% 20.33% -- 12.34% 15.23% -- 7.74%
Kemper Government
Securities 9/3/87 8.96% 6.61% 7.98% 7.56% 5.21% 6.58% 2.46% 0.61% 6.48%
Kemper Small Cap Growth 5/2/94 34.20% -- 25.83% 32.80% -- 24.43% 27.70% -- 19.83%
</TABLE>
PART 2 OPPENHEIMER VARIABLE ACCOUNT FUNDS
TOTAL RETURN FOR THE PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Performance Accumulation Unit Performance
Column A Column B Column C
(reflects insurance (reflects all
charges and charges and
portfolio expenses) portfolio expenses)
Portfolio 10 yrs 10 yrs 10 yrs
Inception or since or since or since
Portfolio Date 1 yr 5 yrs inception 1 yr 5 yrs inception 1 yr 5 yrs inception
- --------------- --------- ------ ------ ---------- ------ ----- --------- ----- ------- ----------
Oppenheimer High Income 4/30/86 12.21% 13.75% 14.32% 10.81% 12.35% 12.92% 5.71% 7.75% 12.82%
Oppenheimer Bond 4/3/85 9.25% 8.23% 9.50% 7.85% 6.83% 8.10% 2.75% 2.23% 8.00%
Oppenheimer Growth 4/3/85 26.68% 18.61% 16.67% 25.28% 17.21% 15.27% 20.18% 12.61% 15.17%
Oppenheimer Growth & Income 7/5/95 32.48% -- 37.24% 31.08% -- 35.84% 25.98% -- 31.24%
Oppenheimer Strategic Bond 5/3/93 8.71% -- 7.64% 7.31% -- 6.24% 2.21% -- 1.64%
</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 __, 1998 for The Annuity Contract issued by Cova.
(Please print or type and fill in all information)
---------------------------------------------------------------------------
Name
---------------------------------------------------------------------------
Address
---------------------------------------------------------------------------
City State Zip Code
PART B
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 __, 1998, 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 __, 1998.
TABLE OF CONTENTS
Page
COMPANY
EXPERTS
LEGAL OPINIONS
DISTRIBUTION
Reduction or Elimination of the Withdrawal Charge
CALCULATION OF PERFORMANCE INFORMATION
Total Return
Historical Unit Values
Reporting Agencies
Performance Information
FEDERAL 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 $300 billion
of life insurance in force and approximately $24 billion in assets. It provides
life and health insurance, retirement plans, and related financial services to
individuals and groups.
EXPERTS
The balance sheets of the Company as of December 31, 1997 and 1996, and the
related statements of income, shareholder's equity, and cash flows for the years
ended December 31, 1997 and 1996, and the periods from June 1, 1995 to December
31, 1995 and January 1, 1995 to May 31, 1995, and the statement of assets and
liabilities of the Separate Account as of December 31, 1997, and the related
statement of operations for the year or period then ended, the statements of
changes in contract owners' equity for each of the years or periods presented,
and the financial highlights for each of the years or periods presented, 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. The report of
KPMG Peat Marwick LLP covering the Company's financial statements referred to
above contains an explanatory paragraph stating that as a result of its 1995
acquisition, the financial information for the periods subsequent to the
acquisition is presented on a different cost basis than for the period prior to
the acquisition and, therefore, is not comparable.
LEGAL OPINIONS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut has provided advice on
certain matters relating to the federal securities and income tax laws in
connection with the Contracts.
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 Charge to arrive at
the ending hypothetical value. The average annual total return is then
determined by computing the fixed interest rate that a $1,000 purchase payment
would have to earn annually, compounded annually, to grow to the hypothetical
value at the end of the time periods described. The formula used in these
calculations is:
n
P (1 + T) = ERV
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
The Accumulation Units which invest in the Portfolios managed by J.P. Morgan
Investment Management Inc., Lord, Abbett & Co., Conning Asset Management
Company, Fidelity Management & Research Company, A I M Advisors, Inc.,
Massachusetts Financial Services Company, Alliance Capital Management L.P.,
Scudder Kemper Investments, Inc., Newport Fund Management Inc. and
OppenheimerFunds, Inc. (collectively, the "Existing Funds") have no meaningful
investment performance history yet. However, certain Portfolios of the
Existing Funds have been in existence for some time and consequently have
an investment performance history. In order to demonstrate how investment
experience of the Existing Funds affect Accumulation Unit values,
performance information was developed. The information is based upon the
historical experience of the Existing Funds and is for the periods shown. The
prospectus contains a chart of performance information.
Future performance of the Existing Funds will vary and the 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 Existing Funds 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.
FEDERAL TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY
OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF THE CONTRACTS.
PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER
UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL
RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS. MOREOVER, NO
ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is not
taxed on increases in the value of a Contract until distribution occurs, either
in the form of a lump sum payment or as annuity payments under the Annuity
Option selected. For a lump sum payment received as a total withdrawal (total
surrender), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For Non-Qualified Contracts, this cost basis is
generally the purchase payments, while for Qualified Contracts there may be no
cost basis. The taxable portion of the lump sum payment is taxed at ordinary
income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract (adjusted for any period or refund feature) bears
to the expected return under the Contract. The exclusion amount for payments
based on a variable annuity option is determined by dividing the cost basis of
the Contract (adjusted for any period certain or refund guarantee) by the number
of years over which the annuity is expected to be paid. Payments received after
the investment in the Contract has been recovered (i.e. when the total of the
excludable amount equals the investment in the Contract) are fully taxable. The
taxable portion is taxed at ordinary income tax rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Contracts
should seek competent financial advice about the tax consequences of any
distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity contract would result in the imposition of federal income
tax to the Owner with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contract meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued Regulations (Teras.
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.
Roth IRAs
Beginning in 1998, individuals may purchase a new type of non-deductible IRA,
known as a Roth IRA. Purchase payments for a Roth IRA are limited to a
maximum of $2,000 per year. Lower maximum limitations apply to individuals
with adjusted gross incomes between $95,000 and $110,000 in the case of
single taxpayers, between $150,000 and $160,000 in the case of married
taxpayers filing joint returns, and between $0 and $10,000 in the case of
married taxpayers filing separately. An overall $2,000 annual limitation
continues to apply to all of a taxpayer's IRA contributions,including Roth
IRA and non-Roth IRAs.
Qualified distributions from Roth IRAs are free from federal income tax.
A qualified distribution requires that an individual has held the Roth IRA
for at least five years and, in addition, that the distribution is made
either after the individual reaches age 59 1/2, on the individual's death
or disability, or as a qualified first-time home purchase, subject to a
$10,000 lifetime maximum, for the individual, a spouse, child, grandchild,
or ancestor. Any distribution which is not a qualified distribution is
taxable to the extent of earnings in the distribution. Distributions are
treated as made from contributions first and therefore no distributions are
taxable until distributions exceed the amount of contributions to the Roth
IRA. The 10% penalty tax and the regular IRA exceptions to the 10% penalty
tax apply to taxable distributions from a Roth IRA.
Amounts may be rolled over from one Roth IRA to another Roth IRA. Furthermore,
an individual may make a rollover contribution from a non-Roth IRA to a Roth
IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual
must pay tax on any portion of the IRA being rolled over that represents
income or a previously deductible IRA contribution. However, for rollovers in
1998, the individual may pay that tax ratably over the four taxable year period
beginning with tax year 1998.
Purchasers of Contracts to be qualified as a Roth IRA 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 and 408A
(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; (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); (h) distributions from
an Individual Retirement Annuity made to the Owner or Annuitant (as applicable)
to the extent such distributions do not exceed the qualified higher education
expenses (as defined in Section 72(t)(7) of the Code) of the Owner or Annuitant
(as applicable) for the taxable year; and (i) distributions from an Individual
Retirement Annuity made to the Owner or Annuitant (as applicable) which are
qualified first-time home buyer distributions (as defined in Section 72(t)(8) of
the Code). 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 transfers between Tax-Sheltered Annuity Plans. Owners should consult
their own tax counsel or other tax adviser regarding any distributions.
ANNUITY PROVISIONS
VARIABLE ANNUITY
A variable annuity is an annuity with payments which: (1) are not predetermined
as to dollar amount; and (2) will vary in amount with the net investment results
of the applicable investment portfolio(s) of the Separate Account. At the
Annuity Date, the Contract Value in each investment portfolio will be applied to
the applicable Annuity Tables. The Annuity Table used will depend upon the
Annuity Option chosen. If, as of the Annuity Date, the then current Annuity
Option rates applicable to this class of Contracts provide a first Annuity
Payment greater than guaranteed under the same Annuity Option under this
Contract, the greater payment will be made. The dollar amount of Annuity
Payments after the first is determined as follows:
(1) the dollar amount of the first Annuity Payment is divided by the value of
an Annuity Unit as of the Annuity Date. This establishes the number of
Annuity Units for each monthly payment. The number of Annuity Units remains
fixed during the Annuity Payment period.
(2) the fixed number of Annuity Units is multiplied by the Annuity Unit value
for the last Valuation Period of the month preceding the month for which
the payment is due. This result is the dollar amount of the payment.
The total dollar amount of each Variable Annuity Payment is the sum of all
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:
(a) the Accumulation Unit value as of the close of the current Valuation
Period, by
(b) the Accumulation Unit value as of the close of the immediately preceding
Valuation Period.
The Net Investment Factor may be greater or less than one, as the Annuity Unit
value may increase or decrease.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each Annuity Payment after the
first Annuity Payment will not be affected by variations in mortality or expense
experience.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts.
COVA VARIABLE ANNUITY ACCOUNT FIVE
Financial Statements
December 31, 1997
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Contract Owners of Cova Variable
Annuity Account Five, Board of
Directors and Shareholder of
Cova Financial Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of the
Quality Income, Money Market, Stock Index, Growth and Income, Bond Debenture,
Developing Growth, Mid-Cap Value, Quality Bond, Small Cap Stock, Select Equity,
and International Equity sub-accounts (investment options within the Cova Series
Trust) and the Growth and Income sub-account (investment option within the Lord
Abbett Series Fund, Inc.) and the Money Market sub-account (investment option
within the General American Capital Company) of Cova Variable Annuity Account
Five of Cova Financial Life Insurance Company (the Separate Account), as of
December 31, 1997, and the related statement of operations for the year or
period then ended, the statements of changes in contract owners' equity for each
of the years or periods presented, and the financial highlights for each of the
years or periods presented. These financial statements and financial highlights
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with transfer agents. 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 and financial highlights referred to
above present fairly, in all material respects, the financial position of the
sub-accounts of Cova Variable Annuity Account Five of Cova Financial Life
Insurance Company as of December 31, 1997, the results of its operations for the
year or period then ended, the changes in its contract owners' equity for each
of the years or periods presented, and the financial highlights for each of the
years or periods presented, in conformity with generally accepted accounting
principles.
Chicago, Illinois
February 20, 1998
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ASSETS
Investments:
Cova Series Trust:
<S> <C>
Quality Income Portfolio - 67,069 shares at a net asset value of $10.90 per share (cost $716,343) $731,022
Money Market Portfolio - 370,670 shares at a net asset value of $1.00 per share (cost $370,670) 370,670
Stock Index Portfolio - 82,467 shares at a net asset value of $21.07 per share (cost $1,344,243) 1,737,586
Growth and Income Portfolio - 98,525 shares at a net asset value of $17.05 per share (cost $1,428,634) 1,680,017
Bond Debenture Portfolio - 369,480 shares at a net asset value of $12.11 per share (cost $4,311,974) 4,475,308
Developing Growth Portfolio - 6,027 shares at a net asset value of $10.55 per share (cost $63,171) 63,575
Mid-Cap Value Portfolio - 8,500 shares at a net asset value of $10.48 per share (cost $86,555) 89,091
Quality Bond Portfolio - 251,571 shares at a net asset value of $10.40 per share (cost $2,575,465) 2,617,582
Small Cap Stock Portfolio - 501,987 shares at a net asset value of $13.10 per share (cost $5,812,661) 6,578,433
Large Cap Stock Portfolio - 738,502 shares at a net asset value of $13.85 per share (cost $9,593,772) 10,224,639
Select Equity Portfolio - 704,990 shares at a net asset value of $13.97 per share (cost $8,560,587) 9,845,561
International Equity Portfolio - 553,682 shares at a net value of $11.47 per share (cost $6,259,980) 6,351,635
Lord Abbett Series Fund, Inc.:
Growth and Income Portfolio - 1,250,767 shares at a net asset value of $19.51 per share (cost $22,888,504) 24,402,594
General American Capital Company:
Money Market Portfolio - 8,247 shares at a net asset value of $18.23 per share (cost $149,869) 150,309
-------
Total Assets $69,318,022
</TABLE>
<TABLE>
<CAPTION>
See accompanying notes to financial statements.
(continued)
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
<S> <C>
Trust Quality Income $28
Trust Money Market 14
Trust Stock Index 67
Trust Growth and Income 64
Trust Bond Debenture 171
Trust Developing Growth 3
Trust Mid-Cap Value 3
Trust Quality Bond 100
Trust Small Cap Stock 250
Trust Large Cap Stock 392
Trust Select Equity 376
Trust International Equity 243
Fund Growth and Income 932
GACC Money Market 6
-
Total Liabilities 2,649
</TABLE>
<TABLE>
<CAPTION>
Contract Owners' Equity:
<S> <C>
Trust Quality Income - 43,729 accumulation units at $16.716340 per unit 730,994
Trust Money Market - 29,951 accumulation units at $12.375227 per unit 370,656
Trust Stock Index - 69,602 accumulation units at $24.963612 per unit 1,737,519
Trust Growth and Income - 80,080 accumulation units at $20.978338 per unit 1,679,953
Trust Bond Debenture - 347,400 accumulation units at $12.881799 per unit 4,475,137
Trust Developing Growth - 6,039 accumulation units at $10.527555 per unit 63,572
Trust Mid-Cap Value - 8,510 accumulation units at $10.467957 per unit 89,088
Trust Quality Bond - 234,643 accumulation units at $11.155144 per unit 2,617,482
Trust Small Cap Stock - 487,580 accumulation units at $13.491493 per unit 6,578,183
Trust Large Cap Stock - 686,677 accumulation units at $14.889464 per unit 10,224,247
Trust Select Equity - 700,550 accumulation units at $14.053503 per unit 9,845,185
Trust International Equity - 554,105 accumulation units at $11.462436 per unit 6,351,392
Fund Growth and Income - 791,310 accumulation units at $30.837057 per unit 24,401,662
GACC Money Market - 14,091 accumulation units at $10.667017 per unit 150,303
-------
Total Contract Owners' Equity 69,315,373
Total Liabilities and Contract Owners' Equity $69,318,022
==========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF OPERATIONS
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1997
Cova
Series
Trust
- ---------------------------------------------------------------------------------------------------------------------------
Quality Money Stock Growth and Bond
Bond Income Market Index Income Debenture
---- ------ ------ ----- ------ ---------
Investment Income
Income:
Dividends and Capital
<S> <C> <C> <C> <C> <C>
Gains Distributions $27,675 $44,503 $25,264 $33,091 $151,661
------ ------ ------ ------ -------
Expenses:
Mortality and Expense
Risk Fee 5,756 10,066 16,637 15,341 27,344
Administrative Fee 691 1,208 1,996 1,841 3,281
--- ----- ----- ----- -----
Total Expenses 6,447 11,274 18,633 17,182 30,625
----- ------ ------ ------ ------
Net Investment Income (Loss) 21,228 33,229 6,631 15,909 121,036
------ ------ ----- ------ -------
Net Realized Gain (Loss)
on Investments (265) -- 18,876 2,998 5,501
Net change in Unrealized
Gain on Investments 14,231 -- 311,158 213,640 154,943
------ ------- ------- -------
Net Realized and Unrealized
Gain on Investments 13,966 -- 330,034 216,638 160,444
------ ------- ------- -------
Net Increase in Contract
Owners' Equity Resulting
From Operations $35,194 $33,229 $336,665 $232,547 $281,480
======= ======= ======== ======== ========
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF OPERATIONS
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1997
Cova Series Trust
- ---------------------------------------------------------------------------------------------------------------------------
Developing Mid-Cap Quality
Bond Growth Value
---- ------ ----- --------
Investment Income
Income:
Dividends and Capital
<S> <C> <C> <C>
Gains Distributions $12 $85 $109,296
-- -- -------
Expenses:
Mortality and Expense
Risk Fee 69 91 19,358
Administrative Fee 8 11 2,323
- -- -----
Total Expenses 77 102 21,681
-- --- ------
Net Investment Income (Loss) (65) (17) 87,615
---- ---- ------
Net Realized Gain (Loss)
on Investments (15) 50 1,954
Net change in Unrealized
Gain on Investments 404 2,536 39,803
--- ----- ------
Net Realized and Unrealized
Gain on Investments 389 2,586 41,757
--- ----- ------
Net Increase in Contract
Owners' Equity Resulting
From Operations $324 $2,569 $129,372
==== ====== ========
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF OPERATIONS
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1997
Cova Lord Abbett
Series Trust Series Fund, Inc.
-------------------------------------------------------- ---------------
Small Large Select Int'l Growth and
Cap Stock Cap Stock Equity Equity Income
--------- --------- ------ ------ ------
Investment Income
Income:
Dividends and Capital
<S> <C> <C> <C> <C> <C>
Gains Distributions $30,620 $610,536 $74,535 $53,207 $1,908,028
------- -------- ------- ------- ----------
Expenses:
Mortality and Expense
Risk Fee 45,153 65,823 69,378 45,495 200,778
Administrative Fee 5,418 7,899 8,325 5,459 24,093
----- ----- ----- ----- ------
Total Expenses 50,571 73,722 77,703 50,954 224,871
------ ------ ------ ------ -------
Net Investment Income (Loss) (19,951) 536,814 (3,168) 2,253 1,683,157
-------- ------- ------- ----- ---------
Net Realized Gain (Loss)
on Investments 9,307 14,746 20,469 2,886 78,243
Net change in Unrealized
Gain on Investments 731,752 574,012 1,183,581 24,972 1,139,321
------- ------- --------- ------ ---------
Net Realized and Unrealized
Gain on Investments 741,059 588,758 1,204,050 27,858 1,217,564
------- ------- --------- ------ ---------
Net Increase in Contract
Owners' Equity Resulting
From Operations $721,108 $1,125,572 $1,200,882 $30,111 $2,900,721
======== ========== ========== ======= ==========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF OPERATIONS
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1997
GACC
-----------
Money Total
Market -----
------
Investment Income
Income:
Dividends and Capital
<S> <C> <C>
Gains Distributions -- $3,068,513
-- ----------
Expenses:
Mortality and Expense
Risk Fee 106 521,395
Administrative Fee 13 62,566
-- ------
Total Expenses 119 583,961
--- -------
Net Investment Income (Loss) (119) 2,484,552
----- ---------
Net Realized Gain (Loss)
on Investments 74 154,824
Net change in Unrealized
Gain on Investments 440 4,390,793
--- ---------
Net Realized and Unrealized
Gain on Investments 514 4,545,617
--- ---------
Net Increase in Contract
Owners' Equity Resulting
From Operations $395 $7,030,169
==== ==========
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1997
Cova Series Trust
- -------------------------------------------------------------------------------------------------------------------------
Quality Money Stock Growth and Bond
Bond Income Market Index Income Debenture
---- ------ ------ ----- ------ ---------
From Operations:
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss) $21,228 $33,229 $6,631 $15,909 $121,036
Net Realized Gain (Loss) on
Investments (265) -- 18,876 2,998 5,501
Net change in Unrealized Gain
on Investments 14,231 -- 311,158 213,640 154,943
------ ------- ------- -------
Net Increase in Contract
Owners' Equity Resulting
From Operations 35,194 33,229 336,665 232,547 281,480
------ ------ ------- ------- -------
From Account Unit
Transactions:
Proceeds from Units of
the Account Sold 5,588 5,425,271 21,617 145,535 986,444
Payments for Units of the
Account Redeemed (46,134) (73,008) (25,416) (12,290) (76,410)
Account Transfers 437,402 (5,336,710) 444,691 627,885 2,836,964
------- ----------- ------- ------- ---------
Net Increase in
Contract Owners' Equity
From Account Unit
Transactions 396,856 15,553 440,892 761,130 3,746,998
------- ------ ------- ------- ---------
Net Increase
in
Contract Owners' Equity 432,050 48,782 777,557 993,677 4,028,478
Contract Owners' Equity:
Beginning of Period 298,944 321,874 959,962 686,276 446,659
------- ------- ------- ------- -------
End of Period $730,994 $370,656 $1,737,519 $1,679,953 $4,475,137
======== ======== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements. (continued)
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1997
Cova Series Trust
- -------------------------------------------------------------------------------------------------------------------------
Developing Mid-Cap Quality
Bond Growth Value
---- ------ -----
From Operations:
<S> <C> <C> <C>
Net Investment Income (Loss) ($65) ($17) $87,615
Net Realized Gain (Loss) on
Investments (15) 50 1,954
Net change in Unrealized Gain
on Investments 404 2,536 39,803
--- ----- ------
Net Increase in Contract
Owners' Equity Resulting
From Operations 324 2,569 129,372
--- ----- -------
From Account Unit
Transactions:
Proceeds from Units of
the Account Sold 15,000 32,249 283,752
Payments for Units of the
Account Redeemed 166 68 (28,465)
Account Transfers 48,082 54,202 1,563,687
------ ------ ---------
Net Increase in
Contract Owners' Equity
From Account Unit
Transactions 63,248 86,519 1,818,974
------ ------ ---------
Net Increase
in
Contract Owners' Equity 63,572 89,088 1,948,346
Contract Owners' Equity:
Beginning of Period -- -- 669,136
-------
End of Period $63,572 $89,088 $2,617,482
======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1997
Cova Series Trust Lord Abbett Series Fund, Inc.
Small Large Select Int'l Growth and
Cap Stock Cap Stock Equity Equity Income
--------- --------- ------ ------ ------
From Operations:
<S> <C> <C> <C> <C> <C>
Net Investment Income (Loss) ($19,951) $536,814 ($3,168) $2,253 $1,683,157
Net Realized Gain (Loss) on
Investments 9,307 14,746 20,469 2,886 78,243
Net change in Unrealized Gain
on Investments 731,752 574,012 1,183,581 24,972 1,139,321
------- ------- --------- ------ ---------
Net Increase in Contract
Owner's Equity Resulting
From Operations 721,108 1,125,572 1,200,882 30,111 2,900,721
------- --------- --------- ------ ---------
From Account Unit
Transactions:
Proceeds from Units of
the Account Sold 965,134 1,764,924 1,672,740 1,161,490 1,887,670
Payments for Units of the
Account Redeemed (119,268) (113,206) (139,188) (92,391) (515,567)
Account Transfers 3,732,024 6,016,134 5,100,198 3,891,923 10,712,632
--------- --------- --------- --------- ----------
Net Increase in
Contract Owners' Equity
From Account Unit
Transactions 4,577,890 7,667,852 6,633,750 4,961,022 12,084,735
--------- --------- --------- --------- ----------
Net Increase in
Contract Owners' Equity 5,298,998 8,793,424 7,834,632 4,991,133 14,985,456
Contract Owners' Equity:
Beginning of Period 1,279,185 1,430,823 2,010,553 1,360,259 9,416,206
--------- --------- --------- --------- ---------
End of Period $6,578,183 $10,224,247 $9,845,185 $6,351,392 $24,401,662
========== =========== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1997
GACC
Money
Market Total
------ -----
From Operations:
<S> <C> <C>
Net Investment Income (Loss) ($119) 2,484,552
Net Realized Gain (Loss) on
Investments 74 154,824
Net change in Unrealized Gain
on Investments 440 4,390,793
--- ---------
Net Increase in Contract
Owner's Equity Resulting
From Operations 395 7,030,169
--- ---------
From Account Unit
Transactions:
Proceeds from Units of
the Account Sold 178,947 14,546,361
Payments for Units of the
Account Redeemed - (1,241,109)
Account Transfers (29,039) 30,100,075
-------- ----------
Net Increase in
Contract Owners' Equity
From Account Unit
Transactions 149,908 43,405,327
------- ----------
Net Increase in
Contract Owners' Equity 150,303 50,435,496
Contract Owners' Equity:
Beginning of Period -- 18,879,877
----------
End of Period $ $150,303 $69,315,373
= ======== ===========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1996
Cova Series Trust
- ------------------------------------------------------------------------------------------------------------------------
Quality Money Stock Growth and Bond
Income Market Index Income Debenture
------ ------ ----- ------ ---------
From Operations:
<S> <C> <C> <C> <C> <C>
Net Investment Income $7,224 $21,633 $34,743 $28,906 $12,071
Net Realized Gain (Loss) on
Investments (682) -- 1,342 518 1,375
Net change in Unrealized
Gain (Loss) on Investments (1,359) -- 80,860 41,537 8,392
------ ------ ------ -----
Net Increase in Contract
Owner's Equity Resulting
From Operations 5,183 21,633 116,945 70,961 21,838
----- ------ ------- ------ ------
From Account Unit
Transactions:
Proceeds from Units of
the Account Sold 57,261 5,011,759 152,928 32,625 115,745
Payments for Units of the
Account Redeemed (22,762) (170) (13,935) (7,535) --
Account Transfers 125,849 (5,037,068) 492,907 485,085 309,076
------- ----------- ------- ------- -------
Net Increase (Decrease) in
Contract Owners' Equity
From Account Unit 160,348 (25,479) 631,900 510,175 424,821
------- -------- ------- ------- -------
Transactions
Net Increase (Decrease) in
Contract Owner's Equity 165,531 (3,846) 748,845 581,136 446,659
Contract Owners' Equity:
Beginning of Period 133,413 325,720 211,117 105,140 --
------- ------- ------- -------
End of Period $298,944 $321,874 $959,962 $686,276 $446,659
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements. (continued)
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1996
Cova Series Trust
- ------------------------------------------------------------------------------------------------------------------------
Quality Small Large
Bond Cap Stock Cap Stock
---- --------- ---------
From Operations:
<S> <C> <C> <C>
Net Investment Income $13,991 $47,627 $29,893
Net Realized Gain (Loss) on
Investments 65 334 3,085
Net change in Unrealized
Gain (Loss) on Investments 2,313 34,020 56,856
----- ------ ------
Net Increase in Contract
Owner's Equity Resulting
From Operations 16,369 81,981 89,834
------ ------ ------
From Account Unit
Transactions:
Proceeds from Units of
the Account Sold 100,194 461,912 542,124
Payments for Units of the
Account Redeemed ( (1,570) (3,036) (7,336)
Account Transfers 554,143 738,328 806,201
------- ------- -------
Net Increase (Decrease) in
Contract Owners' Equity
From Account Unit 652,767 1,197,204 1,340,989
------- --------- ---------
Transactions
Net Increase (Decrease) in
Contract Owner's Equity 669,136 1,279,185 1,430,823
Contract Owners' Equity:
Beginning of Period -- -- --
End of Period $ $669,136 $1,279,185 $1,430,823
= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements. (continued)
<TABLE>
<CAPTION>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR OR PERIOD ENDED DECEMBER 31, 1996
Cova Lord Abbett
Series Trust Series Fund, Inc.
Select Int'l Growth and
Equity Equity Income Total
From Operations:
<S> <C> <C> <C> <C>
Net Investment Income $21,801 $2,480 $534,226 $754,595
Net Realized Gain (Loss) on
Investments 465 132 2,820 9,454
Net change in Unrealized Gain
(Loss) on Investments 101,392 66,683 471,675 862,369
------- ------ ------- -------
Net Increase in Contract
Owner's Equity Resulting
From Operations 123,658 69,295 1,008,721 1,626,418
------- ------ --------- ---------
From Account Unit Transactions:
Proceeds for Units of
the Account Sold 755,570 576,132 1,438,328 9,244,578
Payments for Units of the
Account Redeemed (8,859) (4,725) (131,847) (201,775)
Account Transfers 1,140,184 719,557 4,425,896 4,760,158
--------- ------- --------- ---------
Net Increase (Decrease) in
Contract Owners' Equity
From Account Unit 1,886,895 1,290,964 5,732,377 13,802,961
--------- --------- --------- ----------
Transactions
Net Increase (Decrease) in
Contract Owners Equity 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 $2,010,553 $1,360,259 $9,416,206 $18,879,877
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
Cova Series Trust - Quality Income Portfolio
(Managed by Van Kampen American Capital Investment Advisory Corp.)
<TABLE>
<CAPTION>
YEAR YEAR PERIOD FROM 8/16/95
ENDED ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 12/31/96 THROUGH 12/31/95
Accumulation Unit Value,
<S> <C> <C> <C>
Beginning of Period $15.54 $15.33 $14.42
------ ------ ------
Net Investment Income .84 .46 .32
Net Realized and Unrealized
Gain (Loss) from Security Transactions .34 (.25) .59
--- ---- ---
Total from Investment Operations 1.18 .21 .91
---- --- ---
Accumulation Unit Value,
End of Period $16.72 $15.54 $15.33
====== ====== ======
Total Return* 7.57% 1.36% 6.30%
Contract Owners' Equity,
End of Period (in thousands) $731 $299 $133
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40% 1.40%**
Ratio of Net Investment Income
to Average Contract Owners' Equity 4.60% 3.21% 6.54%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality and
expense fees, administration expense fees and all expenses of the underlying
portfolio (investment advisory fees and portfolio operating expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
Cova Series Trust - Money Market Portfolio
(Managed by Van Kampen American Capital Investment Advisory Corp.)
<TABLE>
<CAPTION>
YEAR YEAR PERIOD FROM 6/19/95
ENDED ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 12/31/96 THROUGH 12/31/95
Accumulation Unit Value,
<S> <C> <C> <C>
Beginning of Period $11.88 $11.42 $11.13
------ ------ ------
Net Investment Income .50 .46 .29
Net Realized and Unrealized
Gain from Security Transactions -- -- --
Total from Investment Operations .50 .46 .29
--- --- ---
Accumulation Unit Value,
End of Period $12.38 $11.88 $11.42
===== ===== =====
Total Return* 4.17% 3.98% 2.61%
Contract Owners' Equity,
End of Period (in thousands) $371 $322 $326
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40% 1.40%**
Ratio of Net Investment Income
to Average Contract Owners' Equity 4.13% 3.91% 4.38%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality and
expense fees, administration expense fees and all expenses of the underlying
portfolio (investment advisory fees and portfolio operating expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
Cova Series Trust - Stock Index Portfolio
(Managed by Van Kampen American Capital Investment Advisory Corp.)
<TABLE>
<CAPTION>
YEAR YEAR PERIOD FROM 7/20/95
ENDED ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 12/31/96 THROUGH 12/31/95
Accumulation Unit Value,
<S> <C> <C> <C>
Beginning of Period $19.04 $15.77 $14.13
------ ------ ------
Net Investment Income .09 .67 .50
Net Realized and Unrealized
Gain from Security Transactions 5.83 2.60 1.14
---- ----- ----
Total from Investment Operations 5.92 3.27 1.64
---- ---- ----
Accumulation Unit Value,
End of Period $24.96 $19.04 $15.77
===== ===== =====
Total Return* 31.13% 20.69% 11.65%
Contract Owners' Equity,
End of Period (in thousands) $1,738 $960 $211
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40% 1.40%**
Ratio of Net Investment Income
to Average Contract Owners' Equity .50% 5.84% 18.57%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality and
expense fees, administration expense fees and all expenses of the underlying
portfolio (investment advisory fees and portfolio operating expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
Cova Series Trust - Growth & Income Portfolio
(Managed by Van Kampen American Capital Investment Advisory Corp.)
<TABLE>
<CAPTION>
YEAR YEAR PERIOD FROM 7/19/95
ENDED ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 12/31/96 THROUGH 12/31/95
Accumulation Unit Value,
<S> <C> <C> <C>
Beginning of Period $17.01 $14.61 $13.05
------ ------ ------
Net Investment Income .23 .68 .99
Net Realized and Unrealized
Gain from Security Transactions 3.74 1.72 .57
---- ---- ---
Total from Investment Operations 3.97 2.40 1.56
---- ---- ----
Accumulation Unit Value,
End of Period $20.98 $17.01 $14.61
====== ====== ======
Total Return* 23.34% 16.42% 11.93%
Contract Owners' Equity,
End of Period (in thousands) $1,680 $686 $105
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40% 1.40%**
Ratio of Net Investment Income
to Average Contract Owners' Equity 1.29% 7.08% 49.49%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality and
expense fees, administration expense fees and all expenses of the underlying
portfolio (investment advisory fees and portfolio operating expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
<TABLE>
<CAPTION>
Cova Series Trust - Bond Debenture Portfolio
(Managed by Lord, Abbett & Co.)
YEAR PERIOD FROM 5/20/96
ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 THROUGH 12/31/96
Accumulation Unit Value,
<S> <C> <C>
Beginning of Period $11.30 $10.15
------ ------
Net Investment Income .40 .33
Net Realized and Unrealized
Gain from Security Transactions 1.18 .82
---- ---
Total from Investment Operations 1.58 1.15
---- ----
Accumulation Unit Value,
End of Period $12.88 $11.30
===== =====
Total Return* 14.05% 11.32%
Contract Owners' Equity,
End of Period (in thousands) $4,475 $447
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%**
Ratio of Net Investment Income
to Average Contract Owners' Equity 5.50% 9.98%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality
and expense fees, administration expense fees and all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
<TABLE>
<CAPTION>
Cova Series Trust - Developing Growth Portfolio
(Managed by Lord, Abbett & Co.)
PERIOD FROM 11/7/97
(COMMENCEMENT OF
OPERATIONS)
THROUGH 12/31/97
Accumulation Unit Value,
<S> <C>
Beginning of Period $10.83
Net Investment Loss (.02)
Net Realized and Unrealized
Loss from Security Transactions (.28)
Total from Investment Operations (0.30)
Accumulation Unit Value,
End of Period $10.53
Total Return* (2.80%)
Contract Owners' Equity
End of Period (in thousands) $64
Ratio of Expenses to Average
Contract Owners' Equity 1.40%**
Ratio of Net Investment Loss
to Average Contract Owners' Equity (1.14%)**
<FN>
* Investment return does not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but does reflect mortality
and expense fees, administration expense fees and all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
<TABLE>
<CAPTION>
Cova Series Trust - Mid-Cap Value Portfolio
(Managed by Lord, Abbett & Co.)
PERIOD FROM 11/7/97
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/97
Accumulation Unit Value,
<S> <C>
Beginning of Period $10.05
Net Investment Loss (.01)
Net Realized and Unrealized
Gain from Security Transactions .43
Total from Investment Operations .42
Accumulation Unit Value,
End of Period $10.47
Total Return* 4.17%
Contract Owners' Equity
End of Period (in thousands) $89
Ratio of Expenses to Average
Contract Owners' Equity 1.40%**
Ratio of Net Investment Loss
to Average Contract Owners' Equity (.22%)**
<FN>
* Investment return does not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but does reflect mortality
and expense fees, administration expense fees and all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
<TABLE>
<CAPTION>
Cova Series Trust - Quality Bond Portfolio
(Managed by J.P. Morgan Investment Management, Inc.)
YEAR PERIOD FROM 5/20/96
ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 THROUGH 12/31/96
Accumulation Unit Value,
<S> <C> <C>
Beginning of Period $10.37 $9.95
------ -----
Net Investment Income .45 .29
Net Realized and Unrealized
Gain from Security Transactions .34 .13
--- ---
Total from Investment Operations .79 .42
--- ---
Accumulation Unit Value,
End of Period $11.16 $10.37
====== =====
Total Return* 7.58% 4.20%
Contract Owners' Equity,
End of Period (in thousands) $2,617 $669
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%**
Ratio of Net Investment Income
to Average Contract Owners' Equity 5.64% 7.33%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality
and expense fees, administration expense fees and all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
<TABLE>
<CAPTION>
Cova Series Trust - Small Cap Stock Portfolio
(Managed by J.P. Morgan Investment Management, Inc.)
YEAR PERIOD FROM 5/15/96
ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 THROUGH 12/31/96
Accumulation Unit Value,
<S> <C> <C>
Beginning of Period $11.31 $10.91
------ ------
Net Investment Income (Loss) (.08) .39
Net Realized and Unrealized
Gain from Security Transactions 2.26 .01
---- ---
Total from Investment Operations 2.18 .40
---- ---
Accumulation Unit Value,
End of Period $13.49 $11.31
====== =====
Total Return* 19.31% 3.69%
Contract Owners' Equity,
End of Period (in thousands) $6,578 $1,279
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%**
Ratio of Net Investment Income (Loss)
to Average Contract Owners' Equity (0.55%) 12.57%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality
and expense fees, administration expense fees and all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
<TABLE>
<CAPTION>
Cova Series Trust - Large Cap Stock Portfolio
(Managed by J.P. Morgan Investment Management, Inc.)
YEAR PERIOD FROM 5/16/96
ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 THROUGH 12/31/96
Accumulation Unit Value,
<S> <C> <C>
Beginning of Period $11.34 $10.16
------ ------
Net Investment Income .77 .22
Net Realized and Unrealized
Gain from Security Transactions 2.78 .96
---- ---
Total from Investment Operations 3.55 1.18
---- ----
Accumulation Unit Value,
End of Period $14.89 $11.34
===== =====
Total Return* 31.36% 11.62%
Contract Owners' Equity,
End of Period (in thousands) $10,224 $1,431
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%**
Ratio of Net Investment Income
to Average Contract Owners' Equity 10.14% 8.33%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality
and expense fees, administration expense fees and all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
<TABLE>
<CAPTION>
Cova Series Trust - Select Equity Portfolio
(Managed by J.P. Morgan Investment Management, Inc.)
YEAR PERIOD FROM 5/15/96
ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 THROUGH 12/31/96
Accumulation Unit Value,
<S> <C> <C>
Beginning of Period $10.84 $10.15
------ ------
Net Investment Income (Loss) (.03) .11
Net Realized and Unrealized
Gain from Security Transactions 3.24 .58
---- ---
Total from Investment Operations 3.21 .69
---- ---
Accumulation Unit Value,
End of Period $14.05 $10.84
===== =====
Total Return* 29.67% 6.76%
Contract Owners' Equity,
End of Period (in thousands) $9,845 $2,011
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%**
Ratio of Net Investment Income (Loss)
to Average Contract Owners' Equity (.06%) 4.23%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality
and expense fees, administration expense fees and all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
<TABLE>
<CAPTION>
Cova Series Trust - International Equity Portfolio
(Managed by J.P. Morgan Investment Management, Inc.)
YEAR PERIOD FROM 5/14/96
ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 THROUGH 12/31/96
Accumulation Unit Value,
<S> <C> <C>
Beginning of Period $10.97 $10.10
------ ------
Net Investment Income (Loss) (.01) .02
Net Realized and Unrealized
Gain from Security Transactions .50 .85
--- ---
Total from Investment Operations .49 .87
--- ---
Accumulation Unit Value,
End of Period $11.46 $10.97
===== =====
Total Return* 4.52% 8.60%
Contract Owners' Equity,
End of Period (in thousands) $6,351 $1,360
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%**
Ratio of Net Investment Income
to Average Contract Owners' Equity .06% .61%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality
and expense fees, administration expense fees and all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
** Annualized
</FN>
</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 are presented below.
<TABLE>
<CAPTION>
Lord Abbett Series Fund, Inc. Growth and Income Portfolio
YEAR YEAR PERIOD FROM 7/20/95
ENDED ENDED (COMMENCEMENT OF
OPERATIONS)
12/31/97 12/31/96 THROUGH 12/31/95
Accumulation Unit Value,
<S> <C> <C> <C>
Beginning of Period $25.09 $21.31 $19.54
------ ------ ------
Net Investment Income 2.01 1.32 1.50
Net Realized and Unrealized
Gain from Security Transactions 3.74 2.46 .27
---- ---- ---
Total from Investment Operations 5.75 3.78 1.77
---- ---- ----
Accumulation Unit Value,
End of Period $30.84 $25.09 $21.31
===== ===== =====
Total Return* 22.91% 17.76% 9.05%
Contract Owners' Equity,
End of Period (in thousands) $24,402 $9,416 $2,675
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40% 1.40%**
Ratio of Net Investment Income
to Average Contract Owners' Equity 10.45% 9.23% 42.60%**
<FN>
* Investment returns do not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but do reflect mortality
and expense fees, administration expense fees and all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period are presented below.
<TABLE>
<CAPTION>
General American Capital Company Money Market Portfolio
PERIOD FROM 12/4/97
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/97
Accumulation Unit Value,
<S> <C>
Beginning of Period $10.63
Net Investment Loss (.01)
Net Realized and Unrealized
Gain from Security Transactions .05
Total from Investment Operations .04
Accumulation Unit Value,
End of Period $10.67
Total Return* .34%
Contract Owners' Equity,
End of Period (in thousands) $150
Ratio of Expenses to Average
Contract Owners' Equity 1.40%**
Ratio of Net Investment Loss
to Average Contract Owners' Equity (1.34%)**
<FN>
* Investment return does not reflect any contract based fees (withdrawal,
contract maintenance or account transfer fees), but does reflect mortality
and expense fees, administration expense fees and all expenses of the
underlying portfolio (investment advisory fees and portfolio operating
expenses).
** Annualized
</FN>
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
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 Lord Abbett Series
Fund, Inc. ("Fund") or General American Capital Company ("GACC"). The Trust
consists of twelve portfolios of which four are managed by Van Kampen American
Capital Investment Advisory Corp., three are managed by Lord, Abbett and Co. and
five are managed by J.P. Morgan Investment Management, Inc. The Trust portfolios
available for investment are the Quality Income, Money Market, Stock Index,
Growth and Income, Bond Debenture, Developing Growth, Mid-Cap Value, Quality
Bond, Small Cap Stock, Large Cap Stock, Select Equity and International Equity.
The Fund has one portfolio available for investment, the Growth and Income
Portfolio and GACC has one portfolio available for investment, the Money Market
portfolio. Not all portfolios of the Trust, Fund and GACC are available for
investment depending upon the nature and specific terms of the different
contracts being offered for sale. The Trust, Fund and GACC are diversified,
open-end, management investment companies which are intended to meet differing
investment objectives.
The Trust Developing Growth and Trust Mid-Cap Value sub-accounts commenced
operations on November 7, 1997. The GACC Money Market sub-account commenced
operations on December 4, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES :
A. Investment Valuation
Investments in shares of the Trust, Fund and GACC are carried in the
statement of assets and liabilities at the underlying net asset value of the
Trust, Fund and GACC. The net asset value of the Trust, Fund and GACC has been
determined on the market value basis and is valued daily by the Trust, Fund and
GACC investment managers. Realized gains and losses are calculated by the
average cost method.
B. Reinvestment of Dividends
With the exception of GACC, 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. Dividend and capital
gain distributions are recorded as income on the ex-dividend date.
GACC follows the Federal income tax practice known as consent dividending,
whereby substantially all of its net investment income and net realized capital
gains are deemed to be passed through to the Separate Account. As a result, GACC
does not distribute any dividends or capital gains. During December of each
year, accumulated investment income and capital gains of the underlying GACC
portfolios are allocated to the Separate Account by increasing the cost basis
and recognizing a capital gain in the Separate Account.
(continued)
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
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
owner's gross income until amounts are withdrawn or received pursuant to an
Optional Payment Plan.
3. CONTRACT FEES:
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 fee is calculated and deducted from the contract value.
The withdrawal fee 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 fees.
An annual contract maintenance fee of $30 is imposed on all contracts with
contract values less than $50,000 on their policy anniversary. The fee 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, 1997, withdrawal and account transfer fees of
$6,919 and contract maintenance fees of $12,257 were deducted from the contract
values in the Separate Account
Mortality and expense risks assumed by Cova are compensated by a fee 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
fee 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 fees 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.
(continued)
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
4. GAIN (LOSS) ON INVESTMENTS:
5. The table below summarizes realized and unrealized gains and losses on
investments:
<TABLE>
<CAPTION>
9. REALIZED GAINS (LOSSES) ON INVESTMENTS:
YEAR ENDED YEAR ENDED
12/31/97 12/31/96
Trust Quality Income Portfolio:
<S> <C> <C>
Aggregate Proceeds From Sales $78,042 $50,860
Aggregate Cost 78,307 51,542
------ ------
Net Realized Loss on Investments ($265) ($682)
====== ======
Trust Money Market Portfolio:
Aggregate Proceeds From Sales $5,031,278 $4,136,159
Aggregate Cost 5,031,278 4,136,159
--------- ---------
Net Realized Gain on Investments -- --
Trust Stock Index Portfolio:
Aggregate Proceeds From Sales $100,563 $23,308
Aggregate Cost 81,687 21,966
------ ------
Net Realized Gain on Investments $18,876 $1,342
======= ======
Trust Growth and Income Portfolio:
Aggregate Proceeds From Sales $21,278 $24,274
Aggregate Cost 18,280 23,756
------ ------
Net Realized Gain on Investments $2,998 $518
====== ====
Trust Bond Debenture Portfolio:
Aggregate Proceeds From Sales $109,027 64,093
Aggregate Cost 103,526 62,718
------- ------
True Net Realized Gain on Investments $5,501 $1,375
====== -----
Trust Developing Growth Portfolio:
Aggregate Proceeds From Sales $ 15,035
Aggregate Cost 15,050
-------
True Net Realized Gain on Investments ($15) N/A
======
Trust Mid-Cap Value Portfolio:
Aggregate Proceeds From Sales $ 5,141
Aggregate Cost 5,091
-------
True Net Realized Gain on Investments $ 50 N/A
======
</TABLE>
(continued)
COVA VARIABLE ANNUITY ACCOUNT
FIVE
NOTES TO FINANCIAL STATEMENTS
REALIZED GAINS (LOSSES) ON
INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/97 12/31/96
Trust Quality Bond Portfolio:
<S> <C> <C>
Aggregate Proceeds From Sales $149,426 $9,121
Aggregate Cost 147,472 9,056
------- -----
Net Realized Gain on Investments $1,954 $65
====== ===
Trust Small Cap Stock Portfolio:
Aggregate Proceeds From Sales $91,131 $8,158
Aggregate Cost 81,824 7,824
------ -----
Net Realized Gain on Investments $9,307 $334
====== ====
Trust Large Cap Stock Portfolio:
Aggregate Proceeds From Sales $121,132 $39,604
Aggregate Cost 106,386 36,519
------- ------
Net Realized Gain on Investments $14,746 $3,085
======= ======
Trust Select Equity Portfolio:
Aggregate Proceeds From Sales $150,731 $10,599
Aggregate Cost 130,262 10,134
------- ------
Net Realized Gain on Investments $20,469 $465
======= ====
Trust International Equity Portfolio:
Aggregate Proceeds From Sales $185,858 $4,037
Aggregate Cost 182,972 3,905
------- -----
Net Realized Gain on Investments $2,886 $132
====== ====
Fund Growth and Income Portfolio:
Aggregate Proceeds From Sales $585,935 $96,408
Aggregate Cost 507,692 93,588
------- ------
Net Realized Gain on Investments $78,243 $ 2,820
======= ------
GACC Money Market Portfolio:
Aggregate Proceeds From Sales $ 29,146
Aggregate Cost 29,072
-------
True Net Realized Gain on Investments $ 74 N/A
=======
</TABLE>
(continued)
COVA VARIABLE ANNUITY ACCOUNT
FIVE
NOTES TO FINANCIAL STATEMENTS
NET CHANGE IN UNREALIZED GAINS
(LOSSES) ON INVESTMENTS:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/97 12/31/96
Trust Quality Income Portfolio:
<S> <C> <C>
End of Period $14, 678 $447
Beginning of Period 447 1,806
--- -----
Net change in Unrealized Gain (Loss) on Investments $14,231 ($1,359)
======= ========
Trust Money Market Portfolio:
End of Period -- --
Beginning of Period -- --
Net change in Unrealized Gain on Investments -- --
Trust Stock Index Portfolio:
End of Period $393,343 $82,185
Beginning of Period 82,185 1,325
------ -----
Net change in Unrealized Gain on Investments $311,158 $80,860
======== =======
Trust Growth and Income Portfolio:
End of Period $251,383 $37,743
Beginning of Period 37,743 (3,794)
------ ------
Net change in Unrealized Gain on Investments $213,640 $41,537
======== =======
Trust Bond Debenture Portfolio:
End of Period $163,335 $8,392
Beginning of Period 8,392 --
-----
Net change in Unrealized Gain on Investments $154,943 $8,392
======== ======
Trust Developing Growth Portfolio:
End of Period $404
Beginning of Period --
Net change in Unrealized Gain on Investments $404 N/A
====
Trust Mid-Cap Value Portfolio:
End of Period $2,536
======
Beginning of Period --
Net change in Unrealized Gain on Investments $2,536 N/A
======
</TABLE>
(continued)
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
5. UNREALIZED GAINS ON INVESTMENTS, CONTINUED:
YEAR ENDED YEAR ENDED
12/31/97 12/31/96
Trust Quality Bond Portfolio:
<S> <C> <C>
End of Period $42,116 $2,313
Beginning of Period 2,313 --
-----
Net change in Unrealized Gain on Investments $39,803 $2,313
======= ======
Trust Small Cap Stock Portfolio:
End of Period $765,772 $34,020
Beginning of Period 34,020 --
------
Net change in Unrealized Gain on Investments $731,752 $34,020
======== =======
Trust Large Cap Stock Portfolio:
End of Period $630,868 $56,856
Beginning of Period 56,856 --
------
Net change in Unrealized Gain on Investments $574,012 $56,856
======== =======
Trust Select Equity Portfolio:
End of Period $1,284,973 $101,392
Beginning of Period 101,392 --
-------
Net change in Unrealized Gain on Investments $1,183,581 $101,392
========== ========
Trust International Equity Portfolio:
End of Period $91,655 $66,683
Beginning of Period 66,683 --
------
Net change in Unrealized Gain on Investments $24,972 $66,683
======= =======
Fund Growth and Income Portfolio:
End of Period $1,514,090 $374,769
Beginning of Period 374,769 (96,906)
------- -------
Net change in Unrealized Gain on Investments $1,139,321 $421,675
========== ========
GACC Money Market Portfolio:
End of Period $440
Beginning of Period -- N/A
-----
Net change in Unrealized Gain on Investments $440
==========
</TABLE>
(continued)
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
5. ACCOUNT UNIT TRANSACTIONS:
<TABLE>
<CAPTION>
The change in the number of accumulation units resulting from account unit
transactions is as follows:
Cova Series Trust
---------------------------------------------------------------------------------
Quality Money Stock Growth and Bond
Income Market Index Income Debenture
<S> <C> <C> <C> <C>
Balance at December 31, 1995 8,702 28,509 13,384 7,197 N/A
Units Sold 3,762 429,882 9,129 2,136 10,897
Units Redeemed (1,485) (10) (805) (596) (31)
Units Transferred 8,258 (431,287) 28,718 31,613 28,679
----- --------- ------ ------ ------
Balance at December 31, 1996 19,237 27,094 50,426 40,350 39,545
------ ------ ------ ------ ------
Units Sold 339 449,124 927 8,266 82,546
Units Redeemed (2,985) (5,992) (1,112) (623) (6,072)
Units Transferred 27,138 (440,275) 19,361 32,087 231,381
------ --------- ------ ------ -------
Balance at December 31, 1997 43,729 29,951 69,602 80,080 347,400
====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
The change in the number of accumulation units resulting from account unit
transactions is as follows:
------------------------
Developing Mid-Cap
Growth Value
<S> <C> <C>
Balance at December 31, 1995 N/A N/A
Units Sold
Units Redeemed
Units Transferred
Balance at December 31, 1996 N/A N/A
--- ---
Units Sold 1,385 3,163
Units Redeemed -- --
Units Transferred 4,654 5,347
----- -----
Balance at December 31, 1997 6,039 8,510
===== =====
</TABLE>
<TABLE>
<CAPTION>
(continued)
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
Cova Series Trust Lord Abbett Series Fund, Inc.
------------------------------------------------------------------------ ----
Quality Small Large Select Int'l
Bond Cap Stock Cap Stock Equity Equity
<S> <S> <C> <C> <C> <C>
Balance at December 31, 1995 N/A N/A N/A N/A N/A
Units Sold 9,984 43,638 50,898 74,928 55,862
Units Redeemed (152) (288) (649) (830) (448)
Units Transferred 54,702 69,768 75,982 111,411 68,618
------ ------ ------ ------- ------
Balance at December 31, 1996 64,534 113,118 126,231 185,509 124,032
------ ------- ------- ------- -------
Units Sold 26,745 81,088 131,724 133,310 100,609
Units Redeemed (2,643) (9,279) (8,007) (10,336) (8,250)
Units Transferred 146,007 302,653 436,729 392,067 337,714
------- ------- ------- ------- -------
Balance at December 31, 1997 234,643 487,580 686,677 700,550 554,105
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
(continued)
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
GACC
------------ ------------
Growth and Money
Income Market
<S> <C> <C>
Balance at December 31, 1995 125,555 N/A
Units Sold 61,744
Units Redeemed (5,839)
Units Transferred 193,844
-------
Balance at December 31, 1996 375,304 N/A
------- ---
Units Sold 66,936 16,814
Units Redeemed (17,887) --
Units Transferred 366,957 (2,723)
------- -------
Balance at December 31, 1997 791,310 14,091
======= ======
</TABLE>
COVA FINANCIAL LIFE INSURANCE COMPANY (a wholly owned subsidiary of Cova
Financial Services Life Insurance Company)
Financial Statements
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
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) (the Company) as of December 31, 1997 and 1996, and
the related statements of income, shareholder's equity, and cash flows for
the years ended December 31, 1997 and 1996, and the period from June 1,
1995 to December 31, 1995 (Successor periods), and the period from January
1, 1995 to May 31, 1995 (Predecessor period). 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 audits 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, 1997 and 1996, 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
Predecessor financial statements present fairly, in all material respects,
the results of its operations and its cash flows for the Predecessor
period, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective June 1, 1995,
the predecessor to Cova Corporation, a subsidiary of General American Life
Insurance Company, acquired all of the outstanding stock of Cova Financial
Life Insurance Company in a business combination accounted for as a
purchase. As a result of the acquisition, the financial information for the
periods subsequent to the acquisition is presented on a different cost
basis than that for the period prior to the acquisition and, therefore, is
not comparable.
Chicago, Illinois
March 5, 1998
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets
December 31, 1997 and 1996
(In thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Investments:
Debt securities available for sale, at fair value
<S> <C> <C>
(cost of $96,884 in 1997 and $71,257 in 1996) $ 97,520 71,263
Mortgage loans (net) 1,786 -
Policy loans 1,083 1,048
Short-term investments, at fair value - 44
- -------------------------------------------------------------------------------------------------------------------
Total investments 100,389 72,355
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - interest-bearing 756 4,150
Cash - noninterest-bearing 1,392 2,485
Accrued investment income 1,826 1,122
Deferred policy acquisition costs 6,774 3,321
Present value of future profits 900 1,178
Goodwill 1,923 2,034
Deferred tax asset (net) 1,042 1,115
Receivable from OakRe 68,533 92,238
Reinsurance receivables 114 51
Other assets 14 44
Separate account assets 69,318 18,880
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 252,981 198,973
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets, continued
December 31, 1997 and 1996
(In thousands of dollars, except share data)
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Policyholder deposits $ 157,566 154,566
Future policy benefits 5,381 4,561
Payable on purchase of securities 92 1,048
Accounts payable and other liabilities 1,462 736
Federal and state income taxes payable 106 10
Future purchase price payable to OakRe 565 683
Guaranty fund assessments 1,000 1,585
Separate account liabilities 69,318 18,880
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 235,490 182,069
- -------------------------------------------------------------------------------------------------------------------
Shareholder's equity:
Common stock, $233.34 par value. (Authorized
30,000 shares; issued and outstanding 2,800 2,800
12,000 shares in 1997 and 1996
Additional paid-in capital 13,523 13,523
Retained earnings 1,023 580
Net unrealized appreciation on securities,
net of tax 145 1
- -------------------------------------------------------------------------------------------------------------------
Total shareholder's equity 17,491 16,904
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 252,981 198,973
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Income
Years ended December 31, 1997, 1996, and 1995
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
----------------------------------------- ---------------
7 months 5 months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Premiums $ 1,191 488 142 82
Net investment income 6,761 4,176 1,419 5,271
Net realized gains (losses) on sales of
investments 158 (28) 118 (272)
Separate account fees 599 134 10 -
Other income (expense) 45 35 (7) 57
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 8,754 4,805 1,682 5,138
- ---------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest on policyholder deposits 4,837 2,563 788 5,034
Current and future policy benefits 1,481 722 115 178
Operating and other expenses 1,203 570 309 814
Amortization of purchased intangible
assets 165 66 157 -
Amortization of deferred acquisition
costs 320 187 5 522
- ---------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 8,006 4,108 1,374 6,548
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 748 697 308 (1,410)
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit):
Current 310 351 - (362)
Deferred (5) (66) 140 (201)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) 305 285 140 (563)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 443 412 168 (847)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholder's Equity
Years ended December 31, 1997, 1996, and 1995
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
-------------------------------------- -------------
7 months 5 months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
Common stock:
<S> <C> <C> <C> <C>
Balance at beginning of period $ 2,800 2,800 2,800 600
Par value adjustment - - - 2,200
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period 2,800 2,800 2,800 2,800
- ---------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 13,523 13,523 18,093 17,200
Adjustment to reflect purchase acquisition
indicated in note 2 - - (7,570) -
Par value adjustment - - - (2,200)
Capital contribution - - 3,000 3,093
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period 13,523 13,523 13,523 18,093
- ---------------------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 580 168 209 4,045
Adjustment to reflect purchase acquisition
indicated in note 2 - - (209) -
Net income (loss) 443 412 168 (847)
Adjustment due to financial reinsurance
transaction with OakRe - - - (2,989)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period 1,023 580 168 209
- ---------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on securities:
Balance at beginning of period 1 192 (3,789) (11,316)
Adjustment to reflect purchase acquisition
indicated in note 2 - - 3,789 -
Change in unrealized appreciation (depreciation)
of debt and equity securities 630 (840) 846 15,151
Change in deferred Federal income taxes (77) 103 (104) (4,053)
Change in deferred acquisition costs
attributable to unrealized gains (144) (69) - (3,571)
Change in present value of future profits
attributable to unrealized losses (gains) (265) 615 (550) -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period 145 1 192 (3,789)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholder's equity $ 17,491 16,904 16,683 17,313
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
---------------------------------------- ---------------
7 months 5 months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Interest and dividend receipts $ 6,162 3,676 934 7,283
Premiums received 1,210 509 154 90
Insurance and annuity benefit payments (669) (580) (339) (252)
Operating disbursements (1,341) (768) (490) (1,038)
Taxes on income refunded (paid) (298) (341) - 1,975
Commissions and acquisition costs paid (3,821) (2,413) (1,169) (542)
Other 69 (183) 360 6,299
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 1,312 (100) (550) 13,815
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash used for the purchase of
investment securities (53,534) (42,655) (52,399) (935)
Proceeds from investment securities
sold and matured 25,379 10,635 14,399 151,204
Investment expenses (81) (90) (57) (97)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (28,236) (32,110) (38,057) 150,172
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Policyholder deposits 81,788 38,348 12,442 5,614
Transfers from (to) OakRe 25,060 36,553 33,579 (171,081)
Transfer to separate accounts (56,144) (13,669) (3,312) -
Return of policyholder deposits (28,267) (28,521) (26,897) (15,531)
Capital contributions received - - 3,000 3,093
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 22,437 32,711 18,812 (177,905)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (4,487) 501 (19,795) (13,918)
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents -
beginning of period 6,635 6,134 25,929 39,847
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents -
end of period $ 2,148 6,635 6,134 25,929
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
---------------------------------------- ---------------
7 months 5 months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
Reconciliation of net income (loss) to net cash provided by operating
activities:
<S> <C> <C> <C> <C>
Net income (loss) $ 443 412 168 (847)
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Increase (decrease) in future policy
benefits 820 192 (201) (52)
Increase (decrease) in payables and
accrued liabilities 82 95 161 (252)
Decrease (increase) in accrued
investment income (704) (556) (525) 1,766
Amortization of intangible assets and
deferred acquisition costs 485 253 162 522
Amortization and accretion of
securities premiums and discounts (10) 73 (9) 32
Net realized (gain) loss on sale of
investments (158) 28 (118) 272
Interest on policyholder deposits 4,837 2,563 788 5,034
Investment expenses paid 115 90 57 97
Increase (decrease) in current and
deferred Federal income taxes 91 (66) 140 1,412
Recapture commissions paid to OakRe (159) (273) (223) -
Deferral of acquisition costs (3,917) (2,413) (1,169) (542)
Due to/from affiliates - 44 27 6,470
Other (613) (542) 192 (97)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 1,312 (100) (550) 13,815
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(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 conduct business in the state of California. Most of the
policies issued present no significant mortality or 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. 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 85%, 81%, and 71% of the Company's sales have been through
two specific brokerage firms, A. G. Edwards & Sons, Incorporated, and
Edward Jones & Company, Incorporated, in 1997, 1996, and 1995,
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, 1997 and
1996.
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) Purchase 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 summarizes the
final allocation of purchase price.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 1, 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in millions)
Assets acquired:
<S> <C>
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 fair 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 shareholder's equity of approximately $4.0 million in
1995, reflecting the application of push down purchase accounting. The
Company's financial statements subsequent to June 1, 1995 reflect this
new basis of accounting.
All amounts for periods ended before June 1, 1995 are labeled
"Predecessor" and are based on 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
Debt Securities
Investments in all debt securities with readily determinable fair 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, 1997 and 1996 were classified as
available-for-sale. Securities available-for-sale are carried at fair
value, with unrealized holding gains and losses reported as a separate
component of shareholder's 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.
Mortgage Loans and Other Invested Assets
Mortgage loans and policy loans are carried at their unpaid principal
balance. Other invested assets are carried at the lower of cost or
market.
Reserves for loans are established when the Company determines that
collection of all amounts due under the contractual terms is doubtful
and are calculated in conformity with Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures.
The Company had no impaired loans, but did establish a valuation
allowance of $319 for potential losses on mortgage loans at December 31,
1997.
Cash and Cash Equivalents
Cash and cash equivalents include currency and demand deposits in banks,
U.S. Treasury bills, money market accounts, and commercial paper with
maturities under 90 days, which are not otherwise restricted.
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.
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 amortization period is
the remaining life of the policies, which is approximately 20 years from
the date of original policy issue.
The components of deferred policy acquisition costs are shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
7 Months 5 Months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Deferred policy acquisition costs,
<S> <C> <C> <C> <C>
beginning of period $ 3,321 1,164 6,167 9,718
Effects of push down purchase
accounting - - (6,167) -
Commissions and expenses deferred 3,917 2,413 1,169 542
Amortization (320) (187) (5) (522)
Deferred policy acquisition costs
attributable to unrealized
gains (144) (69) - (3,571)
- ---------------------------------------------------------------------------------------------------------------------------
Deferred policy acquisition costs,
end of period $ 6,774 3,321 1,164 6,167
- ---------------------------------------------------------------------------------------------------------------------------
</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 pretax 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 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 6.2%, 4.6%, 3.8%, 3.1%, and 2.4% for the years ended
December 31, 1998 through 2002, 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 reallocation 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>
- ---------------------------------------------------------------------------------------------------------------------------
7 Months
ended
December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Present value of future profits - beginning of period $ 1,178 576 1,233
Net amortization (13) 78 (107)
Adjustment due to revised push down purchase accounting - (91) -
Present value of future profit attributable to unrealized losses (gains) (265) 615 (550)
- ---------------------------------------------------------------------------------------------------------------------------
Present value of future profits - end of period $ 900 1,178 576
- ---------------------------------------------------------------------------------------------------------------------------
</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>
- ---------------------------------------------------------------------------------------------------------------------------
7 Months
ended
December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Goodwill - beginning of period $ 2,034 2,306 2,375
Amortization (111) (105) (69)
Adjustment due to revised push down purchase accounting - (167) -
- ---------------------------------------------------------------------------------------------------------------------------
Goodwill - end of period $ 1,923 2,034 2,306
- ---------------------------------------------------------------------------------------------------------------------------
</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 rate guarantee period, the
Company will pay a commission to OakRe of 1.75% up to 40% of policy
account values originally reinsured and 3.5% thereafter. On policies
that are recaptured and subsequently exchanged to a variable annuity
policy, the Company will pay a commission to OakRe of 0.50%. The Company
has recorded a future payable that represents the present value of the
anticipated future commission payments payable to OakRe over the
remaining life of the financial reinsurance agreement discounted at an
estimated borrowing rate of 6.5%. This liability 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.
The components of this future payable are shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
7 Months
ended
December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Future payable - beginning of period $ 683 1,265 1,438
Interest added 41 39 50
Payments to OakRe (159) (273) (223)
Adjustment due to revised push down purchase accounting - (348) -
- ---------------------------------------------------------------------------------------------------------------------------
Future payable - end of period $ 565 683 1,265
- ---------------------------------------------------------------------------------------------------------------------------
</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 Company's assets as of the date of acquisition was 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 company's policyholder deposits as of December 31, 1997 was
6.15%.
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 filed its own separate income
tax return. Beginning in 1997, the Company files a consolidated income
tax return with its immediate parent, Cova Financial Services Life
Insurance Company. Allocations of Federal income taxes are based upon
separate return calculations.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in 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
- Amortization of deferred policy acquisition costs -
Amortization of present value of future profits -
Recoverability of goodwill
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 SFAS No. 121, Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed of, 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 at December 31, 1997.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments
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 No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosures 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 value 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.
Investment Securities and Mortgage Loans (Including Mortgage-backed
Securities)
Fair values of 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, certain mortgage-backed securities, and mortgage
loans, 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).
Policy Loans
Fair values of policy loans approximate carrying value as the interest
rates on the majority of policy loans are reset periodically and
therefore approximate current interest rates.
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 contracts 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, 1997 and
1996, the cash surrender value of policyholder funds on deposit was
$1,994,062 and $1,030,007, respectively, less than their stated carrying
value. Of the contracts permitting surrender, substantially all 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, 1997 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 1996 and 1995 amounts have been reclassified to conform to the
1997 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 shareholder's equity. The amortized
cost, estimated fair value, and carrying value of investments at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government Treasuries $ 100 1 - 101 101
Collateralized mortgage
obligations 24,018 305 (64) 24,259 24,259
Corporate, state,
municipalities, and
political subdivisions 72,766 1,500 (1,106) 73,160 73,160
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 96,884 1,806 (1,170) 97,520 97,520
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage loans (net) 1,786 143 - 1,929 1,786
Policy loans 1,083 - - 1,083 1,083
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total investments $ 99,753 1,949 (1,170) 100,532 100,389
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Debt securities:
<S> <C> <C> <C> <C>
U.S. Government Treasuries $ 100 1 - 101 101
Collateralized mortgage
obligations 20,181 81 (119) 20,143 20,143
Corporate, state,
municipalities, and
political subdivisions 50,976 433 (390) 51,019 51,019
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 71,257 515 (509) 71,263 71,263
- ---------------------------------------------------------------------------------------------------------------------------
Policy loans 1,048 - - 1,048 1,048
Short-term investments 44 - - 44 44
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total investments $ 72,349 515 (509) 72,355 72,355
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties. Maturities of mortgage-backed securities will be
substantially shorter than their contractual maturity because they
require monthly principal installments and mortgagees may prepay
principal.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Estimated
Amortized fair
cost value
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Less than one year $ 1,375 1,378
Due after one year through five years 27,132 27,100
Due after five years through ten years 36,120 36,463
Due after ten years 8,239 8,320
Mortgage-backed securities 24,018 24,259
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 96,884 97,520
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, approximately 90.9% of the Company's debt
securities are investment grade or are nonrated but considered to be of
investment grade. Of the 9.1% noninvestment grade debt securities, 7.2%
are rated as BB or its equivalent, and 1.9% are rated B or its
equivalent.
All debt securities were income producing during the years ended
December 31, 1997 and 1996. As of December 31, 1997 and 1996, the
Company had no impaired investments.
The components of investment income, realized gains (losses) and
unrealized appreciation (depreciation) were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
7 Months 5 Months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Income on debt securities $ 6,575 3,926 1,166 4,075
Income on short-term investments 186 243 257 1,261
Income on policy loans 83 86 46 29
Interest on mortgage loans 32 - - -
- ---------------------------------------------------------------------------------------------------------------------------
Miscellaneous interest - 8 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total investment income 6,876 4,263 1,469 5,365
Investment expenses (115) (87) (50) (94)
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income $ 6,761 4,176 1,419 5,271
- ---------------------------------------------------------------------------------------------------------------------------
Net realized capital gains (losses) - debt securities $ 158 (28) 118 (272)
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) were as follows:
Debt securities $ 633 6 850 (10,594)
Short-term investments 3 - (4) 1
Effects on deferred acquisition costs
amortization (213) (69) - 4,767
Effects on present value of future
profits amortization (200) 65 (550) -
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) before income taxes 223 2 296 (5,826)
Unrealized income tax benefit (expenses) (78) (1) (104) 2,037
- ---------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (deprecation)
- ---------------------------------------------------------------------------------------------------------------------------
on investments $ 145 1 192 (3,789)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales, redemptions, and paydowns of investments in debt
securities during 1997 were $25,379,783. Gross gains of $166,335 and
gross losses of $8,658 were realized on those sales. Included in these
amounts were $47,391 of gross gains and $7,300 of gross losses realized
on the sale of noninvestment grade securities.
Proceeds from sales, redemptions and paydowns for 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 noninvestment
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.
(5) Securities Greater than 10% of Shareholder's Equity
As of December 31, 1997 and 1996, the Company held the following
individual securities which exceeded 10% of shareholder's equity:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Colonial Realty, at carrying value $ 2,017,400 2,036,540
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(6) Postretirement 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 1997, 1996, and 1995, the Company was allocated a
portion of benefit costs including severance pay, accumulated vacations,
and disability benefits. At December 31, 1997 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 allocations is not material.
(7) Income Taxes
The Company will file a consolidated Federal income tax return with its
immediate parent, CFSLIC. 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 shareholder's equity accounts. Income tax expense (benefit) for
the years ended December 31 was allocated as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
The Company Predecessor
7 Months 5 Months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Statements of income:
Operating income (excluding realized
<S> <C> <C> <C> <C>
investment gains and losses) $ 250 295 194 (561)
Realized investment gains (losses) 55 (10) (54) (2)
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) included
in the statements of income 305 285 140 (563)
- ---------------------------------------------------------------------------------------------------------------------------
Shareholder's equity:
Change in deferred Federal income taxes 77 (103) 104 4,053
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 382 182 244 3,490
- ---------------------------------------------------------------------------------------------------------------------------
The actual Federal income tax expense (benefit) differed from the
expected tax expense computed by applying the U.S. Federal statutory
rate to income before taxes on income as follows:
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The Company Predecessor
7 Months 5 Months
ended ended
December 31, May 31,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $ 262 35.0% $ 244 35.0% $ 108 35.0% $ (494) 35.0%
Tax-exempt bond interest - - - - - - (70) 5.0
Amortization of intangible assets 39 5.2 37 5.3 25 8.2 - -
Other 4 0.5 4 0.6 7 2.3 1 (0.1)
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 305 40.7 $ 285 40.9% $ 140 45.5%$ (563) 39.9%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
<S> <C> <C>
Tax basis of intangible assets purchased $ 679 733
Liability for commission on recaptures 198 239
Policy reserves 1,898 972
DAC "Proxy Tax" 977 556
Other deferred tax assets - 6
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 3,752 2,506
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gains in investments 78 1
PVFP 144 219
Deferred acquisition costs 2,371 1,162
- ---------------------------------------------------------------------------------------------------------------------------
Other deferred tax liabilities 117 9
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,710 1,391
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 1,042 1,115
- ---------------------------------------------------------------------------------------------------------------------------
</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 was established at
December 31, 1997 or 1996.
(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
Corporation, which provides management services and the employees
necessary to conduct the activities of the Company; and Conning Asset
Management, which provides investment advice. Additionally, a portion of
overhead and other corporate expenses are allocated by the Company's
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. Expenses and fees paid to affiliated companies in 1997 and
1996 for the Company were $396,806 and $303,694, respectively.
(9) Statutory Surplus and Dividend Restriction
GAAP differs in certain respects from accounting practices prescribed or
permitted by insurance regulatory authorities (statutory accounting
principles).
The major differences arise principally from the immediate expense
recognition of policy acquisition costs and intangible assets for
statutory reporting, determination of policy reserves based on different
discount rates and methods, the recognition of deferred taxes under GAAP
reporting, the nonrecognition 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
under statutory accounting principles. In addition, adjustments to
record the carrying values of debt securities and certain equity
securities at estimated fair value 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 shareholder's 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 GAAP were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands
of dollars)
<S> <C> <C>
Statutory capital and surplus $ 10,389 11,176
Reconciling items:
Statutory asset valuation reserves 1,151 825
Interest maintenance reserve 111 34
GAAP investment adjustments to fair value 636 6
Deferred policy acquisition costs 6,774 3,321
GAAP basis policy reserves (4,871) (2,101)
Deferred federal income taxes (net) 1,042 1,115
Goodwill 1,923 2,034
Present value of future profits 900 1,178
Future purchase price payable (565) (683)
Other 1 (1)
- ---------------------------------------------------------------------------------------------------------------------------
GAAP shareholder's equity $ 17,491 16,904
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Statutory net loss for the years ended December 31, 1997, 1996, and
1995 were $461,118, $113,236, and $2,404,316, respectively.
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
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. The maximum
dividend permissible during 1998 will be $758,912, which is 10% of the
Company's December 31, 1997 statutory surplus of $7,589,120.
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,
1997, the Company's Total Adjusted Capital and Authorized Control Level
- RBC were $11,539,912 and $2,062,533, respectively. This level of
adjusted capital qualifies under all tests.
(10) Guaranty Fund Assessments
The Company participates with life insurance companies licensed in
California in an association formed to guaranty benefits to
policyholders of insolvent life insurance companies. Under the state
law, as a condition for maintaining the Company's authority to issue new
business, the Company is contingently liable for its share of claims
covered by the guaranty association for insolvencies incurred through
1997, but for which assessments have not yet been determined or
assessed, to a maximum generally of 1% of statutory premiums per annum.
At December 31, 1997, 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
$1.0 million in future assessments on insolvencies that occurred before
December 31, 1997. 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 $1.0 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 remaining 20%. The credits to be retained for 1997 were
not material.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
a. FINANCIAL STATEMENTS
The following financial statements of the Separate Account are included in
Part B hereof:
1. Independent Auditors' Report.
2. Statement of Assets and Liabilities as of December 31, 1997.
3. Statement of Operations for the year or period ended December
31, 1997.
4. Statements of Changes in Contract Owners' Equity for each of the
years or periods presented.
5. Financial Highlights for each of the years or periods presented.
6. Notes to Financial Statements - December 31, 1997
and 1996.
The following financial statements of the Company are included in Part B
hereof:
1. Independent Auditors' Report.
2. Balance Sheets as of December 31, 1997 and 1996.
3. Statements of Income for the years ended December 31, 1997, 1996, and
1995.
4. Statements of Shareholder's Equity for the Years Ended December 31,
1997, 1996, and 1995.
5. Statements of Cash Flows for the Years Ended December 31, 1997, 1996,
and 1995.
6. Notes to Financial Statements - December 31, 1997, 1996, and 1995.
b. EXHIBITS
1. Resolution of Board of Directors of the Company authorizing the
establishment of the Variable Account+++
2. Not Applicable
3. Principal Underwriter's Agreement+
4. (i) Individual Flexible Purchase Payment Deferred Variable and Fixed
Annuity Contract*
(ii) Endorsement**
5. Application for Variable Annuity*
6. (i) Copy of Articles of Incorporation of the Company+
(ii) Copy of the Bylaws of the Company+
7. Not Applicable
8.(i) Participation Agreement among Variable Insurance Products Fund,
Fidelity Distributors Corporation and Cova Financial Life Insurance
Company++++
(ii) Participation Agreement among Variable Insurance Products Fund II,
Fidelity Distributors Corporation and Cova Financial Life Insurance
Company++++
(iii) Participation Agreement among Variable Insurance Products Fund III,
Fidelity Distributors Corporation and Cova Financial Life Insurance
Company++++
(iv) Form of Fund Participation Agreement among MFS Variable Insurance
Trust, Cova Financial Life Insurance Company and Massachusetts
Financial Services Company+
(v) Form of Fund Participation Agreement by and among AIM Variable
Insurance Funds, Inc., A I M Distributors, Inc., Cova Financial
Life Insurance Company, on behalf of itself and its Separate
Accounts, and Cova Life Sales Company++
9. Opinion and Consent of Counsel++++
10. Consent of Independent Auditors
11. Not Applicable
12. Not Applicable
13. Calculation of Performance Information++++
14. Company Organizational Chart***
27. Not Applicable
* incorporated by reference to Xerox Variable Annuity Account Five,
Form N-4 (File No. 33-50174) as filed on July 29, 1992.
** incorporated by reference to Registrant's Pre-Effective Amendment
No. 1 to Form N-4 (File No. 33-50174) as filed on July 16, 1993.
*** incorporated by reference to Registrant's Post-Effective Amendment
No. 3 to Form N-4 (File No. 33-50174) as filed electronically on
April 25, 1996.
+ incorporated by reference to Pre-Effective Amendment No. 1 to
Form N-4 (File No. 333-34817) as filed electronically on November 19,
1997.
++ incorporated by reference to Post-Effective Amendment No. 1 to
Form N-4 (File No. 333-34817) as filed electronically on February 11,
1998.
+++ incorporated by reference to Cova Variable Life Account Five, Initial
Registration Statement on Form S-6 (File No. 333-37559) as filed
electronically on October 9, 1997.
++++ incorporated by reference to Post-Effective Amendment No. 6 to Form N-4
(File No. 33-50174) as filed electronically on April 29, 1998.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR.
The following are the Officers and Directors who are engaged directly or
indirectly in activities relating to the Registrant or the variable annuity
contracts offered by the Registrant and the executive officers of the Company:
Name and Principal Positions and Offices
Business Address with Depositor
- -------------------------------- --------------------------------
Richard A. Liddy Chairman of the Board and Director
700 Market Street
St. Louis, MO 63101
Leonard M. Rubenstein Director
700 Market Street
St. Louis, MO 63101
Lorry J. Stensrud President and Director
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Mark E. Reynolds Executive Vice President and Director
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
John W. Barber Director
13045 Tesson Ferry Rd.
St. Louis, MO 63128
Frances S. Cook Secretary
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Connie A. Doern Vice President
1776 West Lakes Parkway
West Des Moines, IA 50266
Judy M. Drew Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Patricia E. Gubbe Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Philip A. Haley Executive Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
J. Robert Hopson Vice President,
One Tower Lane, Suite 3000 Chief Actuary and Director
Oakbrook Terrace, IL 60181-4644
E. Thomas Hughes, Jr. Treasurer and Director
700 Market Street
St. Louis, MO 63101
Lisa O. Kirchner Vice President
1776 West Lakes Parkway
West Des Moines, IA 50266
Douglas E. Jacobs Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
William C. Mair Vice President, Controller and
One Tower Lane, Suite 3000 Director
Oakbrook Terrace, IL 60181-4644
Matthew P. McCauley Assistant Secretary and Director
700 Market Street
St. Louis, MO 63101
Myron H. Sandberg Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
John W. Schaus Vice President
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181-4644
Peter L. Witkewiz Vice President
1776 West Lakes Parkway
West Des Moines, IA 50266
Kent P. Zimmerman Assistant Treasurer
700 Market Street
St. Louis, MO 63101
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR
OR REGISTRANT.
A company organizational chart was filed as Exhibit 14 in Registrant's
Post-Effective Amendment No. 3 to Form N-4 and is incorporated herein by
reference.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of April 16, 1998, there were 2 Qualified Contract Owners and 10
Non-Qualified Contract Owners.
ITEM 28. INDEMNIFICATION.
The Bylaws of the Company (Article V, Section 9) provide that:
This corporation shall indemnify, to the fullest extent allowed by California
law, its present and former directors and officers against expenses, judgments,
fines, settlements, and other amounts incurred in connection with any proceeding
or threatened proceeding brought against such directors or officers in their
capacity as such. Such indemnification shall be made in accordance with
procedures set forth by California law. Sums for expenses incurred in defending
any such proceeding may also be advanced to any such director or officer to the
extent and under the conditions provided by California law.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted directors and officers or controlling persons of the
Company pursuant to the foregoing, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Cova Life Sales Company is the principal underwriter for the following
investment companies (other than Registrant):
Cova Variable Annuity Account One
Cova Variable Life Account One
Cova Variable Life Account Five
First Cova Variable Annuity Account One
Cova Variable Annuity Account Four
(b) Cova Life Sales Company is the principal underwriter for the Contracts. The
following persons are the officers and directors of Cova Life Sales Company. The
principal business address for each officer and director of Cova Life Sales
Company is One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644.
Name and Principal Positions and Offices
Business Address with Underwriter
- ----------------------- ---------------------------
Judy M. Drew President, Chief Operations
Officer and Director
Lorry J. Stensrud Director
Patricia E. Gubbe Vice President and Chief
Compliance Officer
William C. Mair Director
Philip A. Haley Vice President
Frances S. Cook Assistant Secretary
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
William Flory, whose address is One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644 maintains physical possession of the accounts,
books or documents of the Variable Account required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder.
ITEM 31. MANAGEMENT SERVICES.
Not Applicable.
ITEM 32. UNDERTAKINGS.
a. Registrant hereby undertakes to file a post-effective amendment to this
registration statement as frequently as is necessary to ensure that the audited
financial statements in the registration statement are never more than sixteen
(16) months old for so long as payment under the variable annuity contracts may
be accepted.
b. Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
c. Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under this
Form promptly upon written or oral request.
d. Cova Financial Life Insurance Company ("Company") hereby represents that
the fees and charges deducted under the Contracts described in the Prospectus,
in the aggregate, are reasonable in relation to the services rendered, the
expenses to be incurred and the risks assumed by the Company.
REPRESENTATIONS
The Company hereby represents that it is relying upon a No Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been complied
with:
1. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement, including the
prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in connection with
the offer of the contract;
3. Instruct sales representatives who solicit participants to purchase the
contract specifically to bring the redemption restrictions imposed by Section
403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b) annuity
contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restrictions on
redemption imposed by Section 403(b)(11), and (2) other investment alternatives
available under the employer's Section 403(b) arrangement to which the
participant may elect to transfer his contract value.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf, in the City of Oakbrook
Terrace, and State of Illinois on this 14th day of May, 1998.
COVA VARIABLE ANNUITY ACCOUNT FIVE
(Registrant)
By: COVA FINANCIAL LIFE INSURANCE COMPANY
By: /S/ LORRY J. STENSRUD
_________________________________________
COVA FINANCIAL LIFE INSURANCE COMPANY
Depositor
By: /S/ LORRY J. STENSRUD
________________________________________
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
Chairman of the Board and
- ---------------------- Director --------
Richard A. Liddy Date
/S/ LORRY J. STENSRUD President and Director 5/14/98
- ---------------------- --------
Lorry J. Stensrud Date
- ---------------------- Director --------
Leonard M. Rubenstein Date
Director
- ---------------------- --------
J. Robert Hopson Date
William C. Mair* Controller and Director 5/14/98
- ---------------------- --------
William C. Mair Date
E. Thomas Hughes, Jr.* Treasurer and Director 5/14/98
- ---------------------- --------
E. Thomas Hughes, Jr. Date
Matthew P. McCauley* Director 5/14/98
- ---------------------- --------
Matthew P. McCauley Date
John W. Barber* Director 5/14/98
- ---------------------- --------
John W. Barber Date
/S/ MARK E. REYNOLDS 5/14/98
- --------------------- Director --------
Mark E. Reynolds Date
*By: /S/ LORRY J. STENSRUD
____________________________________
Lorry J. Stensrud, Attorney-in-Fact
INDEX TO EXHIBITS
EX-99.B10 Consent of Independent Auditors
Consent of Independent Auditors
The Board of Directors
Cova Financial Life Insurance Company
We consent to the use of our reports on the financial statements of Cova
Financial Life Insurance Company (the Company) dated March 5, 1998 and on the
financial statements of the subaccounts of Cova Variable Annuity Account Five
dated February 20, 1998 and to the reference to our firm under the heading
"Experts" in the Statement of Additional Information, in the Post-Effective
Amendment No. 7 to the Registration Statement (Form N-4, No. 33-50174) of Cova
Variable Annuity Account Five. Our report on the Company's financial statements
dated March 5, 1998, contains an explanatory paragraph stating that as a result
of its 1995 acquisition, the financial information for the periods subsequent to
the acquisition is presented on a different cost basis than for the period prior
to the acquisition and, therefore, is not comparable.
/s/KPMG Peat Marwick LLP
Chicago, Illinois
May 13, 1998
