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 OCTOBER 28, 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 OCTOBER 28, 1998.
TABLE OF CONTENTS
Page
COMPANY ..................................................................3
EXPERTS ..................................................................3
LEGAL OPINIONS.............................................................3
DISTRIBUTION...............................................................4
Reduction or Elimination of the Withdrawal Charge.................4
PERFORMANCE INFORMATION....................................................5
Total Return......................................................5
Historical Unit Values............................................6
Reporting Agencies................................................6
Performance Information...........................................7
FEDERAL TAX STATUS.........................................................7
General .........................................................7
Diversification...................................................8
Multiple Contracts...............................................10
Contracts Owned by Other than Natural Persons....................10
Tax Treatment of Assignments.....................................10
Income Tax Withholding...........................................11
Tax Treatment of Withdrawals - Non-Qualified Contracts...........11
Qualified Plans..................................................11
Tax Treatment of Withdrawals - Qualified Contracts...............14
Tax Sheltered Annuities - Withdrawal Limitations.................16
ANNUITY PROVISIONS........................................................16
Annuity Contract Variable Annuity................................16
Fixed Annuity....................................................17
Annuity Unit.....................................................17
Net Investment Factor............................................17
Mortality and Expense Guarantee..................................17
FINANCIAL STATEMENTS......................................................17
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, Franklin Advisers, Inc., Franklin
Mutual Advisers, Inc., Templeton Investment Counsel, Inc. and Templeton Asset
Management Ltd. (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 (Treas.
Reg.1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contract. The Regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the Regulations, an investment portfolio will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more than 70% of the
value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment portfolios underlying the Contracts will
be managed in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Separate
Account resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owners being
retroactively determined to be the owners of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
Multiple Contracts
The Code provides that multiple non-qualified annuity contracts which are issued
within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining
the tax consequences of any distribution. Such treatment may result in adverse
tax consequences including more rapid taxation of the distributed amounts from
such combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
Contracts Owned by Other than Natural Persons
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts generally
will not be treated as annuities for federal income tax purposes. However, this
treatment is not applied to a Contract held by a trust or other entity as an
agent for a natural person nor to Contracts held by Qualified Plans. Purchasers
should consult their own tax counsel or other tax adviser before purchasing a
Contract to be owned by a non-natural person.
Tax Treatment of Assignments
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
Income Tax Withholding
All distributions or the portion thereof which is includible in the gross income
of the Owner are subject to federal income tax withholding. Generally, amounts
are withheld from periodic payments at the same rate as wages and at the rate of
10% from non-periodic payments. However, the Owner, in most cases, may elect not
to have taxes withheld or to have withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code, which are not directly rolled
over to another eligible retirement plan or individual retirement account or
individual retirement annuity, are subject to a mandatory 20% withholding for
federal income tax. The 20% withholding requirement generally does not apply to:
a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary or for a specified period of 10
years or more; or b) distributions which are required minimum distributions; or
c) the portion of the distributions not includible in gross income (i.e. returns
of after-tax contributions). Participants should consult their own tax counsel
or other tax adviser regarding withholding requirements.
Tax Treatment of Withdrawals - Non-Qualified Contracts
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includible in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any premature distribution. However, the penalty is not imposed on amounts
received: (a) after the taxpayer reaches age 59 1/2; (b) after the death of the
Owner; (c) if the taxpayer is totally disabled (for this purpose disability is
as defined in Section 72(m)(7) of the Code); (d) in a series of substantially
equal periodic payments made not less frequently than annually for the life (or
life expectancy) of the taxpayer or for the joint lives (or joint life
expectancies) of the taxpayer and his or her Beneficiary; (e) under an immediate
annuity; or (f) which are allocable to purchase payments made prior to August
14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified Contracts.
(See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Qualified Plans
The Contracts offered herein are designed to be suitable for use under various
types of Qualified Plans. Taxation of participants in each Qualified Plan varies
with the type of plan and terms and conditions of each specific plan. Owners,
Annuitants and Beneficiaries are cautioned that benefits under a Qualified Plan
may be subject to the terms and conditions of the plan regardless of the terms
and conditions of the Contracts issued pursuant to the plan. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into the Company's administrative procedures. Owners, participants
and Beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law. Following are general descriptions of the types of Qualified
Plans with which the Contracts may be used. Such descriptions are not exhaustive
and are for general informational purposes only. The tax rules regarding
Qualified Plans are very complex and will have differing applications depending
on individual facts and circumstances. Each purchaser should obtain competent
tax advice prior to purchasing a Contract issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee V.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
Qualified Plans will utilize annuity tables which do not differentiate on the
basis of sex. Such annuity tables will also be available for use in connection
with certain non-qualified deferred compensation plans.
a. H.R. 10 Plans
Section 401 of the Code permits self-employed individuals to establish Qualified
Plans for themselves and their employees, commonly referred to as "H.R. 10" or
"Keogh" plans. Contributions made to the Plan for the benefit of the employees
will not be included in the gross income of the employees until distributed from
the Plan. The tax consequences to participants may vary depending upon the
particular plan design. However, the Code places limitations and restrictions on
all Plans including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Purchasers of Contracts for use with an H.R. 10 Plan should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
b. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities" by
public schools and certain charitable, educational and scientific organizations
described in Section 501(c)(3) of the Code. These qualifying employers may make
contributions to the Contracts for the benefit of their employees. Such
contributions are not includible in the gross income of the employees until the
employees receive distributions from the Contracts. The amount of contributions
to the tax-sheltered annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions, nondiscrimination and withdrawals. (See "Tax
Treatment of Withdrawals - Qualified Contracts" and "Tax-Sheltered Annuities -
Withdrawal Limitations" below.) Employee loans are not allowable under the
Contracts. Any employee should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
c. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to
an IRA which will be deductible from the individual's gross income. These IRAs
are subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA.
Sales of Contracts for use with IRAs are subject to special requirements imposed
by the Code, including the requirement that certain informational disclosure be
given to persons desiring to establish an IRA. Purchasers of Contracts to be
qualified as Individual Retirement Annuities should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
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
Annuity Contract 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
June 30, 1998
Unaudited
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Assets and Liabilities
June 30, 1998
(In thousands of dollars)
Unaudited
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
Investments:
Cova Series Trust:
<S> <C> <C> <C> <C>
Quality Income Portfolio- 74,376 shares at $ 10.75 per share (cost $ 797 ) $ 799
Money Market Portfolio- 272,847 shares at $ 1.00 per share (cost $ 273 ) 273
Stock Index Portfolio- 107,102 shares at $ 20.40 per share (cost $ 1,870 ) 2,185
VKAC Growth and Income Portfolio- 118,237 shares at $ 17.39 per share (cost $ 1,786 ) 2,056
Bond Debenture Portfolio- 564,915 shares at $ 12.31 per share (cost $ 6,785 ) 6,953
Developing Growth Portfolio- 38,991 shares at $ 11.41 per share (cost $ 440 ) 445
Large Cap Research Portfolio- 11,664 shares at $ 11.40 per share (cost $ 131 ) 133
Mid-Cap Value Portfolio- 35,671 shares at $ 11.28 per share (cost $ 392 ) 403
Quality Bond Portfolio- 362,188 shares at $ 10.59 per share (cost $ 3,756 ) 3,834
Small Cap Stock Portfolio- 639,768 shares at $ 13.26 per share (cost $ 7,754 ) 8,480
Large Cap Stock Portfolio- 1,013,995 shares at $ 16.35 per share (cost $ 13,881 ) 16,579
Select Equity Portfolio- 988,276 shares at $ 14.84 per share (cost $ 12,893 ) 14,669
International Equity Portfolio- 709,066 shares at $ 12.94 per share (cost $ 8,235 ) 9,172
Lord Abbett Series Fund, Inc.:
Growth and Income Portfolio- 1,549,510 shares at $ 21.45 per share (cost $ 29,158 ) 33,231
General American Capital Company
Money Market Fund- 29,277 shares at $ 18.74 per share (cost $ 545 ) 549
Russell Insurance Funds:
Multi-Style Equity Fund- 12,184 shares at $ 15.01 per share (cost $ 179 ) 183
Aggressive Equity Fund- 2,618 shares at $ 13.46 per share (cost $ 35 ) 35
Non-US Fund- 5,578 shares at $ 11.07 per share (cost $ 60 ) 62
Core Bond Fund- 13,349 shares at $ 10.56 per share (cost $ 141 ) 141
AIM Variable Insurance Funds, Inc.:
Value Fund- 1,535 shares at $ 24.67 per share (cost $ 37 ) 38
Capital Appreciation Fund- 90 shares at $ 24.54 per share (cost $ 2 ) 2
International Equity Fund- 4,364 shares at $ 20.35 per share (cost $ 89 ) 89
Alliance Variable Products Series Fund, Inc.:
Premier Growth Portfolio- 9,186 shares at $ 26.92 per share (cost $ 237 ) 247
Real Estate Investment Portfolio- 4,302 shares at $ 11.30 per share (cost $ 50 ) 49
Liberty Variable Investment Trust:
Newport Tiger, Variable Series- 58 shares at $ 1.26 per share (cost $ - ) -
Goldman Sachs Variable Insurance Trust:
Growth and Income Fund- 10,064 shares at $ 11.39 per share (cost $ 116 ) 115
International Equity Fund- 7,624 shares at $ 11.95 per share (cost $ 92 ) 91
Global Income Fund- 10 shares at $ 10.27 per share (cost $ - ) -
(Kemper) Investors Fund Series:
Dreman High Return Portfolio- 102 shares at $ 0.98 per share (cost $ - ) -
Small Cap Growth Portfolio- 14,644 shares at $ 1.89 per share (cost $ 27 ) 28
Small Cap Value Portfolio- 32,225 shares at $ 1.23 per share (cost $ 41 ) 40
Government Securities Portfolio- 89 shares at $ 1.17 per share (cost $ - ) -
</TABLE>
See accompanying notes to financial statements.
(Continued)
1
<TABLE>
<CAPTION>
Investments, continued:
MFS Variable Insurance Trust:
<S> <C> <C> <C> <C>
Bond Series- 9 shares at $ 11.04 per share (cost $ - ) $ -
Research Series- 8,067 shares at $ 18.35 per share (cost $ 145 ) 148
Growth with Income Series- 21,002 shares at $ 19.09 per share (cost $ 395 ) 401
Emerging Growth Series- 14,615 shares at $ 19.45 per share (cost $ 272 ) 284
Foreign & Colonial Emerging
Markets Equity Series- 2,147 shares at $ 7.86 per share (cost $ 20 ) 17
High Income Series- 6,464 shares at $ 12.09 per share (cost $ 78 ) 78
World Governments Series- 321 shares at $ 10.30 per share (cost $ 3 ) 3
Oppenheimer Variable Account Funds:
Growth Fund- 672 shares at $ 34.61 per share (cost $ 23 ) 23
Growth & Income Fund- 1,978 shares at $ 22.12 per share (cost $ 44 ) 44
High Income Fund- 4,711 shares at $ 11.51 per share (cost $ 54 ) 54
Bond Fund- 7,912 shares at $ 11.99 per share (cost $ 93 ) 95
Strategic Bond Fund- 1,264 shares at $ 5.14 per share (cost $ 7 ) 7
Putnam Variable Trust:
Growth and Income Fund- 16,438 shares at $ 27.40 per share (cost $ 456 ) 450
New Value Fund- 1,002 shares at $ 11.91 per share (cost $ 12 ) 12
Vista Fund- 2,754 shares at $ 14.40 per share (cost $ 38 ) 40
International Growth Fund- 23,033 shares at $ 13.69 per share (cost $ 315 ) 315
International New Opportunities Fund- 1,164 shares at $ 11.56 per share (cost $ 14 ) 14
(Fidelity) Variable Insurance Products Fund,
Fund II, Fund III:
Growth Portfolio- 3 shares at $ 38.32 per share (cost $ - ) -
Contrafund Portfolio 5 shares at $ 21.95 per share (cost $ - ) -
Growth Opportunities Portfolio- 5 shares at $ 20.44 per share (cost $ - ) -
Growth & Income Portfolio- 8 shares at $ 14.57 per share (cost $ - ) -
Equity-Income Portfolio- 4 shares at $ 25.17 per share (cost $ - ) -
===========
Total assets $ 102,866
===========
</TABLE>
See accompanying notes to financial statements.
(Continued)
2
<TABLE>
<CAPTION>
Liabilities:
Contract owners' equity:
<S> <C> <C> <C>
Trust Quality Income- 46,255 accumulation units at $ 17.284157 per unit 799
Trust Money Market- 21,607 accumulation units at $ 12.627925 per unit 273
Trust Stock Index- 75,039 accumulation units at $ 29.120238 per unit 2,185
Trust VKAC Growth and Income- 85,695 accumulation units at $ 23.993328 per unit 2,056
Trust Bond Debenture- 514,574 accumulation units at $ 13.512820 per unit 6,953
Trust Developing Growth- 39,321 accumulation units at $ 11.313756 per unit 445
Trust Large Cap Research- 11,717 accumulation units at $ 11.344142 per unit 133
Trust Mid-Cap Value- 35,910 accumulation units at $ 11.209646 per unit 403
Trust Quality Bond- 332,630 accumulation units at $ 11.525627 per unit 3,834
Trust Small Cap Stock- 604,932 accumulation units at $ 14.018905 per unit 8,480
Trust Large Cap Stock- 938,807 accumulation units at $ 17.659385 per unit 16,579
Trust Select Equity- 928,711 accumulation units at $ 15.795532 per unit 14,669
Trust International Equity- 702,336 accumulation units at $ 13.059689 per unit 9,172
Fund Growth and Income- 987,161 accumulation units at $ 33.662983 per unit 33,231
GACC Money Market- 50,373 accumulation units at $ 10.891342 per unit 549
Russell Multi-Style Equity- 15,243 accumulation units at $ 11.993206 per unit 183
Russell Aggressive Equity- 3,302 accumulation units at $ 10.670391 per unit 35
Russell Non-US 5,491 accumulation units at $ 11.242493 per unit 62
Russell Core Bond- 13,610 accumulation units at $ 10.354530 per unit 141
AIM Value- 3,207 accumulation units at $ 11.797664 per unit 38
AIM Capital Appreciation- 197 accumulation units at $ 11.244780 per unit 2
AIM International Equity- 7,499 accumulation units at $ 11.834130 per unit 89
Alliance Premier Growth- 19,347 accumulation units at $ 12.773593 per unit 247
Alliance Real Estate- 5,218 accumulation units at $ 9.310281 per unit 49
Liberty Newport Tiger- 10 accumulation units at $ 7.341000 per unit -
Goldman Sachs Growth and Income- 10,615 accumulation units at $ 10.784483 per unit 115
Goldman Sachs International- 7,952 accumulation units at $ 11.448337 per unit 91
Goldman Sachs Global Income- 10 accumulation units at $ 10.320498 per unit -
Kemper Dreman High Return- 10 accumulation units at $ 9.980000 per unit -
Kemper Small Cap Growth- 2,450 accumulation units at $ 11.264000 per unit 28
Kemper Small Cap Value- 3,878 accumulation units at $ 10.186468 per unit 40
Kemper Government Securities- 10 accumulation units at $ 10.307000 per unit -
MFS Bond- 10 accumulation units at $ 10.225000 per unit -
MFS Research- 12,520 accumulation units at $ 11.814415 per unit 148
MFS Growth with Income- 34,700 accumulation units at $ 11.543425 per unit 401
MFS Emerging Growth- 23,507 accumulation units at $ 12.082390 per unit 284
MFS Foreign & Colonial Emerging
Markets Equity- 1,940 accumulation units at $ 8.688515 per unit 17
MFS High Income- 7,496 accumulation units at $ 10.415267 per unit 78
MFS World Governments- 325 accumulation units at $ 10.165697 per unit 3
</TABLE>
See accompanying notes to financial statements.
(Continued)
3
<TABLE>
<CAPTION>
Contract owners' equity, continued:
<S> <C> <C> <C>
Oppenheimer Growth- 1,995 accumulation units at $ 11.645438 per unit $ 23
Oppenheimer Growth & Income- 3,884 accumulation units at $ 11.254357 per unit 44
Oppenheimer High Income- 5,199 accumulation units at $ 10.423521 per unit 54
Oppenheimer Bond- 9,165 accumulation units at $ 10.341618 per unit 95
Oppenheimer Strategic Bond- 631 accumulation units at $ 10.277402 per unit 7
Putnam Growth & Income- 41,144 accumulation units at $ 10.936902 per unit 450
Putnam New Value- 1,154 accumulation units at $ 10.327686 per unit 12
Putnam Vista- 3,408 accumulation units at $ 11.628968 per unit 40
Putnam International Growth- 26,433 accumulation units at $ 11.918946 per unit 315
Putnam International New Opportunities- 1,162 accumulation units at $ 11.570562 per unit 14
Fidelity Growth- 10 accumulation units at $ 11.266000 per unit -
Fidelity Contrafund- 10 accumulation units at $ 11.202000 per unit -
Fidelity Growth Opportunities- 10 accumulation units at $ 10.583000 per unit -
Fidelity Growth & Income- 10 accumulation units at $ 11.111000 per unit -
Fidelity Equity-Income- 10 accumulation units at $ 10.620000 per unit -
-----------
Total contract owners' equity 102,866
-----------
Total liabilities and contract owners' equity $ 102,866
===========
See accompanying notes to financial statements.
</TABLE>
4
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- -------------------------------------------------------------------------------------------------------------------------------
Cova Series Trust
---------------------------------------------------------------------------------------
Quality Money Stock VKAC Growth Bond Developing
Income Market Index and Income Debenture Growth
Investment income:
<S> <C> <C> <C> <C> <C>
dividend distributions $ 42 9 384 234 263 -
capital gain distributions - - - - - -
---------------------------------------------------------------------------------------
42 9 384 234 263 -
---------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk fee 5 2 12 12 36 1
Administrative fee - - 1 1 4 -
---------------------------------------------------------------------------------------
5 2 13 13 40 1
---------------------------------------------------------------------------------------
Net investment income (loss) 37 7 371 221 223 (1)
---------------------------------------------------------------------------------------
Net realized gain (loss)
on investments 1 - 10 11 19 -
Net change in unrealized
gain (loss) on investments (13) - (78) 19 4 4
Net realized and change in
unrealized gain (loss) on
---------------------------------------------------------------------------------------
investments (12) - (68) 30 23 4
---------------------------------------------------------------------------------------
Net increase (decrease) in
contract owners' equity
resulting from operations $ 25 7 303 251 246 3
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- -----------------------------------------------------------------------------------------------------------------------------------
------------------------------------------
Large Cap Mid-Cap Quality
Research Value Bond
Investment income:
<S> <C> <C>
dividend distributions - 1 85
capital gain distributions - - -
------------------------------------------
- 1 85
------------------------------------------
Expenses:
Mortality and expense risk fee - 2 20
Administrative fee - - 2
------------------------------------------
- 2 22
------------------------------------------
Net investment income (loss) - (1) 63
------------------------------------------
Net realized gain (loss)
on investments - - 3
Net change in unrealized
gain (loss) on investments 2 8 36
Net realized and change in
unrealized gain (loss) on
------------------------------------------
investments 2 8 39
------------------------------------------
Net increase (decrease) in
contract owners' equity
resulting from operations 2 7 102
==========================================
</TABLE>
See accompanying notes to financial statements.
5
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ------------------------------------------------------------------------------------------------- -------------------------------
Cova Series Trust Fund GACC
--------------------------------------------------------- -------------- ---------------
Small Cap Large Cap Select International Growth and Money
Stock Stock Equity Equity Income Market
Investment income:
<S> <C> <C> <C> <C>
dividend distributions $ 279 184 891 155 - -
capital gain distributions - - - - - -
--------------------------------------------------------- -------------- ---------------
279 184 891 155 - -
--------------------------------------------------------- -------------- ---------------
Expenses:
Mortality and expense risk fee 48 83 78 49 182 1
Administrative fee 6 10 9 6 22 -
--------------------------------------------------------- -------------- ---------------
54 93 87 55 204 1
--------------------------------------------------------- -------------- ---------------
Net investment income (loss) 225 91 804 100 (204) (1)
--------------------------------------------------------- -------------- ---------------
Net realized gain (loss)
on investments 56 36 82 24 55 3
Net change in unrealized
gain (loss) on investments (39) 2,067 491 845 2,559 3
Net realized and change in
unrealized gain (loss) on
--------------------------------------------------------- -------------- ---------------
investments 17 2,103 573 869 2,614 6
--------------------------------------------------------- -------------- ---------------
Net increase (decrease) in
contract owners' equity
resulting from operations $ 242 2,194 1,377 969 2,410 5
========================================================= ============== ===============
</TABLE>
See accompanying notes to financial statements.
6
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- -------------------------------------------------------------------------------------------------------------------------------
Russell AIM
---------------------------------------------------------------------------------------
Multi-Style Aggressive Non-US Core Value Capital
Equity Equity Bond Appreciation
Investment income:
<S> <C>
dividend distributions $ - - - - - -
capital gain distributions - - - - - -
--------------------------------------------------------- ---------------------------
- - - - - -
--------------------------------------------------------- ---------------------------
Expenses:
Mortality and expense risk fee - - - - - -
Administrative fee - - - - - -
--------------------------------------------------------- ---------------------------
- - - - - -
--------------------------------------------------------- ---------------------------
Net investment income (loss) - - - - - -
--------------------------------------------------------- ---------------------------
Net realized gain (loss)
on investments - - - - - -
Net change in unrealized
gain (loss) on investments 4 1 1 - 1 -
Net realized and change in
unrealized gain (loss) on
--------------------------------------------------------- ---------------------------
investments 4 1 1 - 1 -
--------------------------------------------------------- ---------------------------
Net increase (decrease) in
contract owners' equity
resulting from operations $ 4 1 1 - 1 -
========================================================= ===========================
</TABLE>
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ---------------------------------------------------- -----------------------------
Alliance
---------------- -----------------------------
International Premier Real Estate
Equity Growth Investment
Investment income:
<S> <C>
dividend distributions - - 1
capital gain distributions - - -
---------------- -----------------------------
- - 1
---------------- -----------------------------
Expenses:
Mortality and expense risk fee - - -
Administrative fee - - -
---------------- -----------------------------
- - -
---------------- -----------------------------
Net investment income (loss) - - 1
---------------- -----------------------------
Net realized gain (loss)
on investments - - -
Net change in unrealized
gain (loss) on investments (1) 10 (1)
Net realized and change in
unrealized gain (loss) on
---------------- -----------------------------
investments (1) 10 (1)
---------------- -----------------------------
Net increase (decrease) in
contract owners' equity
resulting from operations (1) 10 -
================ =============================
</TABLE>
See accompanying notes to financial statements.
7
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- -----------------------------------------------------------------------------------------------------------------------------------
Liberty Goldman Sachs Kemper
------------- ------------------------------------------- ------------------------------
Newport Growth and International Global Dreman Small Cap
Tiger Income Equity Income High Return Growth
Investment income:
<S> <C> <C>
dividend distributions $ - - - - - 1
capital gain distributions - - - - - -
------------- ------------------------------------------- ------------------------------
- - - - - 1
------------- ------------------------------------------- ------------------------------
Expenses:
Mortality and expense risk fee - - - - - -
Administrative fee - - - - - -
------------- ------------------------------------------- ------------------------------
- - - - - -
------------- ------------------------------------------- ------------------------------
Net investment income (loss) - - - - - 1
------------- ------------------------------------------- ------------------------------
Net realized gain (loss)
on investments - - - - - -
Net change in unrealized
gain (loss) on investments - (1) (1) - - 1
Net realized and change in
unrealized gain (loss) on
------------- ------------------------------------------- ------------------------------
investments - (1) (1) - - 1
------------- ------------------------------------------- ------------------------------
Net increase (decrease) in
contract owners' equity
resulting from operations $ - (1) (1) - - 2
============= =========================================== ==============================
</TABLE>
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ---------------------------------------------------------------
---------------------------
Small Cap Government
Value Securities
Investment income:
<S> <C> <C>
dividend distributions - -
capital gain distributions - -
---------------------------
- -
---------------------------
Expenses:
Mortality and expense risk fee - -
Administrative fee - -
---------------------------
- -
---------------------------
Net investment income (loss) - -
---------------------------
Net realized gain (loss)
on investments - -
Net change in unrealized
gain (loss) on investments (2) -
Net realized and change in
unrealized gain (loss) on
---------------------------
investments (2) -
---------------------------
Net increase (decrease) in
contract owners' equity
resulting from operations (2) -
===========================
</TABLE>
See accompanying notes to financial statements.
8
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ------------------------------------------------------------------------------------------------------------------------------
MFS
--------------------------------------------------------------------------------------
Bond Research Growth with Emerging Emerging High
Income Growth Markets Income
Equity
Investment income:
<S> <C>
dividend distributions $ - - - - - -
capital gain distributions - - - - - -
--------------------------------------------------------------------------------------
- - - - - -
--------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk fee - - 1 - - -
Administrative fee - - - - - -
--------------------------------------------------------------------------------------
- - 1 - - -
--------------------------------------------------------------------------------------
Net investment income (loss) - - (1) - - -
--------------------------------------------------------------------------------------
Net realized gain (loss)
on investments - - - - - -
Net change in unrealized
gain (loss) on investments - 3 6 11 (3) -
Net realized and change in
unrealized gain (loss) on
--------------------------------------------------------------------------------------
investments - 3 6 11 (3) -
--------------------------------------------------------------------------------------
Net increase (decrease) in
contract owners' equity
resulting from operations $ - 3 5 11 (3) -
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- --------------------------------------------------
---------------
World
Governments
Investment income:
<S> <C>
dividend distributions -
capital gain distributions -
---------------
-
---------------
Expenses:
Mortality and expense risk fee -
Administrative fee -
---------------
-
---------------
Net investment income (loss) -
---------------
Net realized gain (loss)
on investments -
Net change in unrealized
gain (loss) on investments -
Net realized and change in
unrealized gain (loss) on
---------------
investments -
---------------
Net increase (decrease) in
contract owners' equity
resulting from operations -
===============
</TABLE>
See accompanying notes to financial statements.
9
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ---------------------------------------------------------------------------------------------------------------------------------
Oppenheimer
------------------------------------------------------------------------ ---------------
Growth Growth & High Bond Strategic Growth and
Income Income Bond Income
Investment income:
<S> <C> <C>
dividend distributions $ 1 - - - - 2
capital gain distributions - - - - - -
------------------------------------------------------------------------ ---------------
1 - - - - 2
------------------------------------------------------------------------ ---------------
Expenses:
Mortality and expense risk fee - - - - - 1
Administrative fee - - - - - -
------------------------------------------------------------------------ ---------------
- - - - - 1
------------------------------------------------------------------------ ---------------
Net investment income (loss) 1 - - - - 1
------------------------------------------------------------------------ ---------------
Net realized gain (loss)
on investments - - - - - -
Net change in unrealized
gain (loss) on investments - - - 2 - (5)
Net realized and change in
unrealized gain (loss) on
------------------------------------------------------------------------ ---------------
investments - - - 2 - (5)
------------------------------------------------------------------------ ---------------
Net increase (decrease) in
contract owners' equity
resulting from operations $ 1 - - 2 - (4)
======================================================================== ===============
</TABLE>
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ---------------------------------------------------------------------------------------
Putnam
----------------------------------------------------
New Vista International International
Value Growth New
Opportunities
Investment income:
<S> <C> <C> <C> <C>
dividend distributions - - - -
capital gain distributions - - - -
----------------------------------------------------
- - - -
----------------------------------------------------
Expenses:
Mortality and expense risk fee - - - -
Administrative fee - - - -
----------------------------------------------------
- - - -
----------------------------------------------------
Net investment income (loss) - - - -
----------------------------------------------------
Net realized gain (loss)
on investments - - - -
Net change in unrealized
gain (loss) on investments - 2 - -
Net realized and change in
unrealized gain (loss) on
----------------------------------------------------
investments - 2 - -
----------------------------------------------------
Net increase (decrease) in
contract owners' equity
resulting from operations - 2 - -
====================================================
</TABLE>
See accompanying notes to financial statements.
(Continued)
10
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Operations
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity Total
------------------------------------------------------------------------
Growth Contrafund Growth Growth & Equity-
Opportunities Income Income
Investment income:
<S> <C> <C>
dividend distributions $ - - - - - 2,532
capital gain distributions - - - - - -
------------------------------------------------------------------------ --------------
- - - - - 2,532
------------------------------------------------------------------------ --------------
Expenses:
Mortality and expense risk fee - - - - - 533
Administrative fee - - - - - 61
------------------------------------------------------------------------ --------------
- - - - - 594
------------------------------------------------------------------------ --------------
Net investment income (loss) - - - - - 1,938
------------------------------------------------------------------------ --------------
Net realized gain (loss)
on investments - - - - - 300
Net change in unrealized
gain (loss) on investments - - - - - 5,936
Net realized and change in
unrealized gain (loss) on
------------------------------------------------------------------------ --------------
investments - - - - - 6,236
------------------------------------------------------------------------ --------------
Net increase (decrease) in
contract owners' equity
resulting from operations $ - - - - - 8,174
======================================================================== ==============
</TABLE>
See accompanying notes to financial statements.
11
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- -------------------------------------------------------------------------------------------------------------------------------
Cova Series Trust
---------------------------------------------------------------------------------------
Quality Money Stock VKAC Growth Bond Developing
Income Market Index and Income Debenture Growth
From operations:
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $ 37 7 371 221 223 (1)
Net realized gain (loss) on
investments 1 - 10 11 19 -
Net change in unrealized gain
(loss) on investments (13) - (78) 19 4 4
Net increase (decrease) in
contract owners' equity
---------------------------------------------------------------------------------------
resulting from operations 25 7 303 251 246 3
---------------------------------------------------------------------------------------
From account unit transactions:
Contributions by Cova - - - - - -
Redemptions by Cova - - - - - -
Proceeds from units of the
account sold - - - 1 514 230
Payments for units of the
account redeemed (7) (4) (12) (12) (150) -
Account transfers, net 50 (101) 157 136 1,868 148
Net increase (decrease) in
contract owners' equity from
---------------------------------------------------------------------------------------
account unit transactions 43 (105) 145 125 2,232 378
---------------------------------------------------------------------------------------
Net increase (decrease) 68 (98) 448 376 2,478 381
Contract owners' equity, beginning 731 371 1,737 1,680 4,475 64
=======================================================================================
Contract owners' equity, ending $ 799 273 2,185 2,056 6,953 445
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ----------------------------------------------------------------------------
------------------------------------------
Large Cap Mid-Cap Quality
Research Value Bond
From operations:
<S> <C> <C>
Net investment income (loss) - (1) 63
Net realized gain (loss) on
investments - - 3
Net change in unrealized gain
(loss) on investments 2 8 36
Net increase (decrease) in
contract owners' equity
------------------------------------------
resulting from operations 2 7 102
------------------------------------------
From account unit transactions:
Contributions by Cova - - -
Redemptions by Cova - - -
Proceeds from units of the
account sold 73 215 385
Payments for units of the
account redeemed - - (41)
Account transfers, net 58 92 771
Net increase (decrease) in
contract owners' equity from
------------------------------------------
account unit transactions 131 307 1,115
------------------------------------------
Net increase (decrease) 133 314 1,217
Contract owners' equity, beginning - 89 2,617
==========================================
Contract owners' equity, ending 133 403 3,834
==========================================
</TABLE>
See accompanying notes to financial statements.
12
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- -----------------------------------------------------------------------------------------------------------------------------------
Cova Series Trust Fund GACC
--------------------------------------------------------- -------------- ---------------
Small Cap Large Cap Select International Growth and Money
Stock Stock Equity Equity Income Market
From operations:
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $ 225 91 804 100 (204) (1)
Net realized gain (loss) on
investments 56 36 82 24 55 3
Net change in unrealized gain
(loss) on investments (39) 2,067 491 845 2,559 3
Net increase (decrease) in
contract owners' equity
--------------------------------------------------------- -------------- ---------------
resulting from operations 242 2,194 1,377 969 2,410 5
--------------------------------------------------------- -------------- ---------------
From account unit transactions:
Contributions by Cova - - - - - -
Redemptions by Cova - - - - - -
Proceeds from units of the
account sold 374 740 855 346 1,499 1,107
Payments for units of the
account redeemed (125) (217) (303) (196) (602) -
Account transfers, net 1,411 3,638 2,895 1,702 5,522 (713)
Net increase (decrease) in
contract owners' equity from
--------------------------------------------------------- -------------- ---------------
account unit transactions 1,660 4,161 3,447 1,852 6,419 394
--------------------------------------------------------- -------------- ---------------
Net increase (decrease) 1,902 6,355 4,824 2,821 8,829 399
Contract owners' equity, beginning 6,578 10,224 9,845 6,351 24,402 150
========================================================= ============== ===============
Contract owners' equity, ending $ 8,480 16,579 14,669 9,172 33,231 549
========================================================= ============== ===============
</TABLE>
See accompanying notes to financial statements.
13
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- -------------------------------------------------------------------------------------------------------------------------------
Russell AIM
---------------------------------------------------------------------------------------
Multi-Style Aggressive Non-US Core Value Capital
Equity Equity Bond Appreciation
From operations:
<S> <C>
Net investment income (loss) $ - - - - - -
Net realized gain (loss) on
investments - - - - - -
Net change in unrealized gain
(loss) on investments 4 1 1 - 1 -
Net increase (decrease) in
contract owners' equity
--------------------------------------------------------- ---------------------------
resulting from operations 4 1 1 - 1 -
--------------------------------------------------------- ---------------------------
From account unit transactions:
Contributions by Cova - - - - - -
Redemptions by Cova - - - - - -
Proceeds from units of the
account sold 178 34 60 141 9 2
Payments for units of the
account redeemed 1 - 1 - - -
Account transfers, net - - - - 28 -
Net increase (decrease) in
contract owners' equity from
--------------------------------------------------------- ---------------------------
account unit transactions 179 34 61 141 37 2
--------------------------------------------------------- ---------------------------
Net increase (decrease) 183 35 62 141 38 2
Contract owners' equity, beginning - - - - - -
========================================================= ===========================
Contract owners' equity, ending $ 183 35 62 141 38 2
========================================================= ===========================
</TABLE>
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ---------------------------------------------------------------------------------
Alliance
---------------- -----------------------------
International Premier Real Estate
Equity Growth Investment
From operations:
<S> <C>
Net investment income (loss) - - 1
Net realized gain (loss) on
investments - - -
Net change in unrealized gain
(loss) on investments (1) 10 (1)
Net increase (decrease) in
contract owners' equity
---------------- -----------------------------
resulting from operations (1) 10 -
---------------- -----------------------------
From account unit transactions:
Contributions by Cova - - -
Redemptions by Cova - - -
Proceeds from units of the
account sold 59 225 43
Payments for units of the
account redeemed - - -
Account transfers, net 31 12 6
Net increase (decrease) in
contract owners' equity from
---------------- -----------------------------
account unit transactions 90 237 49
---------------- -----------------------------
Net increase (decrease) 89 247 49
Contract owners' equity, beginning - - -
================ =============================
Contract owners' equity, ending 89 247 49
================ =============================
</TABLE>
See accompanying notes to financial statements.
14
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ------------------------------------------------------------------------------------------------------------------------------------
Liberty Goldman Sachs Kemper
-------------- -------------------------------------------- ------------------------------
Newport Growth and International Global Dreman Small Cap
Tiger Income Equity Income High Return Growth
From operations:
<S> <C> <C>
Net investment income (loss) $ - - - - - 1
Net realized gain (loss) on
investments - - - - - -
Net change in unrealized gain
(loss) on investments - (1) (1) - - 1
Net increase (decrease) in
contract owners' equity
-------------- -------------------------------------------- ------------------------------
resulting from operations - (1) (1) - - 2
-------------- -------------------------------------------- ------------------------------
From account unit transactions:
Contributions by Cova - - - - - -
Redemptions by Cova - - - - - -
Proceeds from units of the
account sold - 88 92 - - 24
Payments for units of the
account redeemed - - - - - -
Account transfers, net - 28 - - - 2
Net increase (decrease) in
contract owners' equity from
-------------- -------------------------------------------- ------------------------------
account unit transactions - 116 92 - - 26
-------------- -------------------------------------------- ------------------------------
Net increase (decrease) - 115 91 - - 28
Contract owners' equity, beginning - - - - - -
============== ============================================ ==============================
Contract owners' equity, ending $ - 115 91 - - 28
============== ============================================ ==============================
</TABLE>
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ----------------------------------------------------------------
----------------------------
Small Cap Government
Value Securities
From operations:
<S> <C> <C>
Net investment income (loss) - -
Net realized gain (loss) on
investments - -
Net change in unrealized gain
(loss) on investments (2) -
Net increase (decrease) in
contract owners' equity
----------------------------
resulting from operations (2) -
----------------------------
From account unit transactions:
Contributions by Cova - -
Redemptions by Cova - -
Proceeds from units of the
account sold 41 -
Payments for units of the
account redeemed - -
Account transfers, net 1 -
Net increase (decrease) in
contract owners' equity from
----------------------------
account unit transactions 42 -
----------------------------
Net increase (decrease) 40 -
Contract owners' equity, beginning - -
============================
Contract owners' equity, ending 40 -
============================
</TABLE>
See accompanying notes to financial statements.
15
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ------------------------------------------------------------------------------------------------------------------------------
MFS
--------------------------------------------------------------------------------------
Bond Research Growth with Emerging Emerging High
Income Growth Markets Income
Equity
From operations:
<S> <C> <C>
Net investment income (loss) $ - - (1) - - -
Net realized gain (loss) on
investments - - - - - -
Net change in unrealized gain
(loss) on investments - 3 6 11 (3) -
Net increase (decrease) in
contract owners' equity
--------------------------------------------------------------------------------------
resulting from operations - 3 5 11 (3) -
--------------------------------------------------------------------------------------
From account unit transactions:
Contributions by Cova - - - - - -
Redemptions by Cova - - - - - -
Proceeds from units of the
account sold - 141 390 267 20 73
Payments for units of the
account redeemed - - - - - -
Account transfers, net - 4 6 6 - 5
Net increase (decrease) in
contract owners' equity from
--------------------------------------------------------------------------------------
account unit transactions - 145 396 273 20 78
--------------------------------------------------------------------------------------
Net increase (decrease) - 148 401 284 17 78
Contract owners' equity, beginning - - - - - -
======================================================================================
Contract owners' equity, ending $ - 148 401 284 17 78
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- -------------------------------------------------
---------------
World
Governments
From operations:
<S> <C>
Net investment income (loss) -
Net realized gain (loss) on
investments -
Net change in unrealized gain
(loss) on investments -
Net increase (decrease) in
contract owners' equity
---------------
resulting from operations -
---------------
From account unit transactions:
Contributions by Cova -
Redemptions by Cova -
Proceeds from units of the
account sold 3
Payments for units of the
account redeemed -
Account transfers, net -
Net increase (decrease) in
contract owners' equity from
---------------
account unit transactions 3
---------------
Net increase (decrease) 3
Contract owners' equity, beginning -
===============
Contract owners' equity, ending 3
===============
</TABLE>
See accompanying notes to financial statements.
16
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ---------------------------------------------------------------------------------------------------------------------------------
Oppenheimer
------------------------------------------------------------------------ ---------------
Growth Growth & High Bond Strategic Growth and
Income Income Bond Income
From operations:
<S> <C> <C>
Net investment income (loss) $ 1 - - - - 1
Net realized gain (loss) on
investments - - - - - -
Net change in unrealized gain
(loss) on investments - - - 2 - (5)
Net increase (decrease) in
contract owners' equity
------------------------------------------------------------------------ ---------------
resulting from operations 1 - - 2 - (4)
------------------------------------------------------------------------ ---------------
From account unit transactions:
Contributions by Cova - - - - - -
Redemptions by Cova - - - - - -
Proceeds from units of the
account sold 22 44 54 81 7 403
Payments for units of the
account redeemed - - - - - (1)
Account transfers, net - - - 12 - 52
Net increase (decrease) in
contract owners' equity from
------------------------------------------------------------------------ ---------------
account unit transactions 22 44 54 93 7 454
------------------------------------------------------------------------ ---------------
Net increase (decrease) 23 44 54 95 7 450
Contract owners' equity, beginning - - - - - -
======================================================================== ===============
Contract owners' equity, ending $ 23 44 54 95 7 450
======================================================================== ===============
</TABLE>
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- ---------------------------------------------------------------------------------------
Putnam
-----------------------------------------------------
New Vista International International
Value Growth New
Opportunities
From operations:
<S> <C> <C> <C> <C>
Net investment income (loss) - - - -
Net realized gain (loss) on
investments - - - -
Net change in unrealized gain
(loss) on investments - 2 - -
Net increase (decrease) in
contract owners' equity
-----------------------------------------------------
resulting from operations - 2 - -
-----------------------------------------------------
From account unit transactions:
Contributions by Cova - - - -
Redemptions by Cova - - - -
Proceeds from units of the
account sold 1 31 299 14
Payments for units of the
account redeemed - - (1) -
Account transfers, net 11 7 17 -
Net increase (decrease) in
contract owners' equity from
-----------------------------------------------------
account unit transactions 12 38 315 14
-----------------------------------------------------
Net increase (decrease) 12 40 315 14
Contract owners' equity, beginning - - - -
=====================================================
Contract owners' equity, ending 12 40 315 14
=====================================================
</TABLE>
See accompanying notes to financial statements.
(Continued)
17
<TABLE>
<CAPTION>
Cova Variable Annuity Account Five
Statement of Changes in Contract Owners' Equity
For the six months ended or from commencement of operations through June 30, 1998
(In thousands of dollars)
Unaudited
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity Total
------------------------------------------------------------------------ --------------
Growth Contrafund Growth Growth & Equity-
Opportunities Income Income
From operations:
<S> <C> <C>
Net investment income (loss) $ - - - - - 1,938
Net realized gain (loss) on
investments - - - - - 300
Net change in unrealized gain
(loss) on investments - - - - - 5,936
Net increase (decrease) in
contract owners' equity
------------------------------------------------------------------------ --------------
resulting from operations - - - - - 8,174
------------------------------------------------------------------------ --------------
From account unit transactions:
Contributions by Cova - - - - - -
Redemptions by Cova - - - - - -
Proceeds from units of the
account sold - - - - - 9,185
Payments for units of the
account redeemed - - - - - (1,669)
Account transfers, net - - - - - 17,862
Net increase (decrease) in
contract owners' equity from
------------------------------------------------------------------------ --------------
account unit transactions - - - - - 25,378
------------------------------------------------------------------------ --------------
Net increase (decrease) - - - - - 33,552
Contract owners' equity, beginning - - - - - 69,314
======================================================================== ==============
Contract owners' equity, ending $ - - - - - 102,866
======================================================================== ==============
</TABLE>
See accompanying notes to financial statements.
18
Cova Variable Annuity Account Five
Notes to Financial Statements
June 30, 1998
Unaudited
- --------------------------------------------------------------------------------
(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), Lord Abbett Series
Fund, Inc. (Fund), General American Capital Company (GACC), Russell
Insurance Funds (Russell), AIM Variable Insurance Funds, Inc. (AIM),
Alliance Variable Products Series Fund, Inc. (Alliance) , Liberty Variable
Investment Trust (Liberty), Goldman Sachs Variable Insurance Trust (Goldman
Sachs), Investors Fund Series (Kemper), MFS Variable Insurance Trust (MFS),
Oppenheimer Variable Account Funds (Oppenheimer), Putnam Variable Trust
(Putnam), or Variable Insurance Product Fund, Fund II and Fund III
(Fidelity). These entities are all diversified, open-end, management
investment companies which are intended to meet differing investment
objectives. Not all sub-accounts of the Separate Account are available for
investment depending upon the nature and specific terms of the variable
annuity contracts offered for sale by Cova.
<TABLE>
<CAPTION>
The Separate Account sub-accounts that commenced operations during the six
months ending June 30, 1998 are as follows:
<S> <C> <C> <C>
Russell Multi-Style Equity 1/2/98 MFS Foreign & Colonial Emerging
Russell Aggressive Equity 1/2/98 Markets Equity 1/2/98
Russell Non-US 1/2/98 MFS High Income 1/2/98
Russell Core Bond 1/2/98 MFS World Governments 1/2/98
AIM Value 1/2/98 Oppenheimer Growth 1/2/98
AIM Capital Appreciation 1/2/98 Oppenheimer Growth & Income 1/2/98
AIM International Equity 1/2/98 Oppenheimer High Income 1/2/98
Alliance Premier Growth 1/2/98 Oppenheimer Bond 1/2/98
Alliance Real Estate 1/2/98 Oppenheimer Strategic Bond 1/2/98
Liberty Newport Tiger 1/2/98 Putnam Growth & Income 1/2/98
Goldman Sachs Growth and Income 1/29/98 Putnam New Value 1/2/98
Goldman Sachs International 1/29/98 Putnam Vista 1/2/98
Goldman Sachs Global Income 1/29/98 Putnam International Growth 1/2/98
Kemper Dreman High Return 5/15/98 Putnam International New
Kemper Small Cap Growth 1/2/98 Opportunities 1/2/98
Kemper Small Cap Value 1/2/98 Fidelity Growth Portfolio 2/17/98
Kemper Government Securities 1/2/98 Fidelity Contrafund Portfolio 2/17/98
MFS Bond 5/15/98 Fidelity Growth Opportunities Portfolio 2/17/98
MFS Research 1/2/98 Fidelity Growth & Income Portfolio 2/17/98
MFS Growth with Income 1/2/98 Fidelity Equity-Income Portfolio 2/17/98
MFS Emerging Growth 1/2/98
</TABLE>
(Continued)
19
(2) Significant Accounting Policies
(a) Investment Valuation
Investments in shares of the portfolios are carried in the statement
of assets and liabilities at their underlying net asset value. The net
asset value of each portfolio is calculated daily. Realized gains and
losses are calculated using 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 shares of the
portfolio 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.
During December, accumulated investment income and capital gains of
the underlying GACC portfolios are allocated to the Separate Account
by increasing the cost basis.
(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 the earnings of the Separate Account.
Under 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.
(Continued)
20
(3) Contract Fees
Once a year after the first year, a contract owner can withdraw up to 10%
of the total purchase payments Cova has had for more than one year without
incurring a withdrawal fee provided the account value is $5,000 or more on
the day of the withdrawal. Otherwise, a withdrawal fee of 5% of the
purchase payments withdrawn is charged. There is no withdrawal fee on
purchase payments Cova has had for five years. Cova treats withdrawals as
coming from the oldest purchase payment first for purposes of determining
the withdrawal fee. If a withdrawal is for only part of the contract value,
the withdrawal fee is deducted from the remaining contract value. Cova does
not assess withdrawal fees on annuity payments or death benefits.
Cova imposes an annual contract maintenance fee of $30 on all contracts
with contract values less than $50,000 on the policy anniversary. This fee
covers the cost of contract administration for the previous year and is
prorated between the Separate Account sub-accounts and fixed rate annuities
to which the contract value is allocated.
Subject to certain restrictions, a contract owner may transfer all or a
part of the contract value among other sub- accounts of the Separate
Account and Cova's fixed rate annuities. Cova deducts a transfer fee of $25
or 2% of the amount transferred, whichever is less, after twelve transfers
have been made during a contract year. Any transfer made as part of the
Dollar Cost Averaging Program, the Automatic Rebalancing Program, or an
Approved Asset Allocation Program is not counted in determining the
transfer fee.
During the six months ending June 30, 1998, withdrawal and account transfer
charges of approximately $18 thousand and contract maintenance fees of
approximately $11 thousand 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 Separate Account's 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 administrative expenses,
which are equivalent to an annual rate of 0.15% of the Separate Account's
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 not able to obtain a
refund. Cova reserves the right to deduct premium taxes when incurred.
21
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.
