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 DECEMBER 2, 1997, FOR THE
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT WHICH IS DESCRIBED
HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT: One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644,
(800) 831-5433.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED DECEMBER 2, 1997.
TABLE OF CONTENTS
Page
COMPANY
EXPERTS
LEGAL OPINIONS
DISTRIBUTION
Reduction or Elimination of the Withdrawal Charge
PERFORMANCE INFORMATION
Total Return
Historical Unit Values
Reporting Agencies
TAX STATUS
General
Diversification
Multiple Contracts
Contracts Owned by Other than Natural Persons
Tax Treatment of Assignments
Income Tax Withholding
Tax Treatment of Withdrawals - Non-Qualified Contracts
Qualified Plans
Tax Treatment of Withdrawals - Qualified Contracts
Tax-Sheltered Annuities - Withdrawal Limitations
ANNUITY PROVISIONS
Variable Annuity
Fixed Annuity
Annuity Unit
Net Investment Factor
Mortality and Expense Guarantee
FINANCIAL STATEMENTS
COMPANY
Cova Financial Life Insurance Company (the "Company") was originally
incorporated on September 6, 1972 as Industrial Indemnity Life Insurance
Company, a California corporation and changed its name on January 1, 1986 to
Xerox Financial Life Insurance Company. The Company presently is licensed to do
business in the state of California. On June 1, 1995 a wholly-owned subsidiary
of General American Life Insurance Company ("General American") purchased Xerox
Financial Services Life Insurance Company ("Xerox Life"), an affiliate of the
Company, from Xerox Financial Services, Inc. The acquisition of Xerox Life
included related companies, including the Company. On June 1, 1995 the Company
changed its name to Cova Financial Life Insurance Company.
General American is a St. Louis-based mutual company with more than $275 billion
of life insurance in force and approximately $19 billion in assets. It provides
life and health insurance, retirement plans, and related financial services to
individuals and groups.
EXPERTS
The Balance Sheet of the Company as of December 31, 1996 and 1995 and the
related Statements of Income, Shareholder's Equity and Cash Flows for the year
ended December 31, 1996 and the periods from June 1, 1995 through December 31,
1995 and January 1, 1995 through May 31, 1995 and for the year ended December
31, 1994 and the Statements of Assets and Liabilities and Contract Owners'
Equity of the Separate Account as of December 31, 1996 and the related Statement
of Operations for the year then ended and the Statement of Change in Contract
Owners' Equity for the year ended December 31, 1996 and the period from June 19,
1995 through December 31, 1995, have been included herein in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL OPINIONS
Legal matters in connection with the Contracts described herein are being passed
upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
DISTRIBUTION
Cova Life Sales Company ("Life Sales") acts as the distributor. Prior to June 1,
1995, Cova Life Sales Company was known as Xerox Life Sales Company. Life Sales
is an affiliate of the Company. The offering is on a continuous basis.
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
The amount of the Withdrawal Charge on the Contracts may be reduced or
eliminated when sales of the Contracts are made to individuals or to a group of
individuals in a manner that results in savings of sales expenses. The
entitlement to reduction of the Withdrawal Charge will be determined by the
Company after examination of all the relevant factors such as:
1. The size and type of group to which sales are to be made will be
considered. Generally, the sales expenses for a larger group are less than for a
smaller group because of the ability to implement large numbers of Contracts
with fewer sales contacts.
2. The total amount of purchase payments to be received will be considered.
Per Contract sales expenses are likely to be less on larger purchase payments
than on smaller ones.
3. Any prior or existing relationship with the Company will be considered.
Per Contract sales expenses are likely to be less when there is a prior existing
relationship because of the likelihood of implementing the Contract with fewer
sales contacts.
4. There may be other circumstances, of which the Company is not presently
aware, which could result in reduced sales expenses.
If, after consideration of the foregoing factors, the Company determines that
there will be a reduction in sales expenses, the Company may provide for a
reduction or elimination of the Withdrawal Charge.
The Withdrawal Charge may be eliminated when the Contracts are issued to an
officer, director or employee of the Company or any of its affiliates. In no
event will any reduction or elimination of the Withdrawal Charge be permitted
where the reduction or elimination will be unfairly discriminatory to any
person.
PERFORMANCE INFORMATION
Total Return
From time to time, the Company may advertise performance data. Such data will
show the percentage change in the value of an Accumulation Unit based on the
performance of an investment portfolio over a period of time, usually a calendar
year, determined by dividing the increase (decrease) in value for that unit by
the Accumulation Unit value at the beginning of the period.
Any such advertisement will include total return figures for the time periods
indicated in the advertisement. Such total return figures will reflect the
deduction of a 1.25% Mortality and Expense Risk Premium, a .15% Administrative
Expense Charge, the expenses for the underlying investment portfolio being
advertised and any applicable Contract Maintenance Charges and Withdrawal
Charges.
The hypothetical value of a Contract purchased for the time periods described in
the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Contract Maintenance Charges and any applicable Withdrawal Charges to arrive at
the ending hypothetical value. The average annual total return is then
determined by computing the fixed interest rate that a $1,000 purchase payment
would have to earn annually, compounded annually, to grow to the hypothetical
value at the end of the time periods described. The formula used in these
calculations is:
n
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods
used (or fractional portion thereof) of a hypothetical
$1,000 payment made at the beginning of the time
periods used.
The Company may also advertise performance data which will be calculated in the
same manner as described above but which will not reflect the deduction of any
Contract Maintenance Charge and Withdrawal Charge. The deduction of any Contract
Maintenance Charge and 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.
The contracts are new and therefore have no performance history. However, the
Separate Account and certain corresponding Portfolios have been in existence for
sometime and consequently have an investment performance history. In order to
show how the historical investment performance of the Separate Account and the
Portfolios affect Accumulation Unit values, performance information was
developed. The information is based upon the historical experience of the
Separate Account and the Portfolios and is for the periods shown. The prospectus
contains a chart of performance information.
Future performance of the Portfolios 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 for a Portfolio 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.
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.
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 Internal Revenue Code of 1986, as amended (the "Code") governs
taxation of annuities in general. An Owner is not taxed on increases in the
value of a Contract until distribution occurs, either in the form of a lump sum
payment or as annuity payments under the annuity option selected. For a lump sum
payment received as a total withdrawal (total surrender), the recipient is taxed
on the portion of the payment that exceeds the cost basis of the Contract. For
Non-Qualified Contracts, this cost basis is generally the purchase payments,
while for Qualified Contracts there may be no cost basis. The taxable portion of
the lump sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract (adjusted for any period or refund feature) bears
to the expected return under the Contract. The exclusion amount for payments
based on a variable annuity option is determined by dividing the cost basis of
the Contract (adjusted for any period certain or refund guarantee) by the number
of years over which the annuity is expected to be paid. Payments received after
the investment in the Contract has been recovered (i.e. when the total of the
excludible amount equals the investment in the Contract) are fully taxable. The
taxable portion is taxed at ordinary income tax rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Contracts
should seek competent financial advice about the tax consequences of any
distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity contract would result in the imposition of federal income
tax to the Owner with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contract meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contract. The Regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the Regulations, an investment portfolio will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more than 70% of the
value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment portfolios underlying the Contracts will
be managed in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Separate
Account resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owners being
retroactively determined to be the owners of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are issued
within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from such
combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts generally
will not be treated as annuities for federal income tax purposes. However, this
treatment is not applied to a Contract held by a trust or other entity as an
agent for a natural person nor to Contracts held by Qualified Plans. Purchasers
should consult their own tax counsel or other tax adviser before purchasing a
Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross income
of the Owner are subject to federal income tax withholding. Generally, amounts
are withheld from periodic payments at the same rate as wages and at the rate of
10% from non-periodic payments. However, the Owner, in most cases, may elect not
to have taxes withheld or to have withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code, which are not directly rolled
over to another eligible retirement plan or individual retirement account or
individual retirement annuity, are subject to a mandatory 20% withholding for
federal income tax. The 20% withholding requirement generally does not apply to:
a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary, or for a specified period of 10
years or more; or b) distributions which are required minimum distributions; or
c) the portion of the distributions not includible in gross income (i.e. returns
of after-tax contributions). Participants should consult their own tax counsel
or other tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includible in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any premature distribution. However, the penalty is not imposed on amounts
received: (a) after the taxpayer reaches age 59 1/2; (b) after the death of the
Owner; (c) if the taxpayer is totally disabled (for this purpose disability is
as defined in Section 72(m)(7) of the Code); (d) in a series of substantially
equal periodic payments made not less frequently than annually for the life (or
life expectancy) of the taxpayer or for the joint lives (or joint life
expectancies) of the taxpayer and his or her Beneficiary; (e) under an immediate
annuity; or (f) which are allocable to purchase payments made prior to August
14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified Contracts.
(See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS
The Contracts offered by the Prospectus are designed to be suitable for use
under various types of Qualified Plans. Taxation of participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Owners, Annuitants and Beneficiaries are cautioned that benefits
under a Qualified Plan may be subject to the terms and conditions of the plan
regardless of the terms and conditions of the Contracts issued pursuant to the
plan. Some retirement plans are subject to distribution and other requirements
that are not incorporated into the Company's administrative procedures. Owners,
participants and Beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Contracts comply with applicable law. Following are general descriptions of the
types of Qualified Plans with which the Contracts may be used. Such descriptions
are not exhaustive and are for general informational purposes only. The tax
rules regarding Qualified Plans are very complex and will have differing
applications depending on individual facts and circumstances. Each purchaser
should obtain competent tax advice prior to purchasing a Contract issued under a
Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described
herein. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals - Qualified Contracts" below.)
On July 6, 1983, the Supreme Court decided in ARIZONA GOVERNING COMMITTEE V.
NORRIS that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
Qualified Plans will utilize annuity tables which do not differentiate on the
basis of sex. Such annuity tables will also be available for use in connection
with certain non-qualified deferred compensation plans.
a. H.R. 10 Plans
Section 401 of the Code permits self-employed individuals to establish Qualified
Plans for themselves and their employees, commonly referred to as "H.R. 10" or
"Keogh" plans. Contributions made to the Plan for the benefit of the employees
will not be included in the gross income of the employees until distributed from
the Plan. The tax consequences to participants may vary depending upon the
particular plan design. However, the Code places limitations and restrictions on
all Plans including on such items as: amount of allowable contributions; form,
manner and timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
participation; and the tax treatment of distributions, withdrawals and
surrenders. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Purchasers of Contracts for use with an H.R. 10 Plan should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
b. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities" by
public schools and certain charitable, educational and scientific organizations
described in Section 501(c)(3) of the Code. These qualifying employers may make
contributions to the Contracts for the benefit of their employees. Such
contributions are not includible in the gross income of the employees until the
employees receive distributions from the Contracts. The amount of contributions
to the tax-sheltered annuity is limited to certain maximums imposed by the Code.
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions, nondiscrimination and withdrawals. (See "Tax
Treatment of Withdrawals - Qualified Contracts" and "Tax-Sheltered Annuities -
Withdrawal Limitations" below.) Employee loans are not allowable under the
Contracts. Any employee should obtain competent tax advice as to the tax
treatment and suitability of such an investment.
c. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which will be deductible from the individual's gross income. These IRAs are
subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA.
Sales of Contracts for use with IRAs are subject to special requirements imposed
by the Code, including the requirement that certain informational disclosure be
given to persons desiring to establish an IRA. Purchasers of Contracts to be
qualified as Individual Retirement Annuities should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
d. Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit corporate employers to establish
various types of retirement plans for employees. These retirement plans may
permit the purchase of the Contracts to provide benefits under the Plan.
Contributions to the Plan for the benefit of employees will not be includible in
the gross income of the employees until distributed from the Plan. The tax
consequences to participants may vary depending upon the particular plan design.
However, the Code places limitations and restrictions on all Plans including on
such items as: amount of allowable contributions; form, manner and timing of
distributions; transferability of benefits; vesting and nonforfeitability of
interests; nondiscrimination in eligibility and participation; and the tax
treatment of distributions, withdrawals and surrenders. (See "Tax Treatment of
Withdrawals - Qualified Contracts" below.) Purchasers of Contracts for use with
Corporate Pension or Profit Sharing Plans should obtain competent tax advice as
to the tax treatment and suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion of the
amount received is taxable, generally based on the ratio of the individual's
cost basis to the individual's total accrued benefit under the retirement plan.
Special tax rules may be available for certain distributions from a Qualified
Contract. Section 72(t) of the Code imposes a 10% penalty tax on the taxable
portion of any distribution from qualified retirement plans, including Contracts
issued and qualified under Code Sections 401 (H.R. 10 and Corporate Pension and
Profit-Sharing Plans), 403(b) (Tax-Sheltered Annuities) and 408(b) (Individual
Retirement Annuities). To the extent amounts are not includible in gross income
because they have been rolled over to an IRA or to another eligible Qualified
Plan, no tax penalty will be imposed. The tax penalty will not apply to the
following distributions: (a) if distribution is made on or after the date on
which the Owner or Annuitant (as applicable) reaches age 59 1/2; (b)
distributions following the death or disability of the Owner or Annuitant (as
applicable) (for this purpose disability is as defined in Section 72(m)(7) of
the Code); (c) after separation from service, distributions that are part of
substantially equal periodic payments made not less frequently than annually for
the life (or life expectancy) of the Owner or Annuitant (as applicable) or the
joint lives (or joint life expectancies) of such Owner or Annuitant (as
applicable) and his or her designated Beneficiary; (d) distributions to an Owner
or Annuitant (as applicable) who separated from service after he has attained
age 55; (e) distributions made to the Owner or Annuitant (as applicable) to the
extent such distributions do not exceed the amount allowable as a deduction
under Code Section 213 to the Owner or Annuitant (as applicable) for amounts
paid during the taxable year for medical care; (f) distributions made to an
alternate payee pursuant to a qualified domestic relations order; (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 rollovers and transfers between certain Qualified Plans. Owners should
consult their own tax counsel or other tax adviser regarding any distributions.
ANNUITY PROVISIONS
VARIABLE ANNUITY
A variable annuity is an annuity with payments which: (1) are not predetermined
as to dollar amount; and (2) will vary in amount with the net investment results
of the applicable investment portfolio(s) of the Separate Account. At the
annuity date, the Contract value in each investment portfolio will be applied to
the applicable Annuity Tables. The Annuity Table used will depend upon the
annuity option chosen. If, as of the annuity date, the then current annuity
option rates applicable to this class of Contracts provide a first Annuity
Payment greater than guaranteed under the same annuity option under this
Contract, the greater payment will be made. The dollar amount of Annuity
Payments after the first is determined as follows:
(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 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
(UNAUDITED)
September 30, 1997
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997 (Unaudited)
ASSETS
INVESTMENTS:
<TABLE>
<CAPTION>
<S> <C>
VAN KAMPEN MERRIT SERIES TRUST:
Quality Income Portfolio - 58,973 shares at a net asset value of $10.73 per share (cost $628,539) $ 632,757
Growth and Income Portfolio - 87,613 shares at a net asset value of $17.24 per share (cost $1,240,861) 1,510,813
Money Market Portfolio - 734,959 shares at a net asset value of $1.00 per share (cost $734,959) 734,959
Stock Index Portfolio - 74,778 shares at a net asset value of $20.60 per share (cost $1,175,774 ) 1,540,139
Bond Debenture Portfolio - 262,799 shares at a net asset value of $12.15 per share (cost $3,003,949) 3,193,707
Quality Bond Portfolio - 195,355 shares at a net asset value of $10.38 per share (cost $1,983,754) 2,027,003
Small Cap Stock Portfolio - 407,913 shares at a net asset value of $13.36 per share (cost $4,568,661) 5,448,908
Large Cap Stock Portfolio -550,119 shares at a net asset value of $14.34 per share (cost $6,894,860) 7,890,678
Select Equity Portfolio - 552,622 shares at a net asset value of $14.11 per share (cost $6,431,548) 7,795,957
International Equity Portfolio - 433,807 shares at a net asset value of $12.11 per share (cost $4,878,908) 5,252,163
LORD ABBETT SERIES FUND, INC:
Growth and Income Portfolio - 950,414 shares at a net asset value of $21.22 per share (cost $16,725,762) 20,163,736
Total Assets $56,190,820
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF ASSETS AND LIABILITIES (Continued)
September 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND CONTRACT OWNERS EQUITY
Contract Owners' Equity:
Accumulation Phase:
Trust Quality Income - 38,842 accumulation units at $16.290627 per unit 632,757
Trust Growth and Income - 71,378 accumulation units at $21.166489 per unit 1,510,813
Trust Money Market - 60,026 accumulation units at $12.244080 per unit 734,959
Trust Stock Index - 63,270 accumulation units at $24.342237 per unit 1,540,139
Trust Bond Debenture - 252,345 accumulation units at $12.656093 per unit 3,193,707
Trust Quality Bond - 186,347 accumulation units at $10.877568 per unit 2,027,003
Trust Small Cap Stock - 395,558 accumulation units at $13.775253 per unit 5,448,908
Trust Large Cap Stock - 539,661 accumulation units at $14.621557 per unit 7,890,678
Trust Select Equity - 549,003 accumulation units at $14.200214 per unit 7,795,957
Trust International Equity - 434,016 accumulation units at $12.101317 per unit 5,252,163
Fund Growth and Income - 651,703 accumulation units at $30.940092 per unit 20,163,736
-----------
Total Contract Owners' Equity 56,190,820
Total Liabilities and Contract Owners' Equity $56,190,820
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1997 (Unaudited)
COVA LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
<TABLE>
<CAPTION>
QUALITY GROWTH & MONEY STOCK BOND QUALITY SMALL CAP LARGE CAP SELECT
INCOME INCOME MARKET INDEX DEBENTURE BOND STOCK STOCK EQUITY
-------- -------- ------ ------- --------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends and Capital Gains 17,814 23,391 35,417 14,932 43,514 42,357 18,606 43,632 42,910
Distributions
Total Income 17,814 23,391 35,417 14,932 43,514 42,357 18,606 43,632 42,910
EXPENSES:
Mortality and Expense
Risk Fee 3,580 10,392 8,052 11,506 15,296 12,032 26,373 37,484 41,925
Other Operating Expenses 430 1,247 966 1,381 1,835 1,444 3,165 4,498 5,031
Total Expenses 4,010 11,639 9,018 12,887 17,131 13,476 29,538 41,982 46,956
Net Investment Income 13,804 11,752 26,399 2,045 26,383 28,881 (10,932) 1,650 (4,046)
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS (319) 1,605 -- 10,809 1,413 1,226 405 8,346 8,091
NET CHANGE IN UNREALIZED
GAIN ON INVESTMENTS 3,771 232,208 -- 282,181 181,366 40,936 846,226 938,963 1,263,016
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 3,452 233,813 -- 292,990 182,779 42,162 846,631 947,309 1,271,107
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS 17,256 245,565 26,399 295,035 209,162 71,043 835,699 948,959 1,267,061
INTL GROWTH & TOTAL
----------
EQUITY INCOME
------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends and Capital Gains 32,807 0 315,380
Distributions
Total Income 32,807 0 315,380
EXPENSES:
Mortality and Expense
Risk Fee 27,512 131,533 325,685
Other Operating Expenses 3,301 15,784 39,082
Total Expenses 30,813 147,317 364,767
Net Investment Income 1,994 (147,317) (49,387)
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS 1,703 39,221 72,500
NET CHANGE IN UNREALIZED
GAIN ON INVESTMENTS 306,572 3,063,205 7,158,444
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 308,275 3,102,426 7,230,944
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS 310,269 2,955,109 7,181,557
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS EQUITY
For the Nine Months Ended September 30, 1997 (Unaudited)
COVA LORD ABBETT
SERIES TRUST SERIES FUND, INC.
_____________________________________________________________________________
____________________________________ ___________
<TABLE>
<CAPTION>
QUALITY GROWTH & MONEY STOCK BOND QUALITY SMALL CAP LARGE CAP
INCOME INCOME MARKET INDEX DEBENTURE BOND STOCK STOCK
-------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income 13,804 11,752 26,399 2,045 26,383 28,881 (10,932) 1,650
Net Realized Gain/(Loss)
on Investments (319) 1,605 -- 10,809 1,413 1,226 405 8,346
Net Unrealized Gain
on Investments 3,771 232,208 -- 282,181 181,366 40,936 846,226 938,963
Net Increase in Contract
Owners' Equity Resulting
from Operations 17,256 245,565 26,399 295,035 209,162 71,043 835,699 948,959
From Account Unit
Transactions:
Proceeds from Units of
the Account Sold -- 139,177 4,851,768 12,900 710,842 250,715 675,061 1,363,875
Payments for Units of the
Account Redeemed (45,371) (7,325) (73,013) (18,980) (25,252) (17,418) (35,775) (42,476)
Account Transfers 361,928 447,120 (4,392,069) 291,222 1,852,296 1,053,527 2,694,738 4,189,497
Net Increase in Contract
Owners' Equity From
Account Unit Transactions 316,557 578,972 386,686 285,142 2,537,886 1,286,824 3,334,024 5,510,896
Net Increase in Contract
Owners' Equity 333,813 824,537 413,085 580,177 2,747,048 1,357,867 4,169,723 6,459,855
Contract Owners' Equity:
Beginning of Period 298,944 686,276 321,874 959,962 446,659 669,136 1,279,185 1,430,823
End of Period 632,757 1,510,813 734,959 1,540,139 3,193,707 2,027,003 5,448,908 7,890,678
SELECT INTL GROWTH & TOTAL
-----------
EQUITY EQUITY INCOME
---------- ---------- -----------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income (4,046) 1,994 (147,317) (49,387)
Net Realized Gain/(Loss)
on Investments 8,091 1,703 39,221 72,500
Net Unrealized Gain
on Investments 1,263,016 306,572 3,063,205 7,158,444
Net Increase in Contract
Owners' Equity Resulting
from Operations 1,267,061 310,269 2,955,109 7,181,557
From Account Unit
Transactions:
Proceeds from Units of
the Account Sold 1,225,811 875,940 1,277,499 11,383,588
Payments for Units of the
Account Redeemed (42,730) (22,216) (351,326) (681,882)
Account Transfers 3,335,262 2,727,911 6,866,248 19,427,680
Net Increase in Contract
Owners' Equity From
Account Unit Transactions 4,518,343 3,581,635 7,792,421 30,129,386
Net Increase in Contract
Owners' Equity 5,785,404 3,891,904 10,747,530 37,310,943
Contract Owners' Equity:
Beginning of Period 2,010,553 1,360,259 9,416,206 18,879,877
End of Period 7,795,957 5,252,163 20,163,736 56,190,820
</TABLE>
See accompanying notes to unaudited financial statements
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
For the Year Ended December 31, 1996
<TABLE>
COVA LORD ABBETT
SERIES TRUST SERIES FUND, INC.
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Quality Growth & Money Stock Bond Quality Small
INCOME INCOME MARKET INDEX Debenture Bond Cap. Stock
--------- ---------- ------------ ---------
From Operations:
Net Investment Income $ 7,224 $ 28,906 $ 21,633 $ 34,743 $ 12,071 $ 13,991 $ 47,627
Net Realized Gain on
Investments (682) 518 -- 1,342 1,375 65 334
Net Unrealized Gain/(Loss)
on Investments (1,359) 41,537 -- 80,860 8,392 2,313 34,020
--------- ---------- ---------
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS 5,183 70,961 21,633 116,945 21,838 16,369 81,981
--------- ---------- ------------ ---------
From Account Unit Transactions:
Proceeds from Units of
the Account Sold 57,261 32,625 5,011,759 152,928 115,745 100,194 461,912
Payments for Units of the
Account Redeemed (22,762) (7,535) (170) (13,935) -- (1,570) (3,036)
Account Transfers 125,849 485,085 (5,037,068) 492,907 309,076 554,143 738,328
--------- ---------- ------------ ---------
Net Increase/(Decrease) in
Contact Owners' Equity
From Account Unit
Transactions 160,348 510,175 (25,479) 631,900 424,821 652,767 1,197,204
--------- ---------- ------------ ---------
Net Increase/(Decrease) in Contract
Owners' Equity 165,531 581,136 (3,846) 748,845 446,659 669,136 1,279,185
--------- ---------- ------------ ---------
Contract Owners' Equity:
Beginning of Period $133,413 $ 105,140 $ 325,720 $211,117 -- -- --
--------- ---------- ------------
End of Period $298,944 $ 686,276 $ 321,874 $959,962 $ 446,659 $669,136 $ 1,279,185
<S> <C> <C> <C> <C> <C>
Large Select Intl Growth &
Cap. Stock Equity Equity INCOME TOTAL
----------- ------------
From Operations:
Net Investment Income $ 29,893 $ 21,801 $ 2,480 $ 534,226 $ 754,595
Net Realized Gain on
Investments 3,085 465 132 2,820 9,454
Net Unrealized Gain/(Loss)
on Investments 56,856 101,392 66,683 471,675 862,369
----------- ------------
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS 89,834 123,658 69,295 1,008,721 1,626,418
----------- ------------
From Account Unit Transactions:
Proceeds from Units of
the Account Sold 542,124 755,570 576,132 1,438,328 9,244,578
Payments for Units of the
Account Redeemed (7,336) (8,859) (4,725) (131,847) (201,775)
Account Transfers 806,201 1,140,184 719,557 4,425,896 4,760,158
----------- ------------
Net Increase/(Decrease) in
Contact Owners' Equity
From Account Unit
Transactions 1,340,989 1,886,895 1,290,964 5,732,377 13,802,961
----------- ------------
Net Increase/(Decrease) in Contract
Owners' Equity 1,430,823 2,010,553 1,360,259 6,741,098 15,429,379
----------- ------------
Contract Owners' Equity:
Beginning of Period -- -- -- $2,675,108 $ 3,450,498
----------- ------------
End of Period $ 1,430,823 $2,010,553 $1,360,259 $9,416,206 $18,879,877
</TABLE>
See accompanying notes to unaudited statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO UNAUDITED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 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 the Lord Abbett
Series Fund, Inc. ("Fund"). The Trust consists of ten portfolios of which
four managed by Van Kampen American Capital Investment Advisory Corp., five
managed by J.P. Morgan Investment Management, Inc. and one portfolio managed
by Lord, Abbett and Co. The Trust portfolios available for investment are the
Quality Income, Growth and Income, Money Market, Stock Index, Bond Debenture,
Quality Bond, Small Cap Stock, Large Cap Stock, Select Equity, and
International Equity Portfolios. The Fund has one portfolio available for
investment: the Growth and Income Portfolio. Not all portfolios of the Trust
and the Fund are available for investment depending upon the nature and
specific terms of the different contracts currently being offered for sale.
The Trust and the Fund are all diversified, open-end, management investment
companies which are intended to meet differing investment objectives.
2. SIGNIFICANT ACCOUNTING POLICIES:
A. INVESTMENT VALUATION
Investments in shares of the Trust and Fund are carried in the statement of
assets and liabilities at the underlying net asset value of the Trust and
Fund. The net asset value of the Trust and Fund has been determined on the
market value basis, and is valued daily by the Trust and Fund investment
managers. Realized gains and losses are calculated by the average cost
method.
B. REINVESTMENT OF DIVIDENDS
Dividends received from net investment income and net realized capital gains
are reinvested in additional shares of the portfolio of the Trust or Fund
making the distribution or, at the election of the Separate Account, received
in cash. Dividend income and capital gain distributions are recorded as
income on the ex-dividend date.
C. FEDERAL INCOME TAXES
Operations of the Separate Account form a part of Cova, which is taxed as a
"Life Insurance Company" under the Internal Revenue Code ("Code"). Under
current provisions of the Code, no Federal income taxes are payable by Cova
with respect to earnings of the Separate Account.
Under the principles set forth in Internal Revenue Ruling 81-225 and Section
817(h) of the Code and regulations thereunder, Cova believes that it will be
treated as the owner of the assets invested in the Separate Account for
Federal income tax purposes, with the result that earnings and gains, if any,
derived from those assets will not be included in a contract owners gross
income until amounts are withdrawn or received pursuant to an Optional Payment
Plan.
3. GENERAL:
The accompanying unaudited financial statements include all adjustments,
consisting of normal recurring accruals, that management considers necessary
for fair presentation of the separate accounts financial position and results
of operations as of and for the interim periods presented. Certain footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission, all though the Separate account believes the disclosures
in these financial statements are adequate to present fairly the information
contained herein. The results of operations for the nine months ended
September 30, 1997, are not necessarily indicative of the results to be
expected for the full year.
COVA VARIABLE ANNUITY ACCOUNT FIVE
Financial Statements
December 31, 1996
(With Independent Auditors' Report Thereon)
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
ASSETS
INVESTMENTS:
<TABLE>
<CAPTION>
<S> <C>
COVA SERIES TRUST:
Quality Income Portfolio - 27,535 shares at a net asset value of $10.69 per share (cost $293,906) $ 294,353
Growth and Income Portfolio - 46,829 shares at a net asset value of $13.99 per share (cost $617,232) 654,976
Money Market Portfolio - 321,874 shares at a net asset value of $1.00 per share (cost $321,874) 321,874
Stock Index Portfolio - 57,208 shares at a net asset value of $16.13 per share (cost $840,381) 922,565
Bond Debenture Portfolio - 39,495 shares at a net asset value of $10.97 per share (cost $424,882) 433,274
Quality Bond Portfolio - 64,756 shares at a net asset value of $10.08 per share (cost $650,565) 652,878
Small Capital Stock Portfolio - 112,341 shares at a net asset value of $10.92 per share (cost $1,192,979) 1,227,000
Large Capital Stock Portfolio - 125,692 shares at a net asset value of $11.11 per share (cost $1,339,783) 1,396,638
Select Equity Portfolio - 184,560 shares at a net asset value of $10.74 per share (cost $1,881,173) 1,982,566
International Equity Portfolio - 123,533 shares at a net value of $10.96 per share (cost $1,287,163) 1,353,846
LORD ABBETT SERIES FUND, INC:
Growth and Income Portfolio - 553,055 shares at a net asset value of $17.03 per share (cost $9,041,437) 9,416,206
DIVIDENDS RECEIVABLE:
COVA SERIES TRUST:
Quality Income Portfolio 4,591
Growth and Income Portfolio 31,300
Stock Index Portfolio 37,397
Bond Debenture Portfolio 13,385
Quality Bond Portfolio 16,258
Small Cap Portfolio 52,185
Large Cap Portfolio 34,185
Select Equity Portfolio 27,987
International Equity Portfolio 6,413
-----------
TOTAL DIVIDENDS RECEIVABLE 223,701
-----------
TOTAL ASSETS $18,879,877
===========
LIABILITIES AND CONTRACT OWNERS' EQUITY
CONTRACT OWNERS' EQUITY:
Trust Quality Income - 19,237 accumulation units at $15.540286 per unit $ 298,944
Trust Growth and Income - 40,350 accumulation units at $17.008156 per unit 686,276
Trust Money Market - 27,094 accumulation units at $11.879722 per unit 321,874
Trust Stock Index - 50,426 accumulation units at $19.036955 959,962
per unit
Trust Bond Debenture Portfolio - 39,545 accumulation units at $11.294929 per unit 446,659
Trust Quality Bond Portfolio - 64,534 accumulation units at $10.368767 per unit 669,136
Trust Small Cap Stock Portfolio - 113,118 accumulation units at $11.308427 per unit 1,279,185
Trust Large Cap Stock Portfolio - 126,231 accumulation units at $11.334982 per unit 1,430,823
Trust Select Equity Portfolio - 185,509 accumulation units at $10.838053 per unit 2,010,553
Trust International Equity Portfolio - 124,032 accumulation units at $10.967004 per unit 1,360,259
Fund Growth and Income - 375,304 accumulation units at $25.089540 per unit 9,416,206
-----------
TOTAL CONTRACT OWNERS' EQUITY 18,879,877
-----------
TOTAL LIABILITIES AND CONTRACT OWNERS' EQUITY $18,879,877
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
_____________________________________________________________________________
_____________________________________ ____________
<TABLE>
<CAPTION>
QUALITY GROWTH & MONEY STOCK BOND QUALITY SMALL LARGE SELECT
INCOME INCOME MARKET INDEX DEBENTURE BOND CAP STOCK CAP STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends and Capital Gains
Distributions $ 10,397 $ 34,666 $29,444 $ 43,128 $ 13,769 $ 16,671 $ 52,946 $ 34,930 $ 29,027
Total Income 10,397 34,666 29,444 43,128 13,769 16,671 52,946 34,930 29,027
EXPENSES:
Mortality and Expense
Risk Fee 2,833 5,143 6,974 7,487 1,516 2,393 4,749 4,497 6,452
Administrative Fee 340 617 837 898 182 287 570 540 774
Total Expenses 3,173 5,760 7,811 8,385 1,698 2,680 5,319 5,037 7,226
NET INVESTMENT INCOME 7,224 28,906 21,633 34,743 12,071 13,991 47,627 29,893 21,801
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS (682) 518 -- 1,342 1,375 65 334 3,085 465
NET CHANGE IN UNREALIZED
GAIN/(LOSS) ON INVESTMENTS (1,359) 41,537 -- 80,860 8,392 2,313 34,020 56,856 101,392
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS (2,041) 42,055 -- 82,202 9,767 2,378 34,354 59,941 101,857
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS $ 5,183 $ 70,961 $21,633 $116,945 $ 21,838 $ 16,369 $ 81,981 $ 89,834 $123,658
========= ========= ======= ======== ========== ======== ========== ========== ========
INTL GROWTH &
EQUITY INCOME TOTAL
<S> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividends and Capital Gains
Distributions $ 8,149 $ 615,866 $ 888,993
Total Income 8,149 615,866 888,993
EXPENSES:
Mortality and Expense
Risk Fee 5,062 72,893 119,999
Administrative Fee 607 8,747 14,399
Total Expenses 5,669 81,640 134,398
NET INVESTMENT INCOME 2,480 534,226 754,595
NET REALIZED GAIN/(LOSS)
ON INVESTMENTS 132 2,820 9,454
NET CHANGE IN UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 66,683 471,675 862,369
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 66,815 474,495 871,823
NET INCREASE IN CONTRACT
OWNERS' EQUITY RESULTING
FROM OPERATIONS $69,295 $1,008,721 $1,626,418
======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
For the Year Ended December 31, 1996
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
_____________________________________________________________________________
_________ __________
<TABLE>
<CAPTION>
QUALITY GROWTH & MONEY STOCK BOND QUALITY SMALL
INCOME INCOME MARKET INDEX DEBENTURE BOND CAP. STOCK
--------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 7,224 $ 28,906 $ 21,633 $ 34,743 $ 12,071 $ 13,991 $ 47,627
Net Realized Gain/(Loss) on
Investments (682) 518 -- 1,342 1,375 65 334
Net Unrealized Gain/(Loss)
on Investments (1,359) 41,537 -- 80,860 8,392 2,313 34,020
NET INCREASE IN CONTRACT
Net Increase in Contract
Owners' Equity Resulting
Owners Equity Resulting
FROM OPERATIONS 5,183 70,961 21,633 116,945 21,838 16,369 81,981
FROM ACCOUNT UNIT TRANSACTIONS:
Proceeds from Units of
the Account Sold 57,261 32,625 5,011,759 152,928 115,745 100,194 461,912
Payments for Units of the
Account Redeemed (22,762) (7,535) (170) (13,935) -- (1,570) (3,036)
Account Transfers 125,849 485,085 (5,037,068) 492,907 309,076 554,143 738,328
NET INCREASE/(DECREASE) IN
CONTRACT OWNERS' EQUITY
FROM ACCOUNT UNIT 160,348 510,175 (25,479) 631,900 424,821 652,767 1,197,204
TRANSACTIONS
NET INCREASE/(DECREASE) IN CONTRACT
OWNERS' EQUITY 165,531 581,136 (3,846) 748,845 446,659 669,136 1,279,185
CONTRACT OWNERS' EQUITY:
BEGINNING OF PERIOD 133,413 105,140 325,720 211,117 -- -- --
END OF PERIOD $298,944 $ 686,276 $ 321,874 $959,962 $ 446,659 $669,136 $ 1,279,185
LARGE SELECT INTL GROWTH &
CAP. STOCK EQUITY EQUITY INCOME TOTAL
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net Investment Income $ 29,893 $ 21,801 $ 2,480 $ 534,226 $ 754,595
Net Realized Gain/(Loss) on
Investments 3,085 465 132 2,820 9,454
Net Unrealized Gain/(Loss)
on Investments 56,856 101,392 66,683 471,675 862,369
NET INCREASE IN CONTRACT
Net Increase in Contract
Owners' Equity Resulting
Owners Equity Resulting
FROM OPERATIONS 89,834 123,658 69,295 1,008,721 1,626,418
FROM ACCOUNT UNIT TRANSACTIONS:
Proceeds from Units of
the Account Sold 542,124 755,570 576,132 1,438,328 9,244,578
Payments for Units of the
Account Redeemed (7,336) (8,859) (4,725) (131,847) (201,775)
Account Transfers 806,201 1,140,184 719,557 4,425,896 4,760,158
NET INCREASE/(DECREASE) IN
CONTRACT OWNERS' EQUITY
FROM ACCOUNT UNIT 1,340,989 1,886,895 1,290,964 5,732,377 13,802,961
TRANSACTIONS
NET INCREASE/(DECREASE) IN CONTRACT
OWNERS' EQUITY 1,430,823 2,010,553 1,360,259 6,741,098 15,429,379
CONTRACT OWNERS' EQUITY:
BEGINNING OF PERIOD -- -- -- 2,675,108 3,450,498
END OF PERIOD $ 1,430,823 $2,010,553 $1,360,259 $9,416,206 $18,879,877
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
<TABLE>
VAN KAMPEN MERRITT LORD ABBETT
SERIES TRUST SERIES FUND, INC.
___________________________________________ ___________________
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Quality Growth & Money Stock Growth &
INCOME INCOME MARKET INDEX INCOME TOTAL
--------- ---------- ------------ --------- ----------- -----------
FROM OPERATIONS:
Net Investment Income $ 1,133 $ 7,080 $ 8,149 $ 7,348 $ 197,406 $ 221,116
Net Realized Gain on
Investments 6 262 -- 1,432 2,243 3,943
Net Unrealized Gain/(Loss)
on Investments 1,806 (3,794) -- 1,325 (96,906) (97,569)
--------- ---------- --------- ----------- -----------
NET INCREASE IN CONTRACT
OWNERS' EQUITY
RESULTING FROM
OPERATIONS 2,945 3,548 8,149 10,105 102,743 127,490
--------- ---------- ------------ --------- ----------- -----------
From Account Unit Transactions:
Proceeds from Units of
the Account Sold 20,000 148 2,128,675 15,778 441,266 2,605,867
Payments for Units of the
Account Redeemed (248) -- -- (2,204) (3,894) (6,346)
Account Transfers 110,716 101,444 (1,811,104) 187,438 2,134,993 723,487
--------- ---------- ------------ --------- ----------- -----------
Net Increase in Contract
Owners' Equity From
Account Unit
Transactions 130,468 101,592 317,571 201,012 2,572,365 3,323,008
--------- ---------- ------------ --------- ----------- -----------
Net Increase in Contract
Owners' Equity 133,413 105,140 325,720 211,117 2,675,108 3,450,498
--------- ---------- ------------ --------- ----------- -----------
Contract Owners' Equity:
Beginning of Period -- -- -- -- -- --
--------- ---------- ------------ --------- ----------- -----------
End of Period $133,413 $ 105,140 $ 325,720 $211,117 $2,675,108 $3,450,498
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
COVA SERIES TRUST - QUALITY INCOME PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
FOR THE PERIOD FROM 8/16/95
FOR THE YEAR (COMMENCEMENT OF OPERATIONS)
ENDED 12/31/96 THROUGH 12/31/95)
---------------- -----------------------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 15.33 $ 14.42
---------------- -----------------------------
Net Investment Income .46 .32
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions (.25) .59
---------------- -----------------------------
Total from Investment Operations .21 .91
---------------- -----------------------------
Accumulation Unit Value,
End of Period $ 15.54 $ 15.33
================ =============================
Total Return** 1.36% 17.03%*
Contract Owners Equity,
End of Period (in thousands) $ 299 $ 133
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 3.21% 6.54%*
Number of Units Outstanding
at End of Period 19,237 8,702
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios (investment
advisory fees and portfolio
operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
COVA SERIES TRUST - GROWTH & INCOME PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
FOR THE PERIOD FROM 7/19/95
FOR THE YEAR (COMMENCEMENT OF OPERATIONS)
ENDED 12/31/96 THROUGH 12/31/95
-----------------------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 14.61 $ 13.05
Net Investment Income .68 .99
Net Realized and Unrealized
Gain from Security
Transactions 1.72 .57
Total from Investment Operations 2.40 1.56
-----------------------------
Accumulation Unit Value,
End of Period $ 17.01 $ 14.61
================ =============================
Total Return** 16.42% 26.71%*
Contract Owners Equity,
End of Period (in thousands) $ 686 $ 105
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 7.08% 49.49%*
Number of Units Outstanding
at End of Period 40,350 7,197
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or
account transfer charges), but do reflect mortality and expense charges,
administration expense charges as well
as all expenses of the underlying portfolios (investment advisory fees and
portfolio operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
COVA SERIES TRUST - MONEY MARKET PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
For the Period From 6/19/95
FOR THE YEAR (Commencement of Operations)
ENDED 12/31/96 Through 12/31/95
---------------- -----------------------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 11.42 $ 11.13
---------------- -----------------------------
Net Investment Income .46 .29
Net Realized and Unrealized
Gain/(Loss) from Security
Transactions -- --
Total from Investment Operations .46 .29
Accumulation Unit Value,
End of Period $ 11.88 $ 11.42
================ =============================
Total Return** 3.98% 4.94%*
Contract Owners Equity,
End of Period (in thousands) $ 322 $ 326
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 3.91% 4.38%*
Number of Units Outstanding
at End of Period 27,094 28,509
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees or
account transfer charges), but do reflect mortality and expense charges,
administration expense charges as well
as all expenses of the underlying portfolios(investment advisory fees and
portfolio operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding throughout the
period
per sub-account are presented below:
<TABLE>
<CAPTION>
COVA SERIES TRUST - STOCK INDEX PORTFOLIO
(MANAGED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.)
For the Period From 7/20/95
FOR THE YEAR (Commencement of Operations)
ENDED 12/31/96 Through 12/31/95
---------------- -----------------------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 15.77 $ 14.13
---------------- -----------------------------
Net Investment Income .67 .50
Net Realized and Unrealized
Gain from Security
Transactions 2.60 1.14
---------------- -----------------------------
Total from Investment Operations 3.27 1.64
---------------- -----------------------------
Accumulation Unit Value,
End of Period $ 19.04 $ 15.77
================ =============================
Total Return** 20.69% 26.25%*
Contract Owners Equity,
End of Period (in thousands) $ 960 $ 211
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 5.84% 18.57%*
Number of Units Outstanding
at End of Period 50,426 13,384
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance fees
or account transfer charges), but do reflect mortality and expense charges,
administration expense charges as
well as all expenses of the underlying portfolios(investment advisory fees
and portfolio operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding
throughout the period per sub-account are presented below:
<TABLE>
<CAPTION>
COVA SERIES TRUST - BOND DEBENTURE PORTFOLIO (MANAGED BY LORD, ABBETT & CO.)
FOR THE PERIOD FROM 5/20/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.15
-----------------------------
Net Investment Income .33
Net Realized and Unrealized
Gain from Security
Transactions .82
-----------------------------
Total from Investment Operations 1.15
-----------------------------
Accumulation Unit Value,
End of Period $ 11.30
=============================
Total Return** 18.73%*
Contract Owners Equity,
End of Period (in thousands) $ 447
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 9.98%*
Number of Units Outstanding
at End of Period 39,545
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios (investment
advisory fees and portfolio
operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding
throughout the period per sub-account are presented below:
<TABLE>
<CAPTION>
COVA SERIES TRUST - QUALITY BOND PORTFOLIO
(MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/20/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 9.95
-----------------------------
Net Investment Income .29
Net Realized and Unrealized
Gain from Security
Transactions .13
-----------------------------
Total from Investment Operations .42
-----------------------------
Accumulation Unit Value,
End of Period $ 10.37
=============================
Total Return** 6.80%*
Contract Owners Equity,
End of Period (in thousands) $ 669
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 7.33%*
Number of Units Outstanding
at End of Period 64,534
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio
operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding
throughout the period per sub-account are presented below:
<TABLE>
<CAPTION>
COVA SERIES TRUST - SMALL CAP STOCK PORTFOLIO
(MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/15/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.91
-----------------------------
Net Investment Income .39
Net Realized and Unrealized
Gain from Security
Transactions .01
-----------------------------
Total from Investment Operations .40
-----------------------------
Accumulation Unit Value,
End of Period $ 11.31
=============================
Total Return** 5.90%*
Contract Owners Equity,
End of Period (in thousands) $ 1,279
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 12.57%*
Number of Units Outstanding
at End of Period 113,118
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio
operating expenses).
</TABLE>
See accompanying notes to financial statements.
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding
throughout the period per sub-account are presented below:
<TABLE>
<CAPTION>
COVA SERIES TRUST - LARGE CAP STOCK PORTFOLIO
(MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/16/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.16
-----------------------------
Net Investment Income .22
Net Realized and Unrealized
Gain from Security
Transactions .96
-----------------------------
Total from Investment Operations 1.18
-----------------------------
Accumulation Unit Value,
End of Period $ 11.34
=============================
Total Return** 19.05%*
Contract Owners Equity,
End of Period (in thousands) $ 1,431
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 8.33%*
Number of Units Outstanding
at End of Period 126,231
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio
operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding
throughout the period per sub-account are presented below:
<TABLE>
<CAPTION>
COVA SERIES TRUST - SELECT EQUITY PORTFOLIO
(MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/15/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.15
-----------------------------
Net Investment Income .11
Net Realized and Unrealized
Gain from Security
Transactions .58
-----------------------------
Total from Investment Operations .69
-----------------------------
Accumulation Unit Value,
End of Period $ 10.84
=============================
Total Return** 10.89%*
%*
Contract Owners Equity,
End of Period (in thousands) $ 2,011
Ratio of Expenses to Average 1.40%*
Contract Owners' Equity
Ratio of Net Investment Income
to Average Contract
Owners' Equity 4.23%*
Number of Units Outstanding
at End of Period 185,509
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio
operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding
throughout the period per sub-account are presented below:
<TABLE>
<CAPTION>
COVA SERIES TRUST - INTERNATIONAL EQUITY PORTFOLIO
(MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT, INC.)
FOR THE PERIOD FROM 5/14/96
(COMMENCEMENT OF OPERATIONS)
THROUGH 12/31/96
-----------------------------
<S> <C>
Accumulation Unit Value,
Beginning of Period $ 10.10
-----------------------------
Net Investment Income .02
Net Realized and Unrealized
Gain from Security
Transactions .85
-----------------------------
Total from Investment Operations .87
-----------------------------
Accumulation Unit Value,
End of Period $ 10.97
=============================
Total Return** 13.86%*
Contract Owners Equity,
End of Period (in thousands) $ 1,360
Ratio of Expenses to Average
Contract Owners' Equity 1.40%*
Ratio of Net Investment Income
to Average Contract
Owners' Equity 0.61%*
Number of Units Outstanding
at End of Period 124,032
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios
(investment advisory fees and portfolio
operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
FINANCIAL HIGHLIGHTS
Financial Highlights for each accumulation unit outstanding
throughout the period per sub-account are presented below:
<TABLE>
<CAPTION>
LORD ABBETT SERIES FUND, INC. - GROWTH AND INCOME PORTFOLIO
FOR THE PERIOD FROM7/20/95
FOR THE YEAR (COMMENCEMENT OF OPERATIONS)
ENDED 12/31/96 THROUGH 12/31/95
---------------- -----------------------------
<S> <C> <C>
Accumulation Unit Value,
Beginning of Period $ 21.31 $ 19.54
---------------- -----------------------------
Net Investment Income 1.32 1.50
Net Realized and Unrealized
Gain from Security
Transactions 2.46 .27
---------------- -----------------------------
Total from Investment Operations 3.78 1.77
---------------- -----------------------------
Accumulation Unit Value,
End of Period $ 25.09 $ 21.31
================ =============================
Total Return** 17.76% 20.38%*
Contract Owners Equity,
End of Period (in thousands) $ 9,416 $ 2,675
Ratio of Expenses to Average
Contract Owners' Equity 1.40% 1.40%*
Ratio of Net Investment Income
to Average Contract 9.23%
Owners' Equity 42.60%*
Number of Units Outstanding
at End of Period 375,304 125,555
<FN>
* Annualized
** Investment returns do not reflect any contract based charges (withdrawal
charges, contract maintenance
fees or account transfer charges), but do reflect mortality and expense
charges, administration expense
charges as well as all expenses of the underlying portfolios (investment
advisory fees and portfolio
operating expenses).
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
1. ORGANIZATION:
Cova Variable Annuity Account Five (the "Separate Account") is a separate
investment account established by a resolution of the Board of Directors of
Cova Financial Life Insurance Company ("Cova"). The Separate Account operates
as a Unit Investment Trust under the Investment Company Act of 1940.
The Separate Account is divided into sub-accounts, with the assets of each
sub-account invested in the Cova Series Trust ("Trust") or the Lord Abbett
Series Fund, Inc. ("Fund"). The Trust consists of ten portfolios of which
four managed by Van Kampen American Capital Investment Advisory Corp., five
managed by J.P. Morgan Investment Management, Inc. and one portfolio managed
by Lord, Abbett and Co. The Trust portfolios available for investment are the
Quality Income, Growth and Income, Money Market, Stock Index, Bond Debenture,
Quality Bond, Small Cap Stock, Large Cap Stock, Select Equity, and
International Equity Portfolios. The Fund has one portfolio available for
investment: the Growth and Income Portfolio. Not all portfolios of the Trust
and the Fund are available for investment depending upon the nature and
specific terms of the different contracts currently being offered for sale.
The Trust and the Fund are all diversified, open-end, management investment
companies which are intended to meet differing investment objectives.
The Trust Quality Income Portfolio invests in U.S. Government issued debt
obligations and in various investment-grade debt instruments, including
mortgage pass-through certificates and collateralized mortgage obligations.
The Trust Growth and Income Portfolio invests primarily in common stocks and
futures and options contracts. The Trust Money Market Portfolio invests in
short-term money market instruments. The Trust Stock Index Portfolio invests
in common stocks, stock index futures and options, and short-term securities.
The Trust Bond Debenture Portfolio invests primarily in convertible and
discount debt securities. The Trust Quality Bond Portfolio invests primarily
in higher grade debt securities. The Small Cap Stock Portfolio invests
primarily in the common stock of small U.S. companies. The Large Cap Stock
and Select Equity Portfolios invest in stocks of large and medium-sized
companies. The International Equity Portfolio invests primarily in stocks of
established companies based in developed countries. The Fund Growth and
Income Portfolio invests primarily in common stocks.
2. SIGNIFICANT ACCOUNTING POLICIES:
A. INVESTMENT VALUATION
Investments in shares of the Trust and Fund are carried in the statement of
assets and liabilities at the underlying net asset value of the Trust and
Fund. The net asset value of the Trust and Fund has been determined on the
market value basis, and is valued daily by the Trust and Fund investment
managers. Realized gains and losses are calculated by the average cost
method.
B. REINVESTMENT OF DIVIDENDS
Dividends received from net investment income and net realized capital gains
are reinvested in additional shares of the portfolio of the Trust or Fund
making the distribution or, at the election of the Separate Account, received
in cash. Dividend income and capital gain distributions are recorded as
income on the ex-dividend date.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
C. FEDERAL INCOME TAXES
Operations of the Separate Account form a part of Cova, which is taxed as a
"Life Insurance Company" under the Internal Revenue Code ("Code"). Under
current provisions of the Code, no Federal income taxes are payable by Cova
with respect to earnings of the Separate Account.
Under the principles set forth in Internal Revenue Ruling 81-225 and Section
817(h) of the Code and regulations thereunder, Cova believes that it will be
treated as the owner of the assets invested in the Separate Account for
Federal income tax purposes, with the result that earnings and gains, if any,
derived from those assets will not be included in a contract owners gross
income until amounts are withdrawn or received pursuant to an Optional Payment
Plan.
3. CONTRACT CHARGES:
There are no deductions made from purchase payments for sales charges at the
time of purchase. However, if all or a portion of the contract value is
withdrawn, a withdrawal charge is calculated and deducted from the contract
value. The withdrawal charge is imposed on withdrawals of contract values
attributable to purchase payments within five years after receipt and is equal
to 5% of the purchase payment withdrawn. After the first contract
anniversary, provided that the contract value prior to withdrawal exceeds
$5,000, an owner may make a withdrawal each contract year of up to 10% of the
aggregate purchase payments free from withdrawal charges.
An annual contract maintenance charge of $30 is imposed on all contracts with
contract values less than $50,000 on their policy anniversary. The charge
covers the cost of contract administration for the previous year and is
prorated between the sub-accounts to which the contract value is allocated.
Subject to certain restrictions, the contract owner may transfer all or a part
of the accumulated value of the contract among other offered and available
account options of the Separate Account and fixed rate annuities of Cova. If
more than 12 transfers have been made in the contract year, a transfer fee of
$25 per transfer or, if less, 2% of the amount transferred will be deducted
from the account value. If the owner is participating in the Dollar Cost
Averaging program, such related transfers are not taken into account in
determining any transfer fee.
For the year ended December 31, 1996, withdrawal and account transfer charges
of $1,050 and contract maintenance charges of $3,324 were deducted from the
contract values in the Separate Account.
Mortality and expense risks assumed by Cova are compensated by a charge
equivalent to an annual rate of 1.25% of the value of net assets. The
mortality risks assumed by Cova arise from its contractual obligation to make
annuity payments after the annuity date for the life of the annuitant, and to
waive the withdrawal charge in the event of the death of the contract owner.
In addition, the Separate Account bears certain administration expenses, which
are equivalent to an annual rate of .15% of net assets. These charges cover
the cost of establishing and maintaining the contracts and Separate Account.
Cova currently advances any premium taxes due at the time purchase payments
are made and then deducts premium taxes from the contract value at the time
annuity payments begin or upon withdrawal if Cova is unable to obtain a
refund. Cova, however, reserves the right to deduct premium taxes when
incurred.
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS:
The table below summarizes realized and unrealized gains and losses on
investments:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS:
<S> <C> <C>
For The Period From 6/19/95
For the Year (Commencement of Operations)
Ended 12/31/96 Through 12/31/95
----------------
Trust Quality Income Portfolio:
Aggregate Proceeds From Sales $ 50,860 $ 687
Aggregate Cost 51,542 681
Net Realized Gain/(Loss) on Investments ($682) $ 6
Trust Growth and Income Portfolio:
Aggregate Proceeds From Sales $ 24,274 $ 27,991
Aggregate Cost 23,756 27,729
---------------- -----------------------------
Net Realized Gain on Investments $ 518 $ 262
- ------------------------------------------ ---------------- -----------------------------
Trust Money Market Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 4,136,159 $ 1,544,456
- ------------------------------------------ ---------------- -----------------------------
Aggregate Cost 4,136,159 1,544,456
- ------------------------------------------ ---------------- -----------------------------
Net Realized Gain/(Loss) on Investments -- --
- ------------------------------------------ ---------------- -----------------------------
Trust Stock Index Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales $ 23,308 $ 152,510
- ------------------------------------------ ---------------- -----------------------------
Aggregate Cost 21,966 151,078
- ------------------------------------------ ---------------- -----------------------------
Net Realized Gain on Investments $ 1,342 $ 1,432
- ------------------------------------------ ---------------- -----------------------------
Trust Bond Debenture Portfolio:
- ------------------------------------------
Aggregate Proceeds From Sales 64,093
- ------------------------------------------ ----------------
Aggregate Cost 62,718 N/A
- ------------------------------------------ ---------------- -----------------------------
Net Realized Gain on Investments $ 1,375
- ------------------------------------------ ================
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
REALIZED GAIN/(LOSS) ON INVESTMENTS
For the Period From 6/19/95
For the Year (Commencement of Operations)
Ended 12/31/96 Through 12/31/95
--------------- -----------------------------
<S> <C> <C>
Trust Quality Bond Portfolio:
Aggregate Proceeds From Sales $ 9,121
Aggregate Cost 9,056 N/A
---------------
Net Realized Gain on Investments $ 65
===============
Trust Small Capital Stock Portfolio:
Aggregate Proceeds From Sales $ 8,158
Aggregate Cost 7,824 N/A
Net Realized Gain on Investments $ 334
===============
Trust Large Capital Stock Portfolio:
Aggregate Proceeds From Sales $ 39,604
Aggregate Cost 36,519 N/A
Net Realized Gain on Investments $ 3,085
===============
Trust Select Equity Portfolio:
Aggregate Proceeds From Sales $ 10,599
Aggregate Cost 10,134 N/A
Net Realized Gain on Investments $ 465
===============
Trust International Equity Portfolio:
Aggregate Proceeds From Sales $ 4,037
Aggregate Cost 3,905 N/A
Net Realized Gain on Investments $ 132
===============
Fund Growth and Income Portfolio:
Aggregate Proceeds From Sales $ 96,408 $ 139,543
Aggregate Cost 93,588 137,300
Net Realized Gain on Investments $ 2,820 $ 2,243
===============
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
UNREALIZED GAIN/(LOSS) ON INVESTMENTS
<S> <C> <C>
For the Period From 6/19/95
For the Year (Commencement of Operations)
Ended 12/31/96 Through 12/31/95
---------------- -----------------------------
Trust Quality Income Portfolio:
End of Period $ 447 $ 1,806
Beginning of Period 1,806 --
Net Change in Unrealized Gain/(Loss) on Investments ($1,359) $ 1,806
================ =============================
Trust Growth and Income Portfolio:
End of Period $ 37,743 ($3,794)
Beginning of Period (3,794) --
Net Change in Unrealized Gain/(Loss) on Investments $ 41,537 ($3,794)
================ =============================
Trust Money Market Portfolio:
End of Period -- --
Beginning of Period -- --
Net Change in Unrealized Gain/(Loss) on Investments -- --
Trust Stock Index Portfolio:
End of Period $ 82,185 $ 1,325
Beginning of Period 1,325 --
Net Change in Unrealized Gain on Investments $ 80,860 $ 1,325
================ =============================
Trust Bond Debenture Portfolio:
End of Period $ 8,392
Beginning of Period -- N/A
Net Change in Unrealized Gain on Investments $ 8,392
================
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
4. GAIN/(LOSS) ON INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
UNREALIZED GAIN/(LOSS) ON INVESTMENTS
<S> <C> <C>
For the Period From 6/19/95
For the Year (Commencement of Operations)
Ended 12/31/96 Through 12/31/95
---------------- ----------------------------
Trust Quality Bond Portfolio:
- ------------------------------------------------------
End of Period $ 2,313
- ------------------------------------------------------ ----------------
Beginning of Period -- N/A
- ------------------------------------------------------ ---------------- ----------------------------
Net Change in Unrealized Gain on Investments $ 2,313
- ------------------------------------------------------ ================
Trust Small Capital Stock Portfolio:
- ------------------------------------------------------
End of Period $ 34,020
- ------------------------------------------------------ ----------------
Beginning of Period -- N/A
- ------------------------------------------------------ ---------------- ----------------------------
Net Change in Unrealized Gain on Investments $ 34,020
- ------------------------------------------------------ ================
Trust Large Capital Stock Portfolio:
- ------------------------------------------------------
End of Period $ 56,856
- ------------------------------------------------------ ----------------
Beginning of Period -- N/A
- ------------------------------------------------------ ---------------- ----------------------------
Net Change in Unrealized Gain on Investments $ 56,856
- ------------------------------------------------------ ================
Trust Select Equity Portfolio:
- ------------------------------------------------------
End of Period $ 101,392 N/A
- ------------------------------------------------------ ---------------- ----------------------------
Beginning of Period --
- ------------------------------------------------------ ----------------
Net Change in Unrealized Gain on Investments $ 101,392
- ------------------------------------------------------ ================
Trust International Equity Portfolio:
- ------------------------------------------------------
End of Period $ 66,683
- ------------------------------------------------------ ----------------
Beginning of Period -- N/A
- ------------------------------------------------------ ---------------- ----------------------------
Net Change in Unrealized Gain on Investments $ 66,683
- ------------------------------------------------------ ================
Fund Growth and Income Portfolio:
- ------------------------------------------------------
End of Period $ 374,769 ($96,906)
- ------------------------------------------------------ ---------------- ----------------------------
Beginning of Period (96,906) --
- ------------------------------------------------------ ---------------- ----------------------------
Net Change in Unrealized Gain/(Loss) on Investments $ 471,675 ($96,906)
- ------------------------------------------------------ ================ ============================
</TABLE>
<PAGE>
COVA VARIABLE ANNUITY ACCOUNT FIVE
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 and
For the Period from June 19, 1995 (Commencement of Operations)
Through December 31, 1995
5. ACCOUNT UNIT TRANSACTIONS:
The change in the number of accumulation units resulting from account unit
transactions is as follows:
COVA
LORD ABBETT
SERIES TRUST
SERIES FUND, INC.
______________________________________________________________________________
_______
<TABLE>
__
<CAPTION>
QUALITY GROWTH & MONEY STOCK BOND QUALITY SMALL LARGE SELECT
-------- --------- --------- ------- ---------- -------- ---------- ---------- --------
INCOME INCOME MARKET INDEX DEBENTURE BOND CAP STOCK CAP STOCK EQUITY
-------- --------- --------- ------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at Commencement
- -----------------------------
of Operations 0 0 0 0 0 0 0 0 0
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Sold 1,387 -- 188,325 1,057 -- -- -- -- --
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Redeemed (16) (1) (28) (114) -- -- -- -- --
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Transferred 7,331 7,198 (159,788) 12,441 -- -- -- -- --
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Balance at December 31, 1995 8,702 7,197 28,509 13,384 N/A N/A N/A N/A N/A
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Sold 3,762 2,136 429,882 9,129 10,897 9,984 43,638 50,898 74,928
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Redeemed (1,485) (596) (10) (805) (31) (152) (288) (649) (830)
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Units Transferred 8,258 31,613 (431,287) 28,718 28,679 54,702 69,768 75,982 111,411
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
Balances at December 31, 1996 19,237 40,350 27,094 50,426 39,545 64,534 113,118 126,231 185,509
- ----------------------------- -------- --------- --------- ------- ---------- -------- ---------- ---------- --------
INTL GROWTH &
-------- ---------
EQUITY INCOME TOTAL
-------- --------- ----------
<S> <C> <C> <C>Balances at Commencement
- -----------------------------
of Operations 0 0 0
- ----------------------------- -------- --------- ----------
Units Sold -- 21,839 212,608
- ----------------------------- -------- --------- ----------
Units Redeemed -- (527) (686)
- ----------------------------- -------- --------- ----------
Units Transferred -- 104,243 (28,575)
- ----------------------------- -------- --------- ----------
Balance at December 31, 1995 N/A 125,555 183,347
- ----------------------------- -------- --------- ----------
Units Sold 55,862 61,744 752,860
- ----------------------------- -------- --------- ----------
Units Redeemed (448) (5,839) (11,133)
- ----------------------------- -------- --------- ----------
Units Transferred 68,618 193,844 240,307
- ----------------------------- -------- --------- ----------
Balances at December 31, 1996 124,032 375,304 1,165,381
- ----------------------------- -------- --------- ----------
</TABLE>
COVA FINANCIAL
LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Financial Statements
December 31, 1996, 1995 and 1994
(With Independent Auditors Report Thereon)
<PAGE>
INDEPENDENT AUDITORS REPORT
The Board of Directors and Shareholder
Cova Financial Life Insurance Company:
We have audited the accompanying balance sheets of Cova Financial Life
Insurance Company (a wholly owned subsidiary of Cova Financial Services Life
Insurance Company) as of December 31, 1996 and 1995 and the related statements
of income, shareholders equity and cash flows for the year ended December 31,
1996 and the period from June 1, 1995 to December 31, 1995 (Successor
periods), and from January 1, 1995 to May 31, 1995, and for the year ended
December 31, 1994 (Predecessor periods). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cova Financial Life Insurance
Company as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the Successor periods, in conformity with generally
accepted accounting principles. Also, in our opinion, the aforementioned
Predecessor financial statements present fairly, in all material respects, the
results of its operations and its cash flows for the Predecessor periods, in
conformity with generally accepted accounting principles.
St. Louis, Missouri
March 7, 1997
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
ASSETS 1996
1995
<S> <C> <C>
Investments:
Debt securities available for sale at market
(cost of $71,257 in 1996 and $37,242 in 1995) $ 71,263 $ 38,092
Policy loans 1,048 1,063
Short-term investments available for sale at market
(cost of $44 in 1996 and $988 in 1995) 44 984
Total investments 72,355 40,139
Cash and cash equivalents - interest bearing 4,150 5,157
Cash - non-interest bearing 2,485 977
Accrued investment income 1,122 566
Deferred policy acquisition costs 3,321 1,164
Present value of future profits 1,178 576
Goodwill 2,034 2,306
Deferred tax asset (net) 1,115 1,007
Receivable from OakRe 92,238 127,335
Reinsurance receivables 51 458
Other assets 44 44
Separate account assets 18,880 3,451
Total Assets $198,973 $183,180
======== ========
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Balance Sheets, Continued
December 31, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS EQUITY 1996 1995
<S> <C> <C>
Policyholder deposits $154,566 $154,458
Future policy benefits 4,561 4,369
Accounts payable and other liabilities 1,794 1,116
Future purchase price payable to OakRe 683 1,265
Guaranty assessments 1,585 1,838
Separate account liabilities 18,880 3,451
Total Liabilities 182,069 166,497
Shareholders equity:
Common stock, $233 par value. (Authorized 30,000
shares; issued and outstanding 12,000 shares in
1996 and 1995) 2,800 2,800
Additional paid-in capital 13,523 13,523
Retained earnings 580 168
Net unrealized appreciation on securities, net of tax 1 192
Total Shareholders Equity 16,904 16,683
Total Liabilities and Shareholders Equity $198,973 $183,180
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Income
Years ended December 31, 1996, 1995, and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 488 $ 142 $ 82 $ 1,335
Net investment income 4,176 1,419 5,271 15,101
Net realized gain (loss) on sale of
investments (28) 118 (272) 318
Separate account charges 134 10 -- --
Other income/(expense) 35 (7) 57 138
Total revenues 4,805 1,682 5,138 16,892
Benefits and expenses:
Interest on policyholder deposits 2,563 788 5,034 13,361
Current and future policy benefits 722 115 178 1,452
Operating and other expenses 570 309 814 1,384
Amortization of purchase intangible assets 66 157 -- --
Amortization of deferred acquisition costs 187 5 522 6,979
Total benefits and expenses 4,108 1,374 6,548 23,176
Income/(loss) before income taxes 697 308 (1,410) (6,284)
Income tax:
Current 351 -- (362) (80)
Deferred (66) 140 (201) (2,050)
Total income tax expense/(benefit) 285 140 (563) (2,130)
Net Income/(Loss) $ 412 $ 168 $ (847) $(4,154)
======= ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholders Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Common stock ($233 par value in 1996 and
12/31/95, $50 par value for 5 mos. ended
5/31/95, 1994 & 1993; authorized 30,000
shares;issued and outstanding 12,000
shares in 1996, 1995 & 1994)
Balance at beginning of period $ 2,800 $ 2,800 $ 600 $ 600
Par value adjustment -- -- 2,200 __
Balance at end of period 2,800 2,800 2,800 600
Additional paid-in capital:
Balance at beginning of period 13,523 18,093 17,200 8,200
Adjustment to reflect purchase acquisition indicated in note 2
-- (7,570) -- --
Par value adjustment -- (2,200)
Capital contribution -- 3,000 3,093 9,000
Balance at end of period 13,523 13,523 18,093 17,200
Retained earnings:
Balance at beginning of period 168 209 4,045 8,199
Adjustment to reflect purchase acquisition indicated in note 2 --
(209) -- --
Net income/(loss) 412 168 (847) (4,154)
Adjustment due to financial reinsurance
transaction with OakRe - (2,989)
Balance at end of period $ 580 $ 168 $ 209 $ 4,045
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Shareholders Equity, Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Net unrealized appreciation/(depreciation) of
securities:
Balance at beginning of period $ 192 $(3,789) ($11,316) --
Adjustment to reflect purchase acquisition indicated in note 2
-- 3,789 -- --
Implementation of change in accounting for
marketable debt and equity securities, net of
effects of deferred taxes of $735 and
deferred acquisition costs of $1,719 -- -- -- $ 1,366
Change in unrealized appreciation/(depreciation)
of debt and equity securities (840) 846 15,151 (29,570)
Change in deferred Federal income taxes 103 (104) (4,053) 6,829
Change in deferred acquisition costs
attributable to unrealized losses/(gains) (69) -- (3,571) 10,059
Change in present value of future profits
attributable to unrealized losses/(gains) 615 (550) -- --
Balance at end of period 1 192 (3,789) (11,316)
Total Shareholders Equity $16,904 $16,683 $ 17,313 $ 10,529
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Interest and dividend receipts $ 3,676 $ 934 $ 7,283 $ 15,690
Premiums received 509 154 90 1,357
Insurance and annuity benefit payments (580) (339) (252) (552)
Operating disbursements (768) (490) (1,038) (1,482)
Taxes on income refunded (paid) (341) -- 1,975 (856)
Commissions and acquisition costs paid (2,413) (1,169) (542) (1,262)
Other (183) 360 6,299 200
Net cash provided by/(used in) operating (100) (550) 13,815 13,095
activities
Cash flows from investing activities:
Cash used for the purchase of investment (42,655) (52,399) (935) (69,199)
securities
Proceeds from investment securities sold 10,635 14,399 151,204 115,994
and matured
Investment expenses (90) (57) (97) (320)
Net cash provided by/(used in) investing
activities $(32,110) $(38,057) $150,172 $ 46,475
---------
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Policyholder deposits $ 38,348 $ 12,442 $ 5,614 $ 11,796
Transfers from/(to) OakRe 36,553 33,579 (171,081) --
Transfer to Separate Accounts (13,669) (3,312) -- --
Return of policyholder deposits (28,521) (26,897) (15,531) (43,377)
Capital contributions received -- 3,000 3,093 2,500
Net cash provided by/(used in) financing
activities 32,711 18,812 (177,905) (29,081)
Increase/(decrease) in cash and cash
equivalents 501 (19,795) (13,918) 30,489
Cash and cash equivalents at beginning of 6,134 25,929 39,847 9,358
period
Cash and cash equivalents at end of period $ 6,635 $ 6,134 $ 25,929 $ 39,847
</TABLE>
See accompanying notes to financial statements.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Statements of Cash Flows, Continued
Years ended December 31, 1996, 1995 and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95 1994
<S> <C> <C> <C> <C>
Reconciliation of net income/(loss) to net cash provided by operating activities:
Net income/(loss) $ 412 $ 168 $ (847) $(4,154)
Adjustments to reconcile net income/(loss)
to net cash provided by operating
activities:
Increase/(decrease)in future policy
benefits (net of reinsurance) 192 (201) (52) 911
Increase/(decrease) in payables and
accrued liabilities 95 161 (252) 126
Decrease/(increase) in accrued investment
income (556) (525) 1,766 636
Amortization of intangible assets and 254 162 522 6,979
deferred acquisition costs
Amortization and accretion of securities
premiums and discounts 73 (9) 32 (369)
Net realized (gain)/loss on sale of
investments 28 (118) 272 (318)
Interest accumulated on policyholder
deposits 2,563 788 5,034 13,361
Investment expenses paid 90 57 97 320
Increase/(decrease) in current and deferred
Federal income taxes (66) 140 1,412 (2,986)
Recapture commissions paid to OakRe (273) (223) -- --
Deferral of acquisition costs (2,413) (1,169) (542) (1,262)
Due to/from affiliates 44 27 6,470 --
Other (543) 192 (97) (149)
Net cash provided by operating activities $ (100) $ (550) $13,815 $13,095
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(1) NATURE OF BUSINESS AND ORGANIZATION
NATURE OF THE BUSINESS
Cova Financial Life Insurance Company (the Company), formerly Xerox Financial
Life Insurance Company (the Predecessor), markets and services single premium
deferred annuities, immediate annuities, variable annuities, and single
premium whole-life insurance policies. The Company is licensed to do business
in the state of California. Most of the policies issued present no
significant mortality nor longevity risk to the Company, but rather represent
investment deposits by the policyholders. Life insurance policies provide
policy beneficiaries with mortality benefits amounting to a multiple, which
declines with age, of the original premium.
Under the deferred annuity contracts, interest rates credited to policyholder
deposits are guaranteed by the Company for periods from one to ten years, but
in no case may renewal rates be less than 3%. The Company may assess
surrender fees against amounts withdrawn prior to scheduled rate reset and
adjust account values based on current crediting rates. Policyholders also
may incur certain Federal income tax penalties on withdrawals.
Although the Company markets its products through numerous distributors,
including regional brokerage firms, national brokerage firms and banks,
approximately 81%, 71% and 47% of the Companys sales have been through two
specific brokerage firms, A.G. Edwards & Sons, Incorporated, and Edward Jones
& Company, Incorporated, in 1996, 1995 and 1994, respectively.
ORGANIZATION
The Company is a wholly owned subsidiary of Cova Financial Services Life
Insurance Company (CFSLIC). On December 31, 1996, Cova Corporation, an
insurance holding company wholly owned by General American Life Insurance
Company (GALIC), transferred 100% of the outstanding shares of the Company to
CFSLIC, an affiliated life insurer domiciled in Missouri. The transfer of
direct ownership had no effect on the operations of the Company as both CFSLIC
and the Company had existed under common management and control prior to the
transfer.
Prior to June 1, 1995 Xerox Financial Services , Inc. (XFSI) owned 100% of the
shares of the Predecessor. XFSI is a wholly owned subsidiary of Xerox
Corporation.
On June 1, 1995 XFSI sold 100% of the issued and outstanding shares of the
Predecessor to Cova Corporation in exchange for approximately $13.3 million
in cash and $1.1 million in future payables. In conjunction with this
Agreement, the Predecessor also entered into a financing reinsurance
transaction that caused OakRe Life Insurance Company(OakRe), an affiliate of
the Predecessor, to assume the economic benefits and risks of the single
premium deferred annuity deposits (SPDAs) which had an aggregate carrying
value at June 1, 1995 of $159.0 million. In exchange, the Predecessor
transferred specifically identified assets to OakRe with a market value at
June 1, 1995 of $162.0 million. Ownership of OakRe was retained by XFSI
subsequent to the sale of the Predecessor and other affiliates. The
Receivable from OakRe to the Company that was created by this transaction will
be liquidated over the remaining crediting rate guaranty periods (which will
be substantially expired by the year 2000) by the transfer of cash in the
amount of the then current account value, less a recapture commission fee to
OakRe on policies retained beyond their 30-day no-fee surrender window by the
Company, upon the next crediting rate reset date of each annuity policy. The
Company may then reinvest that cash for those policies that are retained and
thereafter assume the benefits and risks of those deposits.
In the event that both OakRe and XFSI default on the receivable, the Company
may draw funds from a standby bank irrevocable letter of credit established by
XFSI in the amount of $500 million. No funds were drawn on this letter of
credit during the periods ending December 31, 1996 and 1995.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
In substance, terms of the agreement have allowed the seller, XFSI, to retain
substantially all of the existing financial benefits and risks of the existing
business, while the purchaser, GALIC, obtained the corporate operating and
product licenses, marketing and administrative capabilities of the Company,
and access to the retention of the policyholder deposit base that persists
beyond the next crediting rate reset date.
(2) CHANGE IN ACCOUNTING
Upon closing of the sale, the Company restated its financial statements in
accordance with "push down purchase accounting", which allocates the net
purchase price of $13.3 million according to the fair values of the acquired
assets and liabilities, including the estimated present value of future
profits. These allocated values were dependent upon policies in force and
market conditions at the time of closing, however, these allocations were not
finalized until 1996. The table below summarizes the final allocation of
purchase price.
<TABLE>
<CAPTION>
(In Millions)
<S> <C>
Assets acquired:
Policy loans $ 0.9
Cash and cash equivalents 25.9
Short term investment 0.1
Present value of future profits 1.1
Goodwill 2.2
Deferred tax benefit 1.5
Reinsurance receivable 156.3
Other assets 0.1
--------
$ 188.1
Liabilities assumed:
Policyholder deposits $ 168.7
Future policy benefits 4.5
Future purchase price payable 1.1
Deferred income taxes 0.2
Other liabilities 0.3
$ 174.8
--------
Adjusted purchase price $ 13.3
========
</TABLE>
In addition to revaluing all material tangible assets and liabilities to their
respective estimated market values as of the closing date of the sale, the
Company also recorded in its financial statements the excess of cost over fair
value of net assets acquired (goodwill) as well as the present value of future
profits to be derived from the purchased and reinsured business. These amounts
were determined in accordance with the purchase method of accounting. This new
basis of accounting resulted in a reduction in shareholders equity of
approximately $4.0 million in 1995 reflecting the application of push down
purchase accounting. The Companys financial statements subsequent to June 1,
1995 reflect this new basis of accounting.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
All amounts for periods ended before June 1, 1995 are labeled Predecessor and
are based on Predecessor historical costs. The periods ending on or after
such date are labeled The Company and are based on the new cost basis of the
Company or fair values at June 1, 1995 and the subsequent results of
operations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Investments in all debt securities and short term investments and those equity
securities with readily determinable market values are classified into one of
three categories: held-to-maturity, trading, or available-for-sale.
Classification of investments is based on management's current intent. All
debt securities and short term investments at December 31, 1996 and 1995 were
classified as available-for-sale. Securities available-for-sale are carried at
market value, with unrealized holding gains and losses reported as a separate
component of shareholders equity, net of deferred effects of income tax and
related effects on deferred acquisition costs and present value of future
profits.
Amortization of the discount or premium from the purchase of mortgage-backed
bonds is recognized using a level-yield method which considers the estimated
timing and amount of prepayments of the underlying mortgage loans. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between the prepayments previously
anticipated and the actual prepayments received and currently anticipated.
When such a difference occurs, the net investment in the mortgage-backed bond
is adjusted to the amount that would have existed had the new effective yield
been applied since the acquisition of the bond, with a corresponding charge or
credit to interest income (the "retrospective method").
Investment income is recorded when earned. Realized capital gains and losses
on the sale of investments are determined on the basis of specific costs of
investments and are credited or charged to income.
A realized loss is recognized and charged against income if the Company's
carrying value in a particular investment in the available-for-sale category
has experienced a significant decline in market value that is deemed to be
other than temporary.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include currency and demand deposits in banks, US
Treasury bills, money market accounts, and commercial paper with maturities
under 90 days, which are not otherwise restricted.
SEPARATE ACCOUNT ASSETS
Separate accounts contain segregated assets of the Company that are
specifically assigned to variable annuity policyholders in the separate
accounts and are not available to other creditors of the Company. The
earnings of separate account investments are also assigned to the
policyholders in the separate accounts, and are not guaranteed or supported by
the other general investments of the Company. The Company earns mortality and
expense risk fees from the separate accounts and assesses withdrawal charges
in the event of early withdrawals. Separate accounts assets are valued at
fair market value.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business which vary with and are directly related
to the production of new business, principally commissions, premium taxes,
sales costs, and certain policy issuance and underwriting costs, are deferred.
These deferred costs are amortized in proportion to estimated future gross
profits derived from investment income, realized gains and losses on sales of
securities, unrealized securities gains and losses, interest credited to
accounts, surrender fees, mortality costs, and policy maintenance expenses.
The estimated gross profit streams are periodically reevaluated and the
unamortized balance of deferred acquisition costs is adjusted to the amount
that would have existed had the actual experience and revised estimates been
known and applied from the inception of the policies and contracts. The
amortization and adjustments resulting from unrealized gains and losses is not
recognized currently in income but as an offset to the unrealized gains and
losses reflected as a separate component of equity.
The components of deferred policy acquistion costs are shown below:
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
(In thousands) 1996 12/31/95 5/31/95
1994
<S> <C> <C> <C> <C>
Deferred policy acquisition costs,
beginning of period $1,164 $ 6,167 $ 9,718 $ 7,095
Effects of push down purchase
accounting -- (6,167) -- --
Commissions and expenses deferred 2,413 1,169 542 1,262
Amortization (187) (5) (522) (6,979)
Deferred policy acquisition costs
attributable to unrealized
gains/(losses) (69) -- (3,571) 8,340
Deferred policy acquistion costs,
end of period $3,321 $ 1,164 $ 6,167 $ 9,718
======= ========
</TABLE>
PURCHASE RELATED INTANGIBLE ASSETS AND LIABILITIES
In accordance with the purchase method of accounting for business
combinations, two intangible assets and a future payable related to accrued
purchase price consideration were established as of the purchase date:
PRESENT VALUE OF FUTURE PROFITS
As of June 1, 1995 the Company established an intangible asset which
represents the present value of future profits to be derived from both the
purchased and transferred blocks of business. Certain estimates were utilized
in the computation of this asset including estimates of future policy
retention, investment income, interest credited to policyholders, surrender
fees, mortality costs, and policy maintenance costs discounted at a pre-tax
rate of 18% (12% net after-tax).
In addition, as the Company has the option of retaining its SPDA policies
after they reach their next interest rate reset date and are recaptured from
OakRe, a component of this asset represents estimates of future profits on
recaptured business. This asset will be amortized in proportion to estimated
future gross profits derived from investment income, realized gains and losses
on sales of securities, unrealized securities gains and losses, interest
credited to accounts, surrender fees, mortality costs, and policy maintenance
(continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
expenses. The estimated gross profit streams are periodically reevaluated and
the unamortized balance of present value of future profits will be adjusted to
the amount that would have existed had the actual experience and revised
estimates been known and applied from the inception. The amortization and
adjustments resulting from unrealized gains and losses is not recognized
currently in income but as an offset to the unrealized gains and losses
reflected as a separate component of equity. The amortization period is the
remaining life of the policies, which is approximately 20 years from the date
of original policy issue.
Based on current assumptions, amortization of the original in-force PVFP
asset, expressed as a percentage of the original in-force asset, is projected
to be 8.4%, 6.2%, 4.8%, 4.0% and 3.4% for the years ended December 31, 1997
through 2001, respectively. Actual amortization incurred during these years
may be more or less as assumptions are modified to incorporate actual results.
During 1996, the Company adjusted its original purchase accounting to include
a revised estimate of the ultimate renewal (recapture) rate. This adjustment
resulted in a re-allocation of the net purchased intangible asset between
present value of future profits, goodwill, future payable and deferred taxes.
This final allocation and the resulting impact on inception to date
amortization was recorded, in its entirety, in 1996. No restatement of the
June 1, 1995 opening Balance Sheet was made.
The components of present value of future profits are shown below:
<TABLE>
<CAPTION>
The Company
7
Months
Ended
(In Thousands) 1996
12/31/95
<S> <C> <C>
Present value of future profits - beginning of period $ 576 $1,233
Interest added 74 56
Gross amortization 4 (163)
Adjustment due to revised push down purchase accounting (91) --
Present value of future profit attributable to
unrealized losses/(gains) 615 (550)
------- -------
Present value of future profits - end of period $1,178 $ 576
</TABLE>
FUTURE PAYABLE
Pursuant to the financial reinsurance agreement, the receivable from OakRe
becomes due in installments when the SPDA policies reach their next crediting
rate reset date. For any recaptured policies that continue in force with
OakRe into the next guarantee period, the Company will pay a commission to
OakRe of 1.75% up to 40% of policy account values originally reinsured and
3.5% thereafter. On policies that are recaptured and subsequently exchanged to
a variable annuity policy, the Company will pay commission to OakRe of 0.50%.
The Company has recorded a future payable that represents the present value of
the anticipated future commission payments payable to OakRe over the remaining
life of the financial reinsurance agreement discounted at an estimated
borrowing rate of 6.5%. This liability represents a contingent purchase price
payable for the policies transferred to OakRe on the purchase date and has
been pushed down to the Company through the financial reinsurance agreement.
The Company expects that this payable will be substantially extinguished by
the year 2000.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The components of this future payable are shown below:
<TABLE>
<CAPTION>
The Company
7
Months
Ended
(In Thousands) 1996
12/31/95
<S> <C> <C>
Future payable - beginning of period $1,265 $1,438
Interest added 39 50
Payments to OakRe (273) (223)
Adjustment due to revised push down purchase accounting (348) --
Future payable - end of period $ 683 $1,265
======= =======
</TABLE>
GOODWILL
Under the push down method of purchase accounting, the excess of purchase
price over the fair value of tangible and intangible assets and liabilities
acquired is established as an asset and referred to as Goodwill. The Company
has elected to amortize goodwill on the straight line basis over a 20 year
period.
The components of Goodwill are shown below:
<TABLE>
<CAPTION>
<S> <C> <C>
(In Thousands) The Company
--------------------
7 Months Ended
1996 12/31/95
----------------
Goodwill - beginning of period $ 2,306 $ 2,375
Amortization (105) (69)
Adjustment due to revised push down purchase accounting
(167) --
Goodwill - end of period $ 2,034 $ 2,306
</TABLE>
DEFERRED TAX ASSETS AND LIABILITIES
XFSI and GALIC agreed to file an election to treat the acquisition of the
Company as an asset acquisition under the provisions of Internal Revenue Code
Section 338(h)(10). As a result of that election, the tax basis of the
Companys assets as of the date of acquisition were revalued based upon fair
market values as of June 1, 1995. The principal effect of the election was to
establish a tax asset on the tax-basis balance sheet of approximately $2.9
million for the value of the business acquired that is amortizable for tax
purposes over ten to fifteen years.
POLICYHOLDER DEPOSITS
The Company recognizes its liability for policy amounts that are not subject
to policyholder mortality nor longevity risk at the stated contract value,
which is the sum of the original deposit and accumulated interest, less any
withdrawals. The average weighted interest crediting rate on the Companys
policyholder deposits as of December 31, 1996 was 5.77%.
(Continued)
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
FUTURE POLICY BENEFITS
Reserves are held for future annuity benefits that subject the Company to
risks to make payments contingent upon the continued survival of an individual
or couple (longevity risk). These reserves are valued at the present value of
estimated future benefits discounted for interest, expenses, and mortality.
The assumed mortality is the 1983 Individual Annuity Mortality Tables
discounted at 5.50% to 8.50%, depending upon year of issue.
Current mortality benefits payable are recorded for reported claims and
estimates of amounts incurred but not reported.
PREMIUM REVENUE
The Company recognizes premium revenue at the time of issue on annuity
policies that subject it to longevity risks.
The Company currently assesses no explicit life insurance premium for its
commitment to make payments in excess of its recorded liability that are
contingent upon policyholder mortality. Benefits paid in excess of the
recorded liability are recognized when incurred as the amounts are not
material to the financial statements.
Amounts collected on policies not subject to any mortality or longevity risk
are recorded as increases in the policyholder deposits liability.
FEDERAL INCOME TAXES
Prior to June 1,1995 the revenues and expenses of the Predecessor were
included in a consolidated Federal income tax return with its parent company
and other affiliates. Allocations of Federal income taxes were based upon
separate return calculations.
Subsequent to June 1, 1995 the Company files its own separate income tax
return, independent from its ultimate parent, GALIC.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income to the period that includes
the enactment date.
RISKS AND UNCERTAINTIES
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
The following elements of the financial statements are most affected by the
use of estimates and assumptions:
- Investment market valuation
- Amortization of deferred policy acquisition costs
- Amortization of present value of future profits
- Recoverability of Goodwill
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The market value of the Company's investments is subject to the risk that
interest rates will change and cause a temporary increase or decrease in the
liquidation value of debt securities. To the extent that fluctuations in
interest rates cause the cash flows of assets and liabilities to change, the
Company might have to liquidate assets prior to their maturity and recognize a
gain or loss. Interest rate exposure for the investment portfolio is managed
through asset/liability management techniques which attempt to control the
risks presented by differences in the probable cash flows and reinvestment of
assets with the timing of crediting rate changes in the Company's policies and
contracts. Changes in the estimated prepayments of mortgage-backed securities
also may cause retrospective changes in the amortization period of securities
and the related recognition of income.
The amortization of deferred acquisition costs is based on estimates of
long-term future gross profits from existing policies. These gross profits
are dependent upon policy retention and lapses, the spread between investment
earnings and crediting rates, and the level of maintenance expenses. Changes
in circumstances or estimates may cause retrospective adjustment to the
periodic amortization expense and the carrying value of the deferred expense.
In a similar manner, the amortization of present value of future profits is
based on estimates of long-term future profits from existing and recaptured
policies. These gross profits are dependent upon policy retention and lapses,
the spread between investment earnings and crediting rates, and the level of
maintenance expenses. Changes in circumstances or estimates may cause
retrospective adjustment to the periodic amortization expense and the carrying
value of the asset.
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets
to be Disposed of (SFAS #121), which was adopted by the Company in the fourth
quarter of 1995, the Company has considered the recoverability of Goodwill and
has concluded that no circumstances have occurred which would give rise to
impairment of Goodwill for the period ending December 31, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS #107) applies fair value disclosure
practices with regard to financial instruments, both assets and liabilities,
for which it is practical to estimate fair value. In cases where quoted
market prices are not readily available, fair values are based on estimates
that use present value or other valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Although fair value
estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, might
not be realized in the immediate settlement of the instruments. SFAS #107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Because of this, and further because a value of
a business is also based upon its anticipated earning power, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS
AND ACCRUED INVESTMENT INCOME:
The carrying values amounts reported in the balance sheets for these
instruments approximate their fair values. Short-term debt securities are
considered "available for sale" and are carried at fair value.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES):
Fair values for debt securities are based on quoted market prices, where
available. For debt securities not actively traded, fair value estimates are
obtained from independent pricing services. In some cases, such as private
placements and certain mortgage-backed securities, fair values are estimated
by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments. (See
note 4 for fair value disclosures).
INVESTMENT CONTRACTS:
The Company's policy contracts require the beneficiaries to commence receipt
of payments by the later of age 85 or 10 years after purchase, and
substantially all permit earlier surrenders, generally subject to fees and
adjustments. Fair values for the Company's liabilities for investment type
contracts (Policyholder Deposits) are estimated as the amount payable on
demand. As of December 31, 1996 and 1995 the cash surrender value of
policyholder funds on deposit were $537,442 and $104,571, respectively, less
than their stated carrying value. Of the contracts permitting surrender, 90%
provide the option to surrender without fee or adjustment during the 30 days
following reset of guaranteed crediting rates. The Company has not determined
a practical method to determine the present value of this option.
All of the Company's deposit obligations are fully guaranteed by the acquirer,
GALIC, and the receivable from OakRe equal to the SPDA obligations is
guaranteed by OakRe's parent, XFSI.
REINSURANCE
The impact of reinsurance on the December 31, 1996 financial statements is not
considered material.
The financing reinsurance agreement entered into with OakRe does not meet the
conditions for reinsurance accounting under Generally Accepted Accounting
Principles (GAAP). The net assets initially transferred to OakRe were
established as a receivable and then are subsequently increased as interest is
accrued on the underlying liabilities and decreased as funds are transferred
back to the Company when policies reach their crediting rate reset date or
benefits are claimed.
OTHER
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996
presentation.
(4) INVESTMENTS
The Company's investments in debt securities and short term investments are
considered available for sale and carried at estimated fair value, with the
aggregate unrealized appreciation or depreciation being recorded as a separate
component of shareholders equity. The carrying value and amortized cost of
investments at December 31, 1996 and 1995 were as follows:
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
<TABLE>
<CAPTION>
1996
GROSS GROSS
ESTIMATED
CARRYING UNREALIZED UNREALIZED
FAIR AMORTIZED
VALUE GAINS LOSSES
VALUE COST (in
thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 101 $ 1 $ -- $ 101 $ 100
Collateralized mortgage obligations 20,143 81 (119) 20,143 20,181
Corporate, state, municipalities,
and political subdivisions 51,019 433 (390) 51,019 50,976
Total debt securities 71,263 515 (509) 71,263 71,257
Policy loans 1,048 -- -- 1,048 1,048
Short term investments 44 -- -- 44 44
Total investments $72,355 $515 $(509) $72,355 $72,349
</TABLE>
<TABLE>
<CAPTION>
1995
GROSS GROSS
ESTIMATED
CARRYING UNREALIZED UNREALIZED
FAIR AMORTIZED
VALUE GAINS LOSSES
VALUE COST
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Debt Securities:
US. Government Treasuries $ 104 $ 3 $ -- $ 104 $ 101
Collateralized mortgage obligations 13,377 237 $(14) 13,377 13,154
Corporate, state, municipalities, and
political subdivisions 24,611 624 -- 24,611 23,987
Total debt securities 38,092 864 (14) 38,092 37,242
Policy loans 1,063 -- -- 1,063 1,063
Short term investments 984 0 (4) 984 988
Total investments $40,139 $864 $(18) $40,139 $39,293
======= ==== ===== ======= =======
</TABLE>
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The amortized cost and estimated market value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Maturities of mortgage-backed securities will be substantially shorter than
their contractual maturity because they require monthly principal installments
and mortgagees may prepay principal.
<TABLE>
<CAPTION>
1996
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
(in thousands of dollars)
Due after one year through five years $20,531 $20,572
Due after five years through ten years 28,019 28,010
Due after ten years 2,527 2,538
Mortgage-backed securities 20,180 20,143
Total $71,257 $71,263
<FN>
At December 31, 1996, approximately 95.3% of the Company's debt securities are
investment grade or are non-rated but considered to be of investment grade.
Of the 4.7% non-investment grade debt securities, all are rated as BB+ or its
equivalent.
All debt securities were income producing during the years ended December 31,
1996 and 1995. As of December 31, 1996 and 1995 the Company had no impaired
investments.
</TABLE>
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The components of net investment income, realized capital gains/(losses) and
unrealized gains/(losses)were as follows:
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5
MONTHS
ENDED
ENDED
1996 12/31/95
5/31/95 1994
(in thousands of
dollars)
<S> <C> <C> <C> <C>
Income on debt securities $3,926 $1,166 $ 4,075 $ 15,013
Income on short-term investments 243 257 1,261 349
Income on policy loans 86 46 29 57
Miscellaneous interest 8 -- -- 4
Total investment income 4,263 1,469 5,365 15,423
Investment expenses (87) (50) (94) (322)
Net investment income 4,176 1,419 5,271 15,101
Realized capital gains/(losses) were as
follows:
Debt securities (28) 118 (272) 320
Short-term investments -- -- -- (2)
Net realized gains/(losses) on
investments $ (28) $ 118 $ (272) $ 318
======= ========= =========
Unrealized gains/(losses) were as follows:
Debt securities 6 $ 850 $(10,594) $(25,749)
Short-term investments -- (4) 1 (1)
Effects on deferred acquisition costs
amortization (69) -- 4,767 8,340
Effects on present value of future
profits amortization 65 (550) -- --
Unrealized gains/(losses) before income tax 2 296 (5,826) (17,410)
Unrealized income tax benefit/(expense) (1) (104) 2,037 6,094
Net unrealized gains (losses) on
investments $ 1 $ 192 $ (3,789) $(11,316)
</TABLE>
Proceeds from sales, redemptions and paydowns of investments in debt
securities during 1996 were $10,635,608. Gross gains of $16,757 and gross
losses of $44,311 were realized on those sales. Included in these amounts were
$1,355 of gross gains realized on the sale of non-investment grade securities.
Proceeds from sales, redemptions and paydowns of investments in debt
securities for the Company during 1995 were $14,400,247 and for the
Predecessor were $148,796,033. Gross gains of $136,104 and gross losses of
$17,789 were realized by the Company on its sales. The Predecessor realized
gross gains of $23,293 and gross losses of $295,368 on its sales.
Proceeds from sales, redemptions and paydowns of investments in debt
securities during 1994 were $115,993,655. Gross gains of $1,671,736 and gross
losses of $1,351,406 were realized on those sales.
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
Unrealized appreciation/(depreciation) of debt securities for the Company in
1996 and 1995, and the Predecessor in 1995 and 1994 were $(844,000), $850,000,
$15,152,000, and $(29,644,000), respectively. Unrealized appreciation/
(depreciation) of debt securities is calculated as the change between the cost
and market values of debt securities for the years then ended.
(5) SECURITIES GREATER THAN 10% OF SHAREHOLDERS EQUITY
As of December 31, 1996 the Company held the following individual securities
which exceeded 10% of Shareholders equity:
<TABLE>
<CAPTION>
<S> <C>
Long-term Debt Carrying
Securities Value
- --------------- ----------
Colonial Realty $2,036,540
</TABLE>
As of December 31, 1995 the Company held the following individual securities
which exceeded 10% of Shareholders equity:
<TABLE>
<CAPTION>
<S> <C>
Long-term Debt Carrying
Securities Value
- ----------------------- ----------
North American Mortgage $1,954,398
</TABLE>
(6) POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company has no direct employees and no retired employees. All personnel
used to support the operations of the Company are supplied by contract by Cova
Life Management Company (CLMC), a wholly owned subsidiary of Cova Corporation.
The Company is allocated a portion of certain health care and life insurance
benefits for future retired employees of CLMC. In 1996 and 1995, the Company
was allocated a portion of benefit costs including severance pay, accumulated
vacations, and disability benefits. At December 31, 1996 CLMC had no retired
employees nor any employees fully eligible for retirement and had no
disbursements for such benefit commitments. The expense arising from these
obligations is not material.
(7) INCOME TAXES
The Company files its own Federal Income Tax return. Amounts payable or
recoverable related to periods before June 1, 1995 are subject to an
indemnification agreement with XFSI, which has the effect that the Company is
not at risk for any income taxes nor entitled to recoveries related to those
periods.
Income taxes are recorded in the statements of earnings and directly in
certain shareholders equity accounts. Income tax expense (benefit) for the
years ended December 31 was allocated as follows:
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
<TABLE>
<CAPTION>
THE COMPANY
PREDECESSOR
7 MONTHS 5 MONTHS
ENDED ENDED
1996 12/31/95 5/31/95
1994
(In thousands of
dollars)
<S> <C> <C> <C> <C>
Statements of income:
Operating income (excluded realized
investment gains and losses) $ 295 $194 $ (561) $(2,241)
Realized investment gains/(losses) (10) (54) (2) 111
Income tax expense/(benefit) included
in the statements of income 285 140 (563) (2,130)
Shareholders equity:
Unrealized gains/(losses) on securities
available for sale and intangible assets (103) 104 4,053 (6,829)
Total income tax expense/(benefit) $ 182 $244 $3,490 $(8,959)
</TABLE>
The actual Federal income tax expense differed from the expected tax expense
computed by applying the US. Federal statutory rate to income before taxes on
income as follows:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
1995 1995
1996 7 MONTHS 5 MONTHS
1994
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $244 35.0% $108 35.0% $(494) 35.0% $(2,200) 35.0%
Tax-exempt bond interest -- -- -- -- (70) 5.0 -- --
Amortization of intangible assets 37 5.3 25 8.2 -- -- -- --
Other 4 .6 7 2.3 1 (.1) 70 (1.0)
Total $285 40.9% $140 45.5% $(563) 39.9% $(2,130) 34.0%
==== ===== ====== ===== ======== =====
</TABLE>
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996
and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands of dollars)
<S> <C> <C>
Deferred tax assets:
Tax basis of intangible assets purchased $ 733 $1,009
Liability for commission on recapture 239 443
Policy reserves 972 143
DAC Proxy Tax 556 277
Other Deferred tax assets 6 81
Total assets $2,506 $1,953
Deferred tax liabilities:
Unrealized gains in investments $ 1 $ 104
PVFP 219 377
Deferred acquisition costs 1,162 407
Other deferred tax liabilities 9 58
Total liabilities 1,391 946
Net deferred tax asset $1,115 $1,007
======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
the deferred tax assets will be fully realized in the future based upon
consideration of the reversal of existing temporary differences, anticipated
future earnings, and all other available evidence. Accordingly, no valuation
allowance is established.
(8) RELATED-PARTY TRANSACTIONS
The Company has entered into management, operations and servicing agreements
with both affiliated and unaffiliated companies. The affiliated companies are
Cova Life Management Company (CLMC), a Delaware corporate, which provides
management services and the employees necessary to conduct the activities of
the Company, and General American Investment Management Company, which
provides investment advice. Additionally, a portion of overhead and other
corporate expenses are allocated by the Companys ultimate parent, GALIC. The
unaffiliated companies are Johnson & Higgins, a New Jersey corporation, and
Johnson & Higgins/Kirke Van Orsdel, Inc., a Delaware corporation, which
provide various services for the Company including underwriting, claims and
administrative functions. The affiliated and unaffiliated service providers
are reimbursed for the cost of their services and are paid a service fee.
Expenses and fees paid to affiliated companies in 1996 and the seven months of
1995 for the Company were $303,694 and $375,764, respectively, and by the
Predecessor in 1995 and 1994 were $334,979 and $674,136 respectively.
(9) STATUTORY SURPLUS AND DIVIDEND RESTRICTION
Generally accepted accounting principles (GAAP) differ in certain respects
from the accounting practices prescribed or permitted by insurance regulatory
authorities (statutory accounting principles).
(Continued)
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
The major differences arise principally from the immediate expense recognition
of policy acquisition costs and intangible assets for statutory reporting,
determination of policy reserves based on different discount rates and
methods, the recognition of deferred taxes under GAAP reporting, the
non-recognition of financial reinsurance for GAAP reporting, and the
establishment of an Asset Valuation Reserve as a contingent liability based on
the credit quality of the Company's investment securities and an Interest
Maintenance Reserve as an unearned liability to defer the realized gains and
losses of fixed income investments presumably resulting from changes to
interest rates and amortize them into income over the remaining life of the
investment sold. In addition, SFAS #115 adjustments to record the carrying
values of debt securities and certain equity securities at market are applied
only under GAAP reporting and capital contributions in the form of notes
receivable from an affiliated company are not recognized under GAAP reporting.
Purchase accounting creates another difference as it requires the restatement
of GAAP assets and liabilities to their established fair values, and
shareholders equity to the net purchase price. Statutory accounting does not
recognize the purchase method of accounting.
As of December 31, the differences between statutory capital and surplus and
shareholder's equity determined in conformity with generally accepted
accounting principles (GAAP) were as follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands of dollars)
<S> <C> <C>
Statutory Capital and Surplus $11,176 $11,457
Reconciling items:
Statutory Asset Valuation Reserves 825 700
Interest Maintenance Reserve 34 69
GAAP investment adjustments to fair value 6 846
Deferred policy acquisition costs 3,321 1,164
GAAP basis policy reserves (2,101) (215)
Deferred federal income taxes (net) 1,115 1,007
Goodwill 2,034 2,306
Present value of future profits 1,178 576
Future purchase price payable (683) (1,265)
Other (1) 38
GAAP Shareholders Equity $16,904 $16,683
========
</TABLE>
Statutory net income (loss) for the years ended December 31, 1996, 1995 and
1994 were $(113,236), $(2,404,316) and $(13,042,271) respectively.
The maximum amount of dividends which can be paid by State of California
insurance companies to shareholders without prior approval of the insurance
commissioner is the greater of 10% of statutory surplus or statutory net gain
from operations for the preceding year. Accordingly, the maximum dividend
permissible during 1997 will be $837,581.
The National Association of Insurance Commissioners has developed certain Risk
Based Capital (RBC) requirements for life insurers. If prescribed levels of
RBC are not maintained, certain actions may be required on the part of the
Company or its regulators. At December 31, 1996 the Company's Total Adjusted
Capital and Authorized Control Level - RBC were, $12,001,030 and $1,360,234
respectively. This level of adjusted capital satisfies regulatory
requirements.
<PAGE>
COVA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Cova Financial Services Life Insurance Company)
Notes to Financial Statements
(10) GUARANTY FUND ASSESSMENTS
The Company participates with all life insurance companies licensed in
California in an association formed to guarantee benefits to policyholders of
insolvent life insurance companies. Under the state law, as a condition for
maintaining the Companys authority to issue new business, the Company is
contingently liable for its share of claims covered by the guaranty
association for insolvencies incurred through 1996, but for which assessments
have not yet been determined nor assessed, to a maximum generally of 1% of
statutory premiums per annum.
At December 31, 1996, the National Organization of Life and Health Guaranty
Associations (NOLHGA) distributed a study of the major outstanding industry
insolvencies, with estimates of future assessments by state. Based on this
study, the Company has accrued a liability for approximately $1.6 million in
future assessments on insolvencies that occurred before December 31, 1996.
Under the coinsurance agreement between the Company and OakRe (see note 1),
OakRe is required to reimburse the Company for any future assessments that it
pays which relate to insolvencies occurring prior to June 1, 1995. As such,
the Company has recorded an additional receivable from OakRe for $1.6 million.
At the same time, the Company is liable to OakRe for 80% of any future premium
tax recoveries that are realized from any such assessments and may retain the
