First Cova Life Insurance Company May 1, 1997
PROFILE OF THE FIXED AND VARIABLE ANNUITY CONTRACT
This Profile is a summary of some of the more important points that you should
consider and know before purchasing the Contract. The Contract is more fully
described in the prospectus which accompanies this Profile. Please read the
prospectus carefully.
1. THE ANNUITY CONTRACT: The fixed and variable annuity contract offered by
First Cova is a contract between you, the owner, and First Cova, an insurance
company. The Contract provides a means for investing on a tax-deferred basis
in a fixed account of First Cova and 8 investment portfolios. The Contract is
intended for retirement savings or other long-term investment purposes and
provides for a death benefit and guaranteed income options.
The fixed account offers an interest rate that is guaranteed by the insurance
company, First Cova. This interest rate is set once each year. While your
money is in the fixed account, the interest your money will earn as well as
your principal is guaranteed by First Cova.
This Contract also offers 8 investment portfolios which are listed in Section
4. These portfolios are designed to offer a better return than the fixed
account. However, this is NOT guaranteed. You can also lose your money.
You can put money into any or all of the investment portfolios and the fixed
account. You can transfer between accounts up to 12 times a year without
charge or tax implications. After 12 transfers, the charge is $25 or 2% of the
amount transferred, whichever is less.
The Contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the income phase. During the accumulation phase,
earnings accumulate on a tax-deferred basis and are taxed as income when you
make a withdrawal. The income phase occurs when you begin receiving regular
payments from your Contract.
The amount of money you are able to accumulate in your account during the
accumulation phase will determine the amount of income payments during the
income phase.
2. ANNUITY PAYMENTS (THE INCOME PHASE): If you want to receive regular income
from your annuity, you can choose one of three options: (1) monthly payments
for your life (assuming you are the annuitant); (2) monthly payments for your
life, but with payments continuing to the beneficiary for 5, 10 or 20 years
(as you select) if you die before the end of the selected period; and (3)
monthly payments for your life and for the life of another person (usually
your spouse) selected by you. Once you begin receiving regular payments, you
cannot change your payment plan.
During the income phase, you have the same investment choices you had during
the accumulation phase. You can choose to have payments come from the fixed
account, the investment portfolios or both. If you choose to have any part of
your payments come from the investment portfolios, the dollar amount of your
payments may go up or down.
3. PURCHASE: You can buy this Contract with $5,000 or more under most
circumstances. You can add $2,000 or more any time you like during the
accumulation phase. Your registered representative can help you fill out the
proper forms.
4. INVESTMENT OPTIONS: You can put your money in any or all of these
investment portfolios which are described in the prospectuses for the funds:
<TABLE>
<CAPTION>
<S> <C> <C>
MANAGED BY J.P. MORGAN INVESTMENT MANAGED BY LORD, ABBETT & CO. MANAGED BY CONNING ASSET
MANAGEMENT INC. Bond Debenture MANAGEMENT COMPANY
Select Equity Growth and Income Money Market
Large Cap Stock
Small Cap Stock
International Equity
Quality Bond
</TABLE>
Depending upon market conditions, you can make or lose money in any of these
portfolios.
5. EXPENSES: The Contract has insurance features and investment features, and
there are costs related to each.
Each year First Cova deducts a $30 contract maintenance charge from your
Contract. First Cova currently waives this charge if the value of your
Contract is at least $50,000. First Cova also deducts for its insurance
charges which total 1.40% of the average daily value of your Contract
allocated to the investment portfolios.
There are also investment charges which range from .205% to .95% of the
average daily value of the investment portfolio depending upon the investment
portfolio.
If you take your money out, First Cova may assess a withdrawal charge which is
equal to 7% of each payment you take out in the first and second years after
First Cova receives the payment, 5% of each payment you take out in the third,
fourth and fifth years, and 3% of each payment you take out in the sixth and
seventh years.
The following chart is designed to help you to understand the expenses in the
Contract. The column "Total Annual Expenses" shows the total of the $30
contract maintenance charge (which is represented as .10% below), the 1.40%
insurance charges and the investment expenses for each investment portfolio.
The next two columns show you two examples of the expenses, in dollars, you
would pay under a Contract. The examples assume that you invested $1,000 in a
Contract which earns 5% annually and that you withdraw your money: (1) at the
end of year 1, and (2) at the end of year 10. For year 1, the Total Annual
Expenses are assessed as well as the withdrawal charges. For year 10, the
example shows the aggregate of all the annual expenses assessed for the 10
years, but there is no withdrawal charge.
The premium tax is assumed to be 0% in both examples.
<TABLE>
<CAPTION>
EXAMPLES:
Total Annual
Total Annual Total Annual Total Expenses At End of:
Insurance Portfolio Annual (1) (2)
Portfolio Charges Expenses Expenses 1 Year 10 Years
- -------------------------- ------------- ------------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C>
MANAGED BY J.P. MORGAN
INVESTMENT MANAGEMENT INC.
Select Equity 1.50% 0.85% 2.35% $ 93.80 $ 266.24
Large Cap Stock 1.50% 0.75% 2.25% $ 92.80 $ 256.13
Small Cap Stock 1.50% 0.95% 2.45% $ 94.80 $ 276.23
International Equity 1.50% 0.95% 2.45% $ 94.80 $ 276.23
Quality Bond 1.50% 0.65% 2.15% $ 91.79 $ 245.92
MANAGED BY LORD, ABBETT
& CO.
Bond Debenture 1.50% 0.85% 2.35% $ 93.80 $ 266.24
Growth and Income 1.50% 0.59% 2.09% $ 91.19 $ 239.74
MANAGED BY CONNING ASSET
MANAGEMENT COMPANY
Money Market 1.50% 0.205% 1.705% $ 87.31 $ 199.08
</TABLE>
The expenses reflect any expense reimbursement or fee waiver. For more
detailed information, see the Fee Table in the prospectus for the
Contract.
6. TAXES: Your earnings are not taxed until you take them out. If you take
money out, earnings come out first and are taxed as income. If you are younger
than 59 1/2 when you take money out, you may be charged a 10% federal tax
penalty on the earnings. Payments during the income phase are considered
partly a return of your original investment. That part of each payment is not
taxable as income.
7. ACCESS TO YOUR MONEY: You can take money out at any time during the
accumulation phase. After the first year, you can take up to 10% of your total
purchase payments each year without charge from First Cova. Withdrawals in
excess of that will be charged 7% of each payment you take out in the first
and second years after First Cova receives the payment, 5% of each payment you
take out in the third, fourth and fifth years, and 3% of each payment you take
out in the sixth and seventh years. After First Cova has had a payment for 7
years, there is no charge for withdrawals. Of course, you may also have to pay
income tax and a tax penalty on any money you take out. Each purchase payment
you add to your Contract has its own 7 year withdrawal charge period.
8. PERFORMANCE: The value of the Contract will vary up or down depending upon
the investment performance of the investment portfolios you choose. First Cova
may provide total return figures for each investment portfolio.
9. DEATH BENEFIT: If you die before moving to the income phase, the person you
have chosen as your beneficiary will receive a death benefit. This death
benefit will be the greater of three amounts: 1) the money you've put in less
any money you've taken out, and the related withdrawal charges, or 2) the
current value of your Contract, or 3) the value of your Contract at the most
recent 7th-year-anniversary plus any money you've added since that anniversary
minus any money you've taken out since that anniversary, and the related
withdrawal charges. If you die after age 80, slightly different rules apply.
10. OTHER INFORMATION: Free Look. If you cancel the Contract within 10 days
after receiving it we will send you whatever your Contract is worth on the day
we receive your request (this may be more or less than your original payment)
without assessing a withdrawal charge. If you have purchased the Contract as
an Individual Retirement Annuity (IRA) you will receive back your purchase
payment. (Currently, the Contract is not available under an IRA until the IRA
Endorsement is approved by the State of New York Insurance Department.)
No Probate. In most cases, when you die, the person you choose as your
beneficiary will receive the death benefit without going through probate.
However, the avoidance of probate does not mean that the beneficiary will not
have tax liability as a result of receiving the death benefit.
Who should purchase the Contract? This Contract is designed for people seeking
long-term tax-deferred accumulation of assets, generally for retirement or
other long-term purposes. The tax-deferred feature is most attractive to
people in high federal and state tax brackets. You should not buy this
Contract if you are looking for a short-term investment or if you cannot take
the risk of getting back less money than you put in.
Additional Features. This Contract has additional features you might be
interested in. These include:
* You can arrange to have money automatically sent to you each month while
your Contract is still in the accumulation phase. Of course, you'll have to
pay taxes on money you receive. We call this feature the Systematic Withdrawal
Program.
* You can arrange to have a regular amount of money automatically invested
in investment portfolios each month, theoretically giving you a lower average
cost per unit over time than a single one time purchase. We call this feature
Dollar Cost Averaging.
* First Cova will automatically readjust the money between investment
portfolios periodically to keep the blend you select. We call this feature
Automatic Rebalancing.
11. INQUIRIES: If you need more information about buying a Contract, please
contact us at:
Cova Life Sales Company
One Tower Lane, Suite 3000
Oakbrook Terrace, IL 60181
800-523-1661
If you have any other questions, please contact us at our Home Office:
120 Broadway
New York, NY 10271
(800) 469-4545
(212) 766-0012
THE FIXED
AND VARIABLE ANNUITY
ISSUED BY
FIRST COVA VARIABLE ANNUITY ACCOUNT ONE
AND
FIRST COVA LIFE
INSURANCE COMPANY
This prospectus describes the Fixed and Variable Annuity Contract offered by
First Cova Life Insurance Company (First Cova).
The annuity contract has 9 investment choices - a fixed account which offers
an interest rate which is guaranteed by First Cova, and 8 investment
portfolios listed below. The 8 investment portfolios are part of the Cova
Series Trust, the Lord Abbett Series Fund, Inc. or the General American
Capital Company. You can put your money in the fixed account and/or any of
these investment portfolios.
Cova Series Trust:
Managed by J.P. Morgan
Investment Management Inc.:
Select Equity
Large Cap Stock
Small Cap Stock
International Equity
Quality Bond
Managed by Lord, Abbett & Co.:
Bond Debenture
Lord Abbett Series Fund, Inc.:
Managed by Lord, Abbett & Co.:
Growth and Income
General American Capital Company:
Managed by Conning Asset
Management Company:
Money Market
Please read this prospectus before investing and keep it on file for future
reference. It contains important information about the First Cova Fixed and
Variable Annuity Contract.
To learn more about the First Cova Fixed and Variable Annuity Contract, you
can obtain a copy of the Statement of Additional Information (SAI) dated May
1, 1997. The SAI has been filed with the Securities and Exchange Commission
(SEC) and is legally a part of the prospectus. The Table of Contents of the
SAI is on Page 13 of this prospectus. For a free copy of the SAI, call us at
(800) 831-5433 or write us at: One Tower Lane, Suite 3000, Oakbrook Terrace,
Illinois 60181-4644.
INVESTMENT IN A VARIABLE ANNUITY CONTRACT IS SUBJECT TO RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
May 1, 1997.
TABLE OF CONTENTS Page
INDEX OF SPECIAL TERMS
FEE TABLE
EXAMPLES
1. THE ANNUITY CONTRACT
2. ANNUITY PAYMENTS (THE INCOME PHASE)
3. PURCHASE
Purchase Payments
Allocation of Purchase Payments
Accumulation Units
4. INVESTMENT OPTIONS
Cova Series Trust
Lord Abbett Series Fund, Inc.
General American Capital Company
Transfers
Dollar Cost Averaging Program
Automatic Rebalancing Program
Voting Rights
Substitution
5. EXPENSES
Insurance Charges
Contract Maintenance Charge
Withdrawal Charge
Reduction or Elimination of the
Withdrawal Charge
Transfer Fee
Income Taxes
Investment Portfolio Expenses
6. TAXES
Annuity Contracts in General
Qualified and Non-Qualified Contracts
Withdrawals - Non-Qualified Contracts
Withdrawals - Qualified Contracts
Diversification
7. ACCESS TO YOUR MONEY
Systematic Withdrawal Program
8. PERFORMANCE
9. DEATH BENEFIT
Upon Your Death
Death of Annuitant
10. OTHER INFORMATION
First Cova
The Separate Account
Distributor
Ownership
Beneficiary
Assignment
Suspension of Payments or Transfers
Financial Statements
TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION
APPENDIX A
Performance Information A-1
INDEX OF SPECIAL TERMS
We have tried to make this prospectus as readable and understandable for you
as possible. By the very nature of the contract, however, certain technical
words or terms are unavoidable. We have identified the following as some of
these words or terms. They are identified in the text in italic and the page
that is indicated here is where we believe you will find the best explanation
for the word or term.
Page
Accumulation Phase
Accumulation Unit
Annuitant
Annuity Date
Annuity Options
Annuity Payments
Annuity Unit
Beneficiary
Fixed Account
Income Phase
Investment Portfolios
Joint Owner
Non-Qualified
Owner
Purchase Payment
Qualified
Tax Deferral
<TABLE>
<CAPTION>
FEE TABLE
<S> <C> <C>
OWNER TRANSACTION EXPENSES
Withdrawal Charge (as a percentage of Years Since
purchase payments) (see Note 2 below) Payment Charge
----------- ------
1 7%
2 7%
3 5%
4 5%
5 5%
6 3%
7 3%
8+ 0%
</TABLE>
Transfer Fee (see Note 3 below)
No charge for first 12 transfers in a contract year; thereafter, the fee is
$25 per transfer or, if less, 2% of the amount transferred.
Contract Maintenance Charge (see Note 4 below)
$30 per contract per year
<TABLE>
<CAPTION>
<S> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
Mortality and Expense Risk Premium 1.25%
Administrative Expense Charge .15%
-----
TOTAL SEPARATE ACCOUNT
ANNUAL EXPENSES 1.40%
</TABLE>
INVESTMENT PORTFOLIO EXPENSES
(as a percentage of the average daily net assets of an investment portfolio)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other Expenses
(after expense
reimbursement for
Management 12b-1 certain Portfolios - Total Annual
Fees Fees see Note 5 below) Portfolio Expenses
---------- ----- -------------------- ------------------
COVA SERIES TRUST
Managed by J.P. Morgan
Investment Management Inc.
Select Equity* .75% - - .10% .85%
Large Cap Stock* .65% - - .10% .75%
Small Cap Stock* .85% - - .10% .95%
International Equity* .85% - - .10% .95%
Quality Bond* .55% - - .10% .65%
Managed by Lord, Abbett & Co.
Bond Debenture* .75% - - .10% .85%
LORD ABBETT SERIES FUND, INC.
Managed by Lord, Abbett & Co.
Growth and Income# .50% .07% .02% .59%
GENERAL AMERICAN CAPITAL COMPANY
Managed by Conning Asset
Management Company
Money Market .205% - - .00% .205%
<FN>
* Annualized. The Portfolio commenced regular investment operations on April 2, 1996.
# The Growth and Income Portfolio of Lord Abbett Series Fund, Inc. has a 12b-1 plan which
provides for payments to Lord, Abbett & Co. for remittance to a life insurance company for
certain distribution expenses (see the Fund Prospectus). The 12b-1 plan provides that such
remittances, in the aggregate, will not exceed .15%, on an annual basis, of the daily net asset
value of shares of the Growth and Income Portfolio. As of the date of this Prospectus, no
payments have been made under the 12b-1 plan. For the year ending December 31, 1997, the 12b-1
fees are estimated to be .07%. The examples below for this Portfolio reflect the estimated 12b-1
fees.
</TABLE>
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets:
(a) upon surrender at the end of each time period;
(b) if the contract is not surrendered or is annuitized.
<TABLE>
<CAPTION>
Time Periods
<S> <C> <C>
1 year 3 years
------ -------
COVA SERIES TRUST
Managed by J.P. Morgan
Investment Management Inc.
Select Equity (a)$93.80 (a)$118.16
(b)$23.80 (b)73.16
Large Cap Stock (a)$92.80 (a)$115.15
(b)$22.80 (b)$70.15
Small Cap Stock (a)$94.80 (a)$121.17
(b)$24.80 (b)$76.17
International Equity (a)$94.80 (a)$121.17
(b)$24.80 (b)$76.17
Quality Bond (a)$91.79 (a)$112.12
(b)$21.79 (b)$67.12
Managed by Lord, Abbett & Co.
Bond Debenture (a)$93.80 (a)$118.16
(b)$23.80 (b)$73.16
LORD ABBETT SERIES FUND, INC.
Managed by Lord, Abbett & Co.
Growth and Income (a)$91.19 (a)$110.30
(b)$21.19 (b)$65.30
GENERAL AMERICAN CAPITAL COMPANY
Managed by Conning Asset
Management Company
Money Market (a)$87.31 (a)$98.54
(b)$17.31 (b)$53.54
</TABLE>
Explanation of Fee Table and Examples
1. The purpose of the Fee Table is to show you the various expenses you will
incur directly or indirectly with the contract. The Fee Table reflects
expenses of the Separate Account as well as of the investment portfolios.
2. The withdrawal charge is 7% of each payment you take out in the first and
second years after First Cova receives the payment, 5% of each payment you
take out in the third, fourth and fifth years, and 3% of each payment you take
out in the sixth and seventh years. After First Cova has had a purchase
payment for 7 years, there is no charge by First Cova for a withdrawal of that
purchase payment. You may also have to pay income tax and a tax penalty on any
money you take out. After the first year, you can take up to 10% of your total
purchase payments each year without a charge from First Cova.
3. First Cova will not charge you the transfer fee even if there are more
than 12 transfers in a year if the transfer is for the Dollar Cost Averaging
or Automatic Rebalancing Programs.
4. First Cova will not charge the contract maintenance charge if the value of
your contract is $50,000 or more, although, if you make a complete withdrawal,
First Cova will charge the contract maintenance charge.
5. An affiliate of First Cova currently reimburses the investment portfolios
of Cova Series Trust for all operating expenses (exclusive of the management
fees) in excess of approximately .10%. Absent this expense reimbursement, the
expenses (on an annualized basis) for the period ended December 31, 1996 would
have been: 1.70% for the Select Equity Portfolio, 2.68% for the Small Cap
Stock Portfolio, 3.80% for the International Equity Portfolio, 1.52% for the
Quality Bond Portfolio, 1.23% for the Large Cap Stock Portfolio and 2.05% for
the Bond Debenture Portfolio.
6. Premium taxes are not reflected. New York does not assess premium taxes.
7. The assumed average contract size is $30,000.
8. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1. THE ANNUITY CONTRACT
This Prospectus describes the Fixed and Variable Annuity Contract offered by
First Cova.
An annuity is a contract between you, the owner, and an insurance company (in
this case First Cova), where the insurance company promises to pay you an
income, in the form of annuity payments, beginning on a designated date that's
at least one year after we issue your contract. Until you decide to begin
receiving annuity payments, your annuity is in the accumulation phase. Once
you begin receiving annuity payments, your contract switches to the income
phase. The contract benefits from tax deferral.
Tax deferral means that you are not taxed on earnings or appreciation on the
assets in your contract until you take money out of your contract.
The contract is called a variable annuity because you can choose among 8
investment portfolios. Depending upon market conditions, you can make or lose
money in any of these portfolios. If you select the variable annuity portion
of the contract, the amount of money you are able to accumulate in your
contract during the accumulation phase depends upon the investment performance
of the investment portfolio(s) you select. The amount of the annuity payments
you receive during the income phase from the variable annuity portion of the
contract also depends upon the investment performance of the investment
portfolios you select for the income phase.
The contract also contains a fixed account. The fixed account offers an
interest rate that is guaranteed by First Cova. This interest rate is set once
each year. First Cova guarantees that the interest credited to the fixed
account will not be less than 3% per year. If you select the fixed account,
your money will be placed with the other general assets of First Cova. If you
select the fixed account, the amount of money you are able to accumulate in
your contract during the accumulation phase depends upon the total interest
credited to your contract. The amount of the annuity payments you receive
during the income phase from the fixed account portion of the contract will
remain level for the entire income phase.
As owner of the contract, you exercise all rights under the contract. You can
change the owner at any time by notifying First Cova in writing. You and
another person can be named joint owners. We have described more information
on this in Section 10 - Other Information.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
Under the contract you can receive regular income payments. You can choose the
month and year in which those payments begin. We call that date the annuity
date. Your annuity date must be the first day of a calendar month. You can
also choose among income plans. We call those annuity options.
We ask you to choose your annuity date and annuity option when you purchase
the contract. You can change either at any time before the annuity date with
30 days notice to us. Your annuity date cannot be any earlier than one year
after we issue the contract. Annuity payments must begin by the annuitant's
90th birthday. The annuitant is the person whose life we look to when we make
annuity payments.
If you do not choose an annuity option at the time you purchase the contract,
we will assume that you selected Option 2 which provides a life annuity with
10 years of guaranteed payments.
During the income phase, you have the same investment choices you had just
before the start of the income phase. At the annuity date, you can choose
whether payments will come from the fixed account, the investment portfolio(s)
or a combination of both. If you don't tell us otherwise, your annuity
payments will be based on the investment allocations that were in place on the
annuity date.
If you choose to have any portion of your annuity payments come from the
investment portfolio(s), the dollar amount of your payment will depend upon 3
things: 1) the value of your contract in the investment portfolio(s) on the
annuity date, 2) the 3% assumed investment rate used in the annuity table for
the contract, and 3) the performance of the investment portfolios you
selected. If the actual performance exceeds the 3% assumed rate, your annuity
payments will increase. Similarly, if the actual rate is less than 3%, your
annuity payments will decrease.
You can choose one of the following annuity options. After annuity payments
begin, you cannot change the annuity option.
OPTION 1. LIFE ANNUITY. Under this option, we will make an annuity payment
each month so long as the annuitant is alive. After the annuitant dies, we
stop making annuity payments.
OPTION 2. LIFE ANNUITY WITH 5, 10 OR 20 YEARS GUARANTEED. Under this option,
we will make an annuity payment each month so long as the annuitant is alive.
However, if, when the annuitant dies, we have made annuity payments for less
than the selected guaranteed period, we will then continue to make annuity
payments for the rest of the guaranteed period to the beneficiary. If the
beneficiary does not want to receive annuity payments, he or she can ask us
for a single lump sum.
OPTION 3. JOINT AND LAST SURVIVOR ANNUITY. Under this option, we will make
annuity payments each month so long as the annuitant and a second person are
both alive. When either of these people dies, we will continue to make annuity
payments, so long as the survivor continues to live. The amount of the annuity
payments we will make to the survivor can be equal to 100%, 66-2/3% or 50% of
the amount that we would have paid if both were alive.
Annuity payments are made monthly unless you have less than $2,000 to apply
toward a payment. In that case, First Cova may provide your annuity payment in
a single lump sum. Likewise, if your annuity payments would be less than $20 a
month, First Cova has the right to change the frequency of payments so that
your annuity payments are at least $20.
3. PURCHASE
PURCHASE PAYMENTS
A purchase payment is the money you give us to buy the contract. The minimum
we will accept is $5,000 when the contract is bought as a non-qualified
contract. If you are buying the contract as part of an IRA (Individual
Retirement Annuity) the minimum we will accept is $2,000. (Currently, the
contract is not available under an IRA until the IRA Endorsement is approved
by the State of New York Insurance Department.) The maximum we accept is $1
million without our prior approval. You can make additional purchase payments
of $2,000 or more to either type of contract.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, we will allocate your purchase payment to the
fixed account and/or one or more of the investment portfolios you have
selected. If you make additional purchase payments, we will allocate them in
the same way as your first purchase payment unless you tell us otherwise.
There is a $500 minimum balance requirement for the fixed account and for each
investment portfolio.
If you change your mind about owning this contract, you can cancel it within
10 days after receiving it. When you cancel the contract within this time
period, First Cova will not assess a withdrawal charge. You will receive back
whatever your contract is worth on the day we receive your request. If you
have purchased the contract as an IRA, we are required to give you back your
purchase payment if you decide to cancel your contract within 10 days after
receiving it.
Once we receive your purchase payment and the necessary information, we will
issue your contract and allocate your first purchase payment within 2 business
days. If you do not give us all of the information we need, we will contact
you to get it. If for some reason we are unable to complete this process
within 5 business days, we will either send back your money or get your
permission to keep it until we get all of the necessary information. If you
add more money to your contract by making additional purchase payments, we
will credit these amounts to your contract within one business day. Our
business day closes when the New York Stock Exchange closes, usually 4:00 P.M.
Eastern time.
ACCUMULATION UNITS
The value of the variable annuity portion of your contract will go up or down
depending upon the investment performance of the investment portfolio(s) you
choose. In order to keep track of the value of your contract, we use a unit of
measure we call an accumulation unit. (An accumulation unit works like a share
of a mutual fund.) During the income phase of the contract we call the unit an
annuity unit.
Every day we determine the value of an accumulation unit for each of the
investment portfolios. We do this by:
1. determining the total amount of money invested in the particular
investment portfolio;
2. subtracting from that amount any insurance charges and any other charges
such as taxes we have deducted; and
3. dividing this amount by the number of outstanding accumulation units.
The value of an accumulation unit may go up or down from day to day.
When you make a purchase payment, we credit your contract with accumulation
units. The number of accumulation units credited is determined by dividing the
amount of the purchase payment allocated to an investment portfolio divided by
the value of the accumulation unit for that investment portfolio.
We calculate the value of an accumulation unit for each investment portfolio
after the New York Stock Exchange closes each day and then credit your
contract.
EXAMPLE:
On Monday we receive an additional purchase payment of $5,000 from you. You
have told us you want this to go to the Quality Bond Portfolio. When the New
York Stock Exchange closes on that Monday, we determine that the value of an
accumulation unit for the Quality Bond Portfolio is $13.90. We then divide
$5,000 by $13.90 and credit your contract on Monday night with 359.71
accumulation units for the Quality Bond Portfolio.
4. INVESTMENT OPTIONS
The Contract offers 8 investment portfolios which are described below.
Additional investment portfolios may be available in the future.
YOU SHOULD READ THE PROSPECTUSES FOR THESE FUNDS CAREFULLY BEFORE INVESTING.
COPIES OF THESE PROSPECTUSES ARE ATTACHED TO THIS PROSPECTUS.
COVA SERIES TRUST
Cova Series Trust is managed by Cova Advisory, which is an affiliate of First
Cova. Cova Series Trust is a mutual fund with multiple portfolios. Each
investment portfolio has a different investment objective. Cova Advisory has
engaged sub-advisers to provide investment advice for the individual
investment portfolios. The following investment portfolios are available under
the contract:
J.P. MORGAN INVESTMENT MANAGEMENT INC. IS THE SUB-ADVISER TO THE FOLLOWING
PORTFOLIOS:
Select Equity Portfolio
Large Cap Stock Portfolio
Small Cap Stock Portfolio
International Equity Portfolio
Quality Bond Portfolio
LORD, ABBETT & CO. IS THE SUB-ADVISER TO THE FOLLOWING PORTFOLIO:
Bond Debenture Portfolio
LORD ABBETT SERIES FUND, INC.
Lord Abbett Series Fund, Inc. is a mutual fund with multiple portfolios. Each
portfolio is managed by Lord, Abbett & Co. The following portfolio is
available under the contract:
Growth and Income Portfolio
GENERAL AMERICAN CAPITAL COMPANY
General American Capital Company is a mutual fund with multiple portfolios.
Each portfolio is managed by Conning Asset Management Company. The following
portfolio is available under the contract:
Money Market Fund
TRANSFERS
You can transfer money among the fixed account and the 8 investment
portfolios.
TRANSFERS DURING THE ACCUMULATION PHASE.
You can make 12 transfers every year during the accumulation phase without
charge. We measure a year from the anniversary of the day we issued your
contract. You can make a transfer to or from the fixed account and to or from
any investment portfolio. If you make more than 12 transfers in a year, there
is a transfer fee deducted. The fee is $25 per transfer or, if less, 2% of the
amount transferred. The following apply to any transfer during the
accumulation phase:
1. The minimum amount which you can transfer is $500 or your entire value in
the investment portfolio or fixed account.
2. Your request for transfer must clearly state which investment portfolio(s)
or the fixed account are involved in the transfer.
3. Your request for transfer must clearly state how much the transfer is for.
4. You cannot make any transfers within 7 calendar days of the annuity date.
TRANSFERS DURING THE INCOME PHASE.
You can only make transfers between the investment portfolios once each year.
We measure a year from the anniversary of the day we issued your contract. You
cannot transfer from the fixed account to an investment portfolio, but you can
transfer from one or more investment portfolios to the fixed account at any
time. If you make more than 12 transfers in a year, a transfer fee will be
charged.
You can make transfers by telephone. If you own the contract with a joint
owner, unless First Cova is instructed otherwise, First Cova will accept
instructions from either you or the other owner. First Cova will use
reasonable procedures to confirm that instructions given us by telephone are
genuine. If First Cova fails to use such procedures, we may be liable for any
losses due to unauthorized or fraudulent instructions. First Cova tape records
all telephone instructions.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a set
amount each month from the Money Market Fund of General American Capital
Company or the fixed account to any of the other investment portfolio(s). By
allocating amounts on a regular schedule as opposed to allocating the total
amount at one particular time, you may be less susceptible to the impact of
market fluctuations.
The minimum amount which can be transferred each month is $500. You must have
at least $6,000 in the Money Market Fund of General American Capital Company
or the fixed account, (or the amount required to complete your program, if
less) in order to participate in the Dollar Cost Averaging Program.
All Dollar Cost Averaging transfers will be made on the 15th day of the month
unless that day is not a business day. If it is not, then the transfer will be
made the next business day.
If you participate in the Dollar Cost Averaging Program, the transfers made
under the program are not taken into account in determining any transfer fee.
AUTOMATIC REBALANCING PROGRAM
Once your money has been allocated among the investment portfolios, the
performance of each portfolio may cause your allocation to shift. You can
direct us to automatically rebalance your contract to return to your original
percentage allocations by selecting our Automatic Rebalancing Program. You can
tell us whether to rebalance quarterly, semi-annually or annually. We will
measure these periods from the anniversary of the date we issued your
contract. The transfer date will be the 1st day after the end of the period
you selected. If you participate in the Automatic Rebalancing Program, the
transfers made under the program are not taken into account in determining any
transfer fee.
EXAMPLE:
Assume that you want your initial purchase payment split between 2 investment
portfolios. You want 40% to be in the Quality Bond Portfolio and 60% to be in
the Select Equity Portfolio. Over the next 2-1 2 months the bond market does
very well while the stock market performs poorly. At the end of the first
quarter, the Quality Bond Portfolio now represents 50% of your holdings
because of its increase in value. If you had chosen to have your holdings
rebalanced quarterly, on the first day of the next quarter, First Cova would
sell some of your units in the Quality Bond Portfolio to bring its value back
to 40% and use the money to buy more units in the Select Equity Portfolio to
increase those holdings to 60%.
VOTING RIGHTS
First Cova is the legal owner of the investment portfolio shares. However,
First Cova believes that when an investment portfolio solicits proxies in
conjunction with a vote of shareholders, it is required to obtain from you and
other owners instructions as to how to vote those shares. When we receive
those instructions, we will vote all of the shares we own in proportion to
those instructions. This will also include any shares that First Cova owns on
its own behalf. Should First Cova determine that it is no longer required to
comply with the above, we will vote the shares in our own right.
SUBSTITUTION
First Cova may be required to substitute one of the investment portfolios you
have selected with another portfolio. We would not do this without the prior
approval of the Securities and Exchange Commission. We will give you notice of
our intent to do this.
5. EXPENSES
There are charges and other expenses associated with the contracts that reduce
the return on your investment in the contract. These charges and expenses are:
INSURANCE CHARGES
Each day, First Cova makes a deduction for its insurance charges. First Cova
does this as part of its calculation of the value of the accumulation units
and the annuity units. The insurance charge has two parts: 1) the mortality
and expense risk premium and 2) the administrative expense charge.
MORTALITY AND EXPENSE RISK PREMIUM. This charge is equal, on an annual basis,
to 1.25% of the daily value of the contracts invested in an investment
portfolio, after expenses have been deducted. This charge is for all the
insurance benefits e.g., guarantee of annuity rates, the death benefits, for
certain expenses of the contract, and for assuming the risk (expense risk)
that the current charges will be sufficient in the future to cover the cost of
administering the contract. If the charges under the contract are not
sufficient, then First Cova will bear the loss. First Cova does, however,
expect to profit from this charge. The mortality and expense risk premium
cannot be increased. First Cova may use any profits we make from this charge
to pay for the costs of distributing the contract.
ADMINISTRATIVE EXPENSE CHARGE. This charge is equal, on an annual basis, to
.15% of the daily value of the contracts invested in an investment portfolio,
after expenses have been deducted. This charge, together with the contract
maintenance charge (see below) is for all the expenses associated with the
administration of the contract. Some of these expenses are: preparation of the
contract, confirmations, annual reports and statements, maintenance of
contract records, personnel costs, legal and accounting fees, filing fees, and
computer and systems costs. Because this charge is taken out of every unit
value, you may pay more in administrative costs than those that are associated
solely with your contract. First Cova does not intend to profit from this
charge. However, if this charge and the contract maintenance charge are not
enough to cover the costs of the contracts in the future, First Cova will bear
the loss.
CONTRACT MAINTENANCE CHARGE
During the accumulation phase, every year on the anniversary of the date when
your contract was issued, First Cova deducts $30 from your contract as a
contract maintenance charge. This charge is for administrative expenses (see
above). This charge can not be increased.
First Cova will not deduct this charge, if when the deduction is to be made,
the value of your contract is $50,000 or more. First Cova may some time in the
future discontinue this practice and deduct the charge.
If you make a complete withdrawal from your contract, the contract maintenance
charge will also be deducted. A prorata portion of the charge will be deducted
if the annuity date is other than an anniversary. After the annuity date, the
charge will be collected monthly out of the annuity payment.
WITHDRAWAL CHARGE
During the accumulation phase, you can make withdrawals from your contract.
First Cova keeps track of each purchase payment. Once a year after the first
year, you can withdraw up to 10% of your total purchase payments and no
withdrawal charge will be assessed on the 10%, if on the day you make your
withdrawal the value of your contract is $5,000 or more. Otherwise, the charge
is 7% of each payment you take out in the first and second years after First
Cova receives the payment, 5% of each payment you take out in the third,
fourth and fifth years, and 3% of each payment you take out in the sixth and
seventh years. After First Cova has had a purchase payment for 7 years, there
is no charge when you withdraw that purchase payment. For purposes of the
withdrawal charge, First Cova treats withdrawals as coming from the oldest
purchase payment first. When the withdrawal is for only part of the value of
your contract, the withdrawal charge is deducted from the remaining value in
your contract.
NOTE: For tax purposes, withdrawals are considered to have come from the last
money into the contract. Thus, for tax purposes, earnings are considered to
come out first.
First Cova does not assess the withdrawal charge on any payments paid out as
annuity payments or as death benefits.
REDUCTION OR ELIMINATION OF THE WITHDRAWAL CHARGE
First Cova will reduce or eliminate the amount of the withdrawal charge when
the contract is sold to an officer, director or employee of First Cova. In no
event will elimination of the Withdrawal Charge be permitted where elimination
will be unfairly discriminatory to any person.
TRANSFER FEE
You can make 12 free transfers every year. We measure a year from the day we
issue your contract. If you make more than 12 transfers a year, we will deduct
a transfer fee of $25 or 2% of the amount that is transferred whichever is
less.
If the transfer is part of the Dollar Cost Averaging Program or the Automatic
Rebalancing Program it will not count in determining the transfer fee.
INCOME TAXES
First Cova will deduct from the contract for any income taxes which it incurs
because of the contract. At the present time, we are not making any such
deductions.
INVESTMENT PORTFOLIO EXPENSES
There are deductions from and expenses paid out of the assets of the various
investment portfolios, which are described in the attached fund prospectuses.
6. TAXES
NOTE: First Cova has prepared the following information on taxes as a general
discussion of the subject. It is not intended as tax advice to any individual.
You should consult your own tax adviser about your own circumstances. First
Cova has included in the Statement of Additional Information an additional
discussion regarding taxes.
ANNUITY CONTRACTS IN GENERAL
Annuity contracts are a means of setting aside money for future needs -
usually retirement. Congress recognized how important saving for retirement
was and provided special rules in the Internal Revenue Code (Code) for
annuities.
Simply stated these rules provide that you will not be taxed on the earnings
on the money held in your annuity contract until you take the money out. This
is referred to as tax deferral. There are different rules as to how you will
be taxed depending on how you take the money out and the type of contract -
qualified or non-qualified (see following sections).
You, as the owner, will not be taxed on increases in the value of your
contract until a distribution occurs - either as a withdrawal or as annuity
payments. When you make a withdrawal you are taxed on the amount of the
withdrawal that is earnings. For annuity payments, different rules apply. A
portion of each annuity payment is treated as a partial return of your
purchase payments and will not be taxed. The remaining portion of the annuity
payment will be treated as ordinary income. How the annuity payment is divided
between taxable and non-taxable portions depends upon the period over which
the annuity payments are expected to be made. Annuity payments received after
you have received all of your purchase payments are fully includible in
income.
When a non-qualified contract is owned by a non-natural person (e.g.,
corporation or certain other entities other than tax-qualified trusts), the
contract will generally not be treated as an annuity for tax purposes.
QUALIFIED AND NON-QUALIFIED CONTRACTS
If you purchase the contract as an individual and not under an Individual
Retirement Annuity (IRA), your contract is referred to as a non-qualified
contract.
If you purchase the contract under an IRA, your contract is referred to as a
qualified contract. Currently, the contract is not available under an IRA
until the IRA Endorsement is approved by the State of New York Insurance
Department.
WITHDRAWALS - NON-QUALIFIED CONTRACTS
If you make a withdrawal from your contract, the Code treats such a withdrawal
as first coming from earnings and then from your purchase payments. Such
withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract
which is included in income may be subject to a penalty. The amount of the
penalty is equal to 10% of the amount that is includible in income. Some
withdrawals will be exempt from the penalty. They include any amounts: (1)
paid on or after the taxpayer reaches age 59-1/2; (2) paid after you die; (3)
paid if the taxpayer becomes totally disabled (as that term is defined in the
Code); (4) paid in a series of substantially equal payments made annually (or
more frequently) under a lifetime annuity, (5) paid under an immediate
annuity; or (6) which come from purchase payments made prior to August 14,
1982.
WITHDRAWALS - QUALIFIED CONTRACTS
The above information describing the taxation of non-qualified contracts does
not apply to qualified contracts. There are special rules that govern with
respect to qualified contracts. We have provided a more complete discussion in
the Statement of Additional Information.
DIVERSIFICATION
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order to be treated as an
annuity contract. First Cova believes that the investment portfolios are being
managed so as to comply with the requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to date
provide guidance as to the circumstances under which you, because of the
degree of control you exercise over the underlying investments, and not First
Cova would be considered the owner of the shares of the investment portfolios.
If this occurs, it will result in the loss of the favorable tax treatment for
the contract. It is unknown to what extent under federal tax law owners are
permitted to select investment portfolios, to make transfers among the
investment portfolios or the number and type of investment portfolios owners
may select from. If any guidance is provided which is considered a new
position, then the guidance would generally be applied prospectively. However,
if such guidance is considered not to be a new position, it may be applied
retroactively. This would mean that you, as the owner of the contract, could
be treated as the owner of the investment portfolios.
Due to the uncertainty in this area, First Cova reserves the right to modify
the contract in an attempt to maintain favorable tax treatment.
7. ACCESS TO YOUR MONEY
You can have access to the money in your contract: (1) by making a withdrawal
(either a partial or a complete withdrawal); (2) by electing to receive
annuity payments; or (3) when a death benefit is paid to your beneficiary.
Withdrawals can only be made during the accumulation phase.
When you make a complete withdrawal you will receive the value of the contract
on the day you made the withdrawal less any applicable withdrawal charge, less
any premium tax and less any contract maintenance charge. (See Section 5.
Expenses for a discussion of the charges.)
Unless you instruct First Cova otherwise, any partial withdrawal will be made
pro-rata from all the investment portfolios and the fixed account you
selected. Under most circumstances the amount of any partial withdrawal must
be for at least $500. First Cova requires that after a partial withdrawal is
made you keep at least $1,000 in your contract.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
WITHDRAWAL YOU MAKE.
SYSTEMATIC WITHDRAWAL PROGRAM
If you are 59-1/2 or older, you may use the Systematic Withdrawal Program.
This program provides an automatic monthly payment to you of up to 10% of your
total purchase payments each year. No withdrawal charge will be deducted for
these payments. First Cova does not have any charge for this program. If you
use this program, you may not also make a single 10% free withdrawal. For a
discussion of the withdrawal charge and the 10% free withdrawal, see Section
5. Expenses.
All Systematic Withdrawals will be paid on the 15th day of the month unless
that day is not a business day. If it is not, then the payment will be the
next business day.
INCOME TAXES MAY APPLY TO SYSTEMATIC WITHDRAWALS.
8. PERFORMANCE
First Cova periodically advertises performance of the various investment
portfolios. First Cova will calculate performance by determining the
percentage change in the value of an accumulation unit by dividing the
increase (decrease) for that unit by the value of the accumulation unit at the
beginning of the period. This performance number reflects the deduction of the
insurance charges. It does not reflect the deduction of any applicable
contract maintenance charge and withdrawal charge. The deduction of any
applicable contract maintenance charge and withdrawal charges would reduce the
percentage increase or make greater any percentage decrease. Any advertisement
will also include total return figures which reflect the deduction of the
insurance charges, contract maintenance charges, and withdrawal charges.
First Cova may, from time to time, include in its advertising and sales
materials, tax deferred compounding charts and other hypothetical
illustrations, which may include comparisons of currently taxable and tax
deferred investment programs, based on selected tax brackets.
Appendix A contains performance information that you may find informative. It
is divided into various parts, depending upon the type of performance
information shown. Future performance will vary and the results shown are not
necessarily representative of future results.
9. DEATH BENEFIT
UPON YOUR DEATH
If you die before annuity payments begin, First Cova will pay a death benefit
to your beneficiary (see below). If you have a joint owner, the death benefit
will be paid when the first of you dies. The surviving joint owner will be
treated as the beneficiary.
The amount of the death benefit depends on how old you or your joint owner is.
Prior to you, or your joint owner, reaching age 80, the death benefit will be
the greater of:
1. Total purchase payments, less withdrawals (and any withdrawal charges paid
on the withdrawals);
2. The value of your contract at the time the death benefit is to be paid; or
3. The value of your contract on the most recent seven year anniversary
before the date of death, plus any subsequent purchase payments, less any
withdrawals (and any withdrawal charges paid on the withdrawals.)
After you, or your joint owner, reaches age 80, the death benefit will be the
greater of:
1. Total purchase payments, less any withdrawals (and any withdrawal charges
paid on the withdrawals);
2. The value of your contract at the time the death benefit is to be paid; or
3. The value of your contract on the most recent seven year anniversary on or
before you or your joint owner reaches age 80, plus any subsequent purchase
payments, less any withdrawals (and any withdrawal charges paid on the
withdrawals).
The entire death benefit must be paid within 5 years of the date of death
unless the beneficiary elects to have the death benefit payable under an
annuity option. The death benefit payable under an annuity option must be paid
over the beneficiary's lifetime or for a period not extending beyond the
beneficiary's life expectancy. Payment must begin within one year of the date
of death. If the beneficiary is the spouse of the owner, he/she can continue
the contract in his/her own name at the then current value. If a lump sum
payment is elected and all the necessary requirements are met, the payment
will be made within 7 days.
DEATH OF ANNUITANT
If the annuitant, not an owner or joint owner, dies before annuity payments
begin, you can name a new annuitant. If no annuitant is named within 30 days
of the death of the annuitant, you will become the annuitant. However, if the
owner is a non-natural person (for example, a corporation), then the death or
change of annuitant will be treated as the death of the owner, and a new
annuitant may not be named.
Upon the death of the annuitant after annuity payments begin, the death
benefit, if any, will be as provided for in the annuity option selected.
10. OTHER INFORMATION
FIRST COVA
First Cova Life Insurance Company (First Cova) was organized under the laws of
the State of New York on December 31, 1992. First Cova is a wholly-owned
subsidiary of Cova Financial Services Life Insurance Company, a Missouri
insurance company. On June 1, 1995, a wholly-owned subsidiary of General
American Life Insurance Company purchased First Cova which on that date
changed its name to First Cova Life Insurance Company.
First Cova is licensed to do business only in the state of New York.
THE SEPARATE ACCOUNT
First Cova has established a separate account, First Cova Variable Annuity
Account One (Separate Account), to hold the assets that underlie the
contracts. The Board of Directors of First Cova adopted a resolution to
establish the Separate Account under New York insurance law on December 31,
1992. We have registered the Separate Account with the Securities and Exchange
Commission as a unit investment trust under the Investment Company Act of
1940.
The assets of the Separate Account are held in First Cova's name on behalf of
the Separate Account and legally belong to First Cova. However, those assets
that underlie the contracts, are not chargeable with liabilities arising out
of any other business First Cova may conduct. All the income, gains and losses
(realized or unrealized) resulting from these assets are credited to or
charged against the contracts and not against any other contracts First Cova
may issue.
DISTRIBUTOR
Cova Life Sales Company (Life Sales), One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644, acts as the distributor of the contracts. Life
Sales is an affiliate of First Cova.
Commissions will be paid to broker-dealers who sell the contracts.
Broker-dealers will be paid commissions of up to 3.5% of purchase payments. In
addition, under certain circumstances, an expense allowance of up to 2.75% of
purchase payments may be payable. The New York Insurance Department has ruled
that asset based compensation is permissible under certain circumstances.
First Cova may, in the future, adopt an asset based compensation program in
addition to, or in lieu of, the present compensation program. To the extent
that the withdrawal charge is insufficient to cover the actual cost of
distribution, First Cova may use any of its corporate assets, including any
profit from the mortality and expense risk premium, to make up any difference.
OWNERSHIP
OWNER. You, as the owner of the contract, have all the rights under the
contract. Prior to the annuity date, the owner is as designated at the time
the contract is issued, unless changed. On and after the annuity date, the
annuitant is the owner. The beneficiary becomes the owner when a death benefit
is payable.
JOINT OWNER. The contract can be owned by joint owners. Upon the death of
either joint owner, the surviving owner will be the designated beneficiary.
Any other beneficiary designation at the time the contract was issued or as
may have been later changed will be treated as a contingent beneficiary unless
otherwise indicated.
BENEFICIARY
The beneficiary is the person(s) or entity you name to receive any death
benefit. The beneficiary is named at the time the contract is issued unless
changed at a later date. Unless an irrevocable beneficiary has been named, you
can change the beneficiary at any time before you die.
ASSIGNMENT
You can assign the contract at any time during your lifetime. First Cova will
not be bound by the assignment until it receives the written notice of the
assignment. First Cova will not be liable for any payment or other action we
take in accordance with the contract before we receive notice of the
assignment. AN ASSIGNMENT MAY BE A TAXABLE EVENT.
If the contract is issued pursuant to a qualified plan, there may be
limitations on your ability to assign the contract.
SUSPENSION OF PAYMENTS OR TRANSFERS
First Cova may be required to suspend or postpone payments for withdrawal or
transfers for any period when:
1. the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of shares of the
investment portfolios is not reasonably practicable or First Cova cannot
reasonably value the shares of the investment portfolios;
4. during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
First Cova has reserved the right to defer payment for a withdrawal or
transfer from the fixed account for the period permitted by law but not for
more than six months.
FINANCIAL STATEMENTS
The financial statements of First Cova have been included in the Statement of
Additional Information. There are no financial statements for the Separate
Account included in the Statement of Additional Information because as of
December 31, 1996, the Separate Account had no assets.
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Company
Experts
Legal Opinions
Distribution
Performance Information
Tax Status
Annuity Provisions
Financial Statements
APPENDIX A
PERFORMANCE INFORMATION
Future performance will vary and the results shown are not necessarily
representative of future results.
PART 1 COVA SERIES TRUST, LORD ABBETT SERIES FUND, INC. AND GENERAL AMERICAN
CAPITAL COMPANY EXISTING PORTFOLIOS
J.P. Morgan Investment Management Inc. is the sub-adviser for the following
portfolios of Cova Series Trust: Select Equity, Small Cap Stock, International
Equity, Quality Bond and Large Cap Stock. Lord Abbett & Co. is the sub-adviser
for the Bond Debenture Portfolio of Cova Series Trust. Lord, Abbett & Co. is
the investment adviser for Lord Abbett Series Fund, Inc. which currently has
one operating portfolio: Growth and Income. Conning Asset Management Company
is the adviser for the Money Market Fund of General American Capital Company.
All of these portfolios began operations before May 1, 1997. As a result,
performance information is available for these portfolios as well as for the
accumulation unit values.
The performance figures shown for the portfolios in Column A in the chart
below reflect the actual fees and expenses paid by the portfolio. Column B
presents performance figures for the accumulation units which reflect the
insurance charges as well as the fees and expenses of the investment
portfolio. Column C presents performance figures for the accumulation units
which reflect the insurance charges, the contract maintenance charge, the fees
and expenses of the investment portfolio, and assume that you make a
withdrawal at the end of the period and therefore the withdrawal charge is
reflected. For the Cova Series Trust Portfolios, performance is shown from the
dates shares were first offered to the public as follows: May 1, 1996 for the
Select Equity, Small Cap Stock, International Equity, Quality Bond, Large Cap
Stock and Bond Debenture Portfolios. For the Lord Abbett Series Fund, Inc.
Growth and Income Portfolio, operations commenced on December 11, 1989. For
the Money Market Fund of General American Capital Company, performance is
shown from June 3, 1996, the date on which shares were first made available
under the Contract.
The inception date for the accumulation units investing in the investment
portfolios was February 18, 1997. Accumulation unit performance prior to this
date, as shown in Columns B and C below, is therefore hypothetical.
<TABLE>
<CAPTION>
PART 1 COVA SERIES TRUST
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/96
Column A Column B Column C
Portfolio Performance Accumulation Unit Performance
----------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
since SINCE since
Portfolio 1 yr 5 yrs inception 1 YR 5 YRS INCEPTION 1 yr 5 yrs inception
- -------------------- ---- ----- --------- ---- ----- --------- ---- ----- ---------
Select Equity - - - - 8.52% - - - - 7.48% - - - - .86%
Small Cap Stock - - - - 8.65% - - - - 7.57% - - - - .94%
International Equity - - - - 8.44% - - - - 7.36% - - - - .74%
Quality Bond - - - - 5.68% - - - - 4.76% - - - - (1.85)%
Large Cap Stock - - - - 14.35% - - - - 13.32% - - - - 6.68%
Bond Debenture - - - - 12.89% - - - - 11.86% - - - - 5.22%
</TABLE>
<TABLE>
<CAPTION>
PART 1 LORD ABBETT SERIES FUND, INC.
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/96
Column A Column B Column C
Portfolio Performance Accumulation Unit Performance
----------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
since SINCE since
Portfolio 1 yr 5 yrs inception 1 YR 5 YRS INCEPTION 1 yr 5 yrs inception
- ----------------- ---- ----- --------- ---- ----- --------- ---- ----- ---------
Growth and Income 19.49% 16.16% 15.50% 17.76% 14.54% 13.92% 10.86% 13.50% 13.29%
</TABLE>
<TABLE>
<CAPTION>
PART 1 GENERAL AMERICAN CAPITAL COMPANY
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED 12/31/96
Column A Column B Column C
Portfolio Performance Accumulation Unit Performance
----------------------- --------------------------------
<S> <C> <C> <C>
since SINCE since
Portfolio inception INCEPTION inception
- ------------ --------- --------- ---------
Money Market 3.17% 2.34% -4.27%
</TABLE>
PART 2
GENERAL AMERICAN CAPITAL
COMPANY PERFORMANCE
Shares of the General American Capital Company Money Market Fund were first
offered under the Contract on June 3, 1996. However, the General American
Capital Company Money Market Fund has been in existence for sometime and
therefore has an investment performance history. In order to show how
investment performance of the General American Capital Company Money Market
Fund affects accumulation unit values, we have developed performance
information.
The chart below shows the investment performance of the General American
Capital Company Money Market Fund and the accumulation unit performance
calculated by assuming that accumulation units were invested in the General
American Capital Company Money Market Fund for the same periods.
The performance figures in Column A for the General American Capital Company
Money Market Fund reflect the fees and expenses paid by the portfolio. Column
B presents performance figures for the accumulation units which reflect the
insurance charges as well as the fees and expenses of the General American
Capital Company Money Market Fund. Column C presents performance figures for
the accumulation units which reflect the insurance charges, the contract
maintenance charge, the fees and expenses of the General American Capital
Company Money Market Fund, and assumes that you make a withdrawal at the end
of the period and therefore the withdrawal charge is reflected.
<TABLE>
<CAPTION>
PART 2 GENERAL AMERICAN CAPITAL COMPANY MONEY MARKET FUND
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/96
Column A Column B Column C
Fund Performance Accumulation Unit Performance
----------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio 1 yr 5 yrs 10 yrs 1 YR 5 YRS 10 YRS 1 yr 5 yrs 10 yrs
- ----------------- ---- ----- ------ ---- ----- ------ ---- ----- ------
Money Market Fund 5.51% 4.49% 6.01% 4.11% 3.09% 4.61% (2.99)% (1.51)% 4.51%
</TABLE>
- ---------------------------
- --------------------------- STAMP
- ---------------------------
First Cova Life
Insurance Company
Attn: Variable Products
120 Broadway, 10th Floor
New York, New York 10271
Please send me, at no charge, the Statement of Additional Information
dated May 1, 1997 for The Annuity Contract issued by First Cova.
(Please print or type and fill in all information)
---------------------------------------------------------------------------
Name
---------------------------------------------------------------------------
Address
---------------------------------------------------------------------------
City State Zip Code
CNY-1090(5/97) FIRST COVA VA
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT
ISSUED BY
FIRST COVA VARIABLE ANNUITY ACCOUNT ONE
AND
FIRST COVA LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 1997, FOR THE
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT WHICH IS DESCRIBED
HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT: One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois
60181-4644, (800) 831-LIFE.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 1997.
TABLE OF CONTENTS
Page
COMPANY
EXPERTS
LEGAL OPINIONS
DISTRIBUTION
PERFORMANCE INFORMATION
Total Return
Historical Unit Values
Reporting Agencies
Performance Information
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
ANNUITY PROVISIONS
Variable Annuity
Fixed Annuity
Annuity Unit
Net Investment Factor
Mortality and Expense Guarantee
FINANCIAL STATEMENTS
COMPANY
First Cova Life Insurance Company (the "Company") was organized under the laws
of the state of New York on December 31, 1992. The Company is presently
licensed to do business only in the state of New York. The Company is a
wholly-owned subsidiary of Cova Financial Services Life Insurance Company
("Cova Life"), a Missouri insurance company. On December 31, 1992, Cova Life
acquired Wausau Underwriters Life Insurance Company ("Wausau"), a stock life
insurance company organized under the laws of the state of Wisconsin. On April
16, 1993, Wausau was merged into the Company, with the Company as the
surviving corporation.
On June 1, 1995, a wholly-owned subsidiary of General American Life Insurance
Company ("General American") purchased Cova Life from Xerox Financial
Services, Inc. The acquisition of Cova Life included related companies,
including the Company. On June 1, 1995, the Company changed its name to
First Cova Life Insurance Company.
General American is a St. Louis-based mutual company with more than $250
billion of life insurance in force and approximately $19 billion in assets.
It provides life and health insurance, retirement plans, and related financial
services to individuals and groups.
EXPERTS
The statutory financial statements of the Company as of December 31, 1996 and
1995, and for each of the years in the three year period ended December 31,
1996 included in this Prospectus and the Statement of Additional
Information, have been included herein in reliance upon the reports of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements of the
Company contains an explanatory paragraph which states that the financial
statements are presented in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of New York which
differ from generally accepted accounting principles. The effects of the
differences are disclosed in the statutory financial statements.
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.
PERFORMANCE INFORMATION
TOTAL RETURN
From time to time, the Company may advertise performance data. Such data will
show the percentage change in the value of an Accumulation Unit based on the
performance of an investment portfolio over a period of time, usually a
calendar year, determined by dividing the increase (decrease) in value for
that unit by the Accumulation Unit value at the beginning of the period.
Any such advertisement will include total return figures for the time periods
indicated in the advertisement. Such total return figures will reflect the
deduction of a 1.25% Mortality and Expense Risk Premium, a .15% Administrative
Expense Charge, the expenses for the underlying investment portfolio being
advertised and any applicable Contract Maintenance Charges and Withdrawal
Charges.
The hypothetical value of a Contract purchased for the time periods described
in the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Contract Maintenance Charges and any applicable Withdrawal Charges to arrive at
the ending hypothetical value. The average annual total return is then
determined by computing the fixed interest rate that a $1,000 purchase payment
would have to earn annually, compounded annually, to grow to the hypothetical
value at the end of the time periods described. The formula used in these
calculations is:
n
P ( 1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment made
at the beginning of the time periods used.
The Company may also advertise performance data which will be calculated in
the same manner as described above but which will not reflect the deduction of
any Withdrawal Charge. The deduction of any Withdrawal Charge would reduce any
percentage increase or make greater any percentage decrease.
Owners should note that the investment results of each investment portfolio
will fluctuate over time, and any presentation of the investment portfolio's
total return for any period should not be considered as a representation of
what an investment may earn or what an Owner's total return may be in any
future period.
HISTORICAL UNIT VALUES
The Company may also show historical Accumulation Unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual Accumulation Unit values.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the investment
portfolios against established market indices such as the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average or other
management investment companies which have investment objectives similar to
the investment portfolio being compared. The Standard & Poor's 500
Composite Stock Price Index is an unmanaged, unweighted average of 500 stocks,
the majority of which are listed on the New York Stock Exchange. The Dow
Jones Industrial Average is an unmanaged, weighted average of thirty blue chip
industrial corporations listed on the New York Stock Exchange. Both the
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones
Industrial Average assume quarterly reinvestment of dividends.
REPORTING AGENCIES
The Company may also distribute sales literature which compares the
performance of the Accumulation Unit values of the Contracts with the unit
values of variable annuities issued by other insurance companies. Such
information will be derived from the Lipper Variable Insurance Products
Performance Analysis Service, the VARDS Report or from Morningstar.
The Lipper Variable Insurance Products Performance Analysis Service is
published by Lipper Analytical Services, Inc., a publisher of statistical data
which currently tracks the performance of almost 4,000 investment
companies.The rankings compiled by Lipper may or may not reflect the deduction
of asset-based insurance charges. The Company's sales literature utilizing
these rankings will indicate whether or not such charges have been deducted.
Where the charges have not been deducted, the sales literature will indicate
that if the charges had been deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect
the deduction of asset-based insurance charges. In addition, VARDS prepares
risk adjusted rankings, which consider the effects of market risk on total
return performance. This type of ranking may address the question as to which
funds provide the highest total return with the least amount of risk. Other
ranking services may be used as sources of performance comparison, such as
CDA/Weisenberger.
Morningstar rates a variable annuity against its peers with similar investment
objectives. Morningstar does not rate any variable annuity that has less than
three years of performance data.
PERFORMANCE INFORMATION - GENERAL AMERICAN CAPITAL COMPANY MONEY MARKET FUND
AND LORD ABBETT SERIES FUND, INC. GROWTH AND INCOME PORTFOLIO
Even though the Money Market Fund of General American Capital Company and the
Growth and Income Portfolio of Lord Abbett Series Fund, Inc. were not available
under the Contract until June 3, 1996 and February 18, 1997, respectively,
each of these funds has been in existence for some time and consequently
has an investment performance history. In order to demonstrate how investment
experience of the Money Market Fund and the Growth and Income Portfolio
affects Accumulation Unit values, performance information was developed. The
information is based upon the historical experience of the Money Market
Fund and the Growth and Income Portfolio and is for the periods shown. The
prospectus contains a chart of performance information.
Future performance of the Money Market Fund and the Growth and Income
Portfolio will vary and the hypothetical results shown are not necessarily
representative of future results. Performance for periods ending after those
shown may vary substantially from the examples shown. The performance
of the Money Market Fund and the Growth and Income 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.
TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS.
MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER
TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is
not taxed on increases in the value of a Contract until distribution occurs,
either in the form of a lump sum payment or as annuity payments under the
Annuity Option selected. For a lump sum payment received as a total withdrawal
(total surrender), the recipient is taxed on the portion of the payment that
exceeds the cost basis of the Contract. For Non-Qualified Contracts, this cost
basis is generally the purchase payments, while for Qualified Contracts there
may be no cost basis. The taxable portion of the lump sum payment is taxed at
ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments
based on a fixed annuity option is determined by multiplying the payment by
the ratio that the cost basis of the Contract (adjusted for any period or
refund feature) bears to the expected return under the Contract. The exclusion
amount for payments based on a variable annuity option is determined by
dividing the cost basis of the Contract (adjusted for any period certain or
refund guarantee) by the number of years over which the annuity is expected to
be paid. Payments received after the investment in the Contract has been
recovered (i.e. when the total of the excludable amount equals the
investment in the Contract) are fully taxable. The taxable portion is taxed at
ordinary income tax rates. For certain types of Qualified Plans there may be
no cost basis in the Contract within the meaning of Section 72 of the Code.
Owners, Annuitants and Beneficiaries under the Contracts should seek competent
financial advice about the tax consequences of any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification
of the Contract as an annuity contract would result in the imposition of
federal income tax to the Owner with respect to earnings allocable to the
Contract prior to the receipt of payments under the Contract. The Code
contains a safe harbor provision which provides that annuity contracts such as
the Contract meet the diversification requirements if, as of the end of each
quarter, the underlying assets meet the diversification standards for a
regulated investment company and no more than fifty-five percent (55%) of the
total assets consist of cash, cash items, U.S. Government securities and
securities of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the Contract. The
Regulations amplify the diversification requirements for variable contracts
set forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (1) no more than 55% of the value of the total
assets of the portfolio is represented by any one investment; (2) no more than
70% of the value of the total assets of the portfolio is represented by any
two investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment portfolios underlying the Contracts
will be managed in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be
contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available,
would cause the Owner to be considered as the owner of the assets of the
Separate Account resulting in the imposition of federal income tax to the
Owner with respect to earnings allocable to the Contract prior to receipt of
payments under the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a
new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owners
being retroactively determined to be the owners of the assets of the Separate
Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from
such combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts
generally will not be treated as annuities for federal income tax purposes.
However, this treatment is not applied to a Contract held by a trust or other
entity as an agent for a natural person nor to Contracts held by Qualified
Plans. Purchasers should consult their own tax counsel or other tax adviser
before purchasing a Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Owner are subject to federal income tax withholding. Generally,
amounts are withheld from periodic payments at the same rate as wages and at
the rate of 10% from non-periodic payments. However, the Owner, in most cases,
may elect not to have taxes withheld or to have withholding done at a
different rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a
mandatory 20% withholding for federal income tax. The 20% withholding
requirement generally does not apply to: a) a series of substantially equal
payments made at least annually for the life or life expectancy of the
participant or joint and last survivor expectancy of the participant and a
designated beneficiary, or for a specified period of 10 years or more; b)
distributions which are required minimum distributions; or c) the portion of
the distributions not includible in gross income (i.e. returns of after-tax
contributions). Participants should consult their own tax counsel or other
tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate
purchase payments made, any amount withdrawn will be treated as coming first
from the earnings and then, only after the income portion is exhausted, as
coming from the principal. Withdrawn earnings are includible in gross income.
It further provides that a ten percent (10%) penalty will apply to the income
portion of any premature distribution. However, the penalty is not imposed on
amounts received: (a) after the taxpayer reaches age 59 1/2; (b) after the
death of the Owner; (c) if the taxpayer is totally disabled (for this purpose
disability is as defined in Section 72(m)(7) of the Code); (d) in a series of
substantially equal periodic payments made not less frequently than annually
for the life (or life expectancy) of the taxpayer or for the joint lives (or
joint life expectancies) of the taxpayer and his or her Beneficiary; (e) under
an immediate annuity; or (f) which are allocable to purchase payments made
prior to August 14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS
The Contracts offered herein may also be used as Qualified Contracts. Owners,
Annuitants and Beneficiaries are cautioned that benefits under a Qualified
Contract 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. The
following discussion of Qualified Contracts is not exhaustive and is for
general informational purposes only. The tax rules regarding Qualified
Contracts are very complex and will have differing applications depending on
individual facts and circumstances. Each purchaser should obtain competent tax
advice prior to purchasing Qualified Contracts.
Qualified Contracts include special provisions restricting Contract provisions
that may otherwise be available as described herein. Generally, Qualified
Contracts are not transferable except upon surrender or annuitization.
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. Qualified Contracts 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.
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity (IRA).
THE CONTRACTS ARE NOT AVAILABLE AS QUALIFIED CONTRACTS UNTIL AN IRA
ENDORSEMENT IS APPROVED BY THE STATE OF NEW YORK INSURANCE DEPARTMENT. 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.
TAX TREATMENT OF WITHDRAWALS - QUALIFIED CONTRACTS
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 Section 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
Annuitant reaches age 59 1/2; (b) distributions following the death or
disability of the Annuitant (for this purpose disability is as defined in
Section 72(m)(7) of the Code); (c) distributions that are part of
substantially equal periodic payments made not less frequently than annually
for the life (or life expectancy) of the Annuitant or the joint lives (or
joint life expectancies) of the Annuitant and his or her designated
Beneficiary; (d) 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; or (e) 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.
Generally, distributions from a qualified plan must commence no later than
April 1 of the calendar year following the year in which the employee attains
age 70 1/2. Required distributions must be over a period not exceeding the
life expectancy of the individual or the joint lives or life expectancies of
the individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
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.
FIRST COVA LIFE INSURANCE
COMPANY
Statutory Financial Statements
December 31, 1996, 1995 and 1994
(With Independent Auditors Report Thereon)
<PAGE>
INDEPENDENT AUDITORS REPORT
The Board of Directors and Shareholder
First Cova Life Insurance Company:
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of First Cova Life Insurance
Company as of December 31, 1996 and 1995, and related statutory statements of
operations, capital stock and surplus, and cash flow for each of the years in
the three year period ended December 31, 1996. These statutory financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these statutory 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 of
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.
As described more fully in note 2 to the accompanying financial statements,
the Company prepared these financial statements using accounting practices
prescribed or permitted by the State of New York Department of Insurance,
which practices differ from generally accepted accounting principles. The
effects on the financial statements of the variances between the statutory
basis of accounting and generally accepted accounting principles are also
described in note 2.
In our opinion, because of the effects of the matter discussed in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of First Cova Life Insurance Company as of December 31,
1996 and 1995, or the results of its operations, or its cash flow for the
years in the three year period ended December 31, 1996.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and
capital and surplus of First Cova Life Insurance Company as of December 31,
1996 and 1995, and the results of its operations and its cash flow for the
years in the three year period ended December 31, 1996, on the basis of
accounting described in note 2.
St. Louis, Missouri
March 7, 1997
FIRST COVA LIFE INSURANCE COMPANY
Statutory Statements of Admitted Assets, Liabilities,
and Capital Stock and Surplus
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ADMITTED ASSETS 1996 1995
- --------------------------------------------
<S> <C> <C>
Bonds $155,709,584 $ 154,785,930
Mortgage loans on real estate 8,747,207 10,059,682
Policy loans 18,892,768 16,922,627
Cash and short-term investments 3,989,023 3,140,606
Total cash and investments 187,338,582 184,908,845
Investment income due and accrued 2,582,265 2,584,922
Other assets 1,053 2,696
Total admitted assets $189,921,900 $ 187,496,463
LIABILITIES AND CAPITAL STOCK AND SURPLUS
- --------------------------------------------
Aggregate reserve for life policies and
annuity contracts 158,304,214 159,232,113
Supplementary contracts without life
contingencies 90,934 25,347
Life policy and annuity contract claims 271,935 296,837
Interest maintenance reserve 1,461,027 1,407,616
General expenses due or accrued 62,590 47,586
Taxes, licenses, and fees due or accrued
excluding federal income taxes 211,347 233,343
Federal income taxes 333,215 45,000
Remittances and items not allocated 4,523 62
Asset valuation reserve 1,469,780 1,185,008
Payable to parent, subsidiaries, and
affiliates 29,665 58,912
Reinsurance payable 2,457,436 3,161,595
Checks outstanding 72,460 274,310
Accounts payable-security purchases 2,009,896 --
Total liabilities 166,779,022 165,967,729
------------ --------------
Common capital stock, $10 par value.
Authorized, issued and outstanding 200,000
shares 2,000,000 2,000,000
Gross paid-in and contributed surplus 11,501,272 11,501,272
Unassigned surplus 9,641,606 8,027,462
Total capital stock and surplus 23,142,878 21,528,734
------------ --------------
Total liabilities and capital stock
and surplus $189,921,900 $ 187,496,463
------------ --------------
</TABLE>
See accompanying notes to statutory financial statements
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Statutory Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995
------------
<S> <C> <C>
Income:
Premiums, annuity considerations and
deposit-type funds $ 568,601 $ 126,602
Considerations for supplementary contracts
without life contingencies 81,024 32,526
Net investment income 13,507,494 12,526,475
Amortization of interest maintenance
reserve (206,397) (210,681)
------------
Total Income 13,950,722 12,474,922
------------
Benefits and Expenses:
Death benefits 2,691,451 2,101,255
Annuity benefits -- 359,487
Surrender benefits and other fund
withdrawals 8,718,785 9,184,900
Interest on policy or contract funds 10,485 9,097
Payment on supplementary contracts without
life contingencies 12,532 5,838
Increase/(decrease) in aggregate reserves
for life policies and annuity contracts (927,900) 1,910,580
Increase in reserve for supplementary
contracts without life contingencies 65,587 25,347
Commissions on premiums and annuity
considerations 19,901 2,460
Commissions and expense allowances on
reinsurance assumed 399,898 439,112
General insurance expenses 662,810 664,633
Insurance, taxes, licenses, and fees,
excluding federal income taxes 24,749 810,899
Other expenses 887 --
------------ ------------
Total Benefits and Expenses 11,679,185 15,513,608
------------
Income (loss) from operations before federal income taxes and realized capital gains
2,271,537 (3,038,686)
Federal income tax expense/(benefit),
excluding tax on capital gains 444,406 (1,006,592)
------------
Net gain (loss) from operations before
realized capital gains 1,827,131 (2,032,094)
------------ ------------
Realized capital gains (losses) (net of tax
benefit of $110,783 in 1996, tax
benefit of $3,509,040 in 1995, and tax
expense of $122,826 in 1994, and net
of amounts transferred to the IMR of
(152,986), $(4,647,397), and $162,816
in 1996, 1995 and 1994, respectively) -- --
------------ ------------
Net income (loss) $ 1,827,131 $(2,032,094)
------------ ------------
1994
---------------
<S> <C>
Income:
Premiums, annuity considerations and
deposit-type funds $ 19,259,281
Considerations for supplementary contracts
without life contingencies --
Net investment income 14,267,469
Amortization of interest maintenance
reserve 278,726
---------------
Total Income 33,805,476
---------------
Benefits and Expenses:
Death benefits 1,571,941
Annuity benefits 46,038
Surrender benefits and other fund
withdrawals 4,448,864
Interest on policy or contract funds 6,143
Payment on supplementary contracts without
life contingencies --
Increase/(decrease) in aggregate reserves
for life policies and annuity contracts 24,000,789
Increase in reserve for supplementary
contracts without life contingencies --
Commissions on premiums and annuity
considerations 658,827
Commissions and expense allowances on
reinsurance assumed 555,205
General insurance expenses 1,057,081
Insurance, taxes, licenses, and fees,
excluding federal income taxes 473,845
Other expenses --
---------------
Total Benefits and Expenses 32,818,733
---------------
Income (loss) from operations before federal income taxes and realized capital gains
986,743
Federal income tax expense/(benefit),
excluding tax on capital gains (1,045,049)
---------------
Net gain (loss) from operations before
realized capital gains 2,031,792
---------------
Realized capital gains (losses) (net of tax
benefit of $110,783 in 1996, tax
benefit of $3,509,040 in 1995, and tax
expense of $122,826 in 1994, and net
of amounts transferred to the IMR of
(152,986), $(4,647,397), and $162,816
in 1996, 1995 and 1994, respectively) --
---------------
Net income (loss) $2,031,792
---------------
</TABLE>
See accompanying notes to statutory financial statements.
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Statutory Statements of Capital Stock and Surplus
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------
<S> <C> <C> <C>
Capital stock - balance at beginning
and end of year $ 2,000,000 $ 2,000,000 $ 2,000,000
------------ ------------ ------------
Gross paid-in and contributed surplus:
Balance at beginning of year 11,501,272 10,501,272 10,501,272
Capital contribution -- 1,000,000 --
------------
Balance at end of year 11,501,272 11,501,272 10,501,272
------------ ------------ ------------
Unassigned surplus:
Balance at beginning of year 8,027,462 10,210,632 8,498,465
Net income (loss) 1,827,131 (2,032,094) 2,031,792
Change in non-admitted assets -- 203,596 98,589
Change in asset valuation reserve (284,772) (354,672) (418,214)
Prior period FIT adjustment 71,785 -- --
------------
Balance at end of year 9,641,606 8,027,462 10,210,632
------------ ------------
Total capital stock and surplus $23,142,878 $21,528,734 $22,711,904
------------ ------------
</TABLE>
See accompanying notes to statutory financial statements.
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Statutory Statements of Cash Flow
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
Cash from operations:
Premium and annuity considerations
and deposit-type funds $ 568,601 $ 126,602 $ 19,259,281
Other premiums, considerations, and
deposits 81,024 32,526 --
Investment income received, excluding
realized gains/losses and net of
investment expenses 13,499,412 13,036,731 14,540,436
Miscellaneous income 71,785 -- --
------------- -------------
Total 14,220,822 13,195,859 33,799,717
------------- -------------
Life and accident and health claims paid 2,716,353 1,955,156 1,541,350
Surrender benefits and other fund
withdrawals paid 8,718,785 9,184,900 4,448,864
Other benefits to policyholders,
primarily annuity benefits 23,017 380,819 45,783
Commissions, other expenses, and taxes
paid, excluding Federal income tax 1,088,862 1,169,881 2,637,951
Federal income taxes paid/(recovered),
excluding tax on capital gains 156,191 (1,413,286) (472,742)
Total 12,703,208 11,277,470 8,201,206
------------ ------------- -------------
Net cash from operations 1,517,614 1,918,389 25,598,511
------------- -------------
Cash from investments:
Proceeds from bond sales 40,506,099 156,912,941 54,622,631
Proceeds from mortgage loans 1,316,212 111,873 --
Net losses on cash and short-term
investments (138) (19,990) --
Taxes recovered (paid) on capital
losses (gains) 84,406 2,526,724 (208,136)
Total 41,906,579 159,531,548 54,414,495
------------- -------------
Cost of bonds acquired 41,686,380 156,014,905 77,674,404
Cost of mortgage loans acquired -- 10,170,620 --
Net increase in policy loans 1,970,141 1,276,701 2,081,756
Total 43,656,521 167,462,226 79,756,160
Net cash from investments (1,749,942) (7,930,678) (25,341,665)
Cash from financing and miscellaneous sources:
Capital and surplus paid-in -- 1,000,000 --
Other cash provided 2,016,000 1,378,538 1,144,173
Other cash applied (935,255) (12,716) (2,002,738)
Net cash from financing and miscellaneous sources
1,080,745 2,365,822 (858,565)
Net change in cash and short-term
investments 848,417 (3,646,467) (601,719)
------------ ------------- -------------
Cash and short-term investments at
beginning of year 3,140,606 6,787,073 7,388,792
Cash and short-term investments at
end of year $ 3,989,023 $ 3,140,606 $ 6,787,073
------------- -------------
</TABLE>
See accompanying notes to statutory financial statements
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
(1) COMPANY OWNERSHIP AND NATURE OF BUSINESS
COMPANY OWNERSHIP
The Company is a wholly owned subsidiary of Cova Financial Services Life
Insurance Company (CFSLIC). On June 1, 1995, a subsidiary of General American
Life Insurance Company (GALIC), a Missouri domiciled life insurance company,
purchased the Companys parent and its affiliates from their previous owner,
Xerox Financial Services Incorporated (XFSI), a wholly owned subsidiary of
Xerox Corporation, for approximately $106.1 million in cash and additional
future contingent consideration. Following the acquisition, the Companys name
changed from First Xerox Life Insurance Company to First Cova Life Insurance
Company.
NATURE OF BUSINESS
The Company is licensed to do business in the state of New York. The Company
markets and services single premium deferred annuities. 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 five 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 may
also 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 91% and 92% of the Companys sales were through one specific
brokerage firm, Advest in 1996 and 1995 respectively. Approximately 94% of
the Companys sales were through one specific brokerage firm, Dime Agency, in
1994.
(2) BASIS OF PRESENTATION
The accompanying statutory financial statements have been prepared in
conformity with accounting practices prescribed or permitted by the Insurance
Department of the State of New York, which is a comprehensive basis of
accounting other than generally accepted accounting principles. Prescribed
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (the Association). Permitted statutory
accounting practices encompass all accounting practices that are not
prescribed; such practices differ from state to state, may differ from company
to company within a state, and may change in the future. All material
transactions recorded by the Company during 1996, 1995 and 1994 are in
conformity with prescribed practices.
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>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
The major differences arise principally from the immediate expense recognition
of policy acquisition costs and intangible assets for statutory reporting,
determination of policy reserves based on different discount rates and
methods, the non-recognition of financial reinsurance for GAAP reporting, the
establishment of an Asset Valuation Reserve as a contingent liability based on
the credit quality of the Company's investment securities on a statutory
basis, and the establishment of an Interest Maintenance Reserve on a statutory
basis 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, adjustments to record the carrying values of debt securities and
certain equity securities at market are applied only under GAAP reporting.
Another difference arises from Federal income taxes being charged to
operations based on income that is currently taxable. Deferred income taxes
are not provided for on a statutory basis for the tax effect of temporary
differences between book and tax basis of assets and liabilities.
Purchase accounting creates another difference as it requires the restatement
of GAAP assets and liabilities to their estimated fair values and shareholders
equity to the net purchase price. Statutory accounting does not recognize the
purchase method of accounting.
The following schedules set forth the adjustments to statutory net income and
capital stock and surplus necessary to present them in accordance with
generally accepted accounting principles (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> 1996 1995 1994
Net Income-
- -------------------------------------------------
As reported under statutory accounting practices $1,827 $(2,032) $ 2,032
Deferred acquisition costs 48 186 1,238
Change in reserve for policies and contracts 409 3,757 1,582
Interest maintenance reserve 53 (4,437) (116)
Deferred income taxes (642) (925) (1,387)
Amortization of intangible assets and liabilities (189) (526) 64
Other, net 163 252 3
As reported under generally accepted
accounting principles $1,669 $(3,725) $ 3,416
======= ======== ========
</TABLE>
The Companys net income for 1995 reported under GAAP of $(3,725) includes the
periods from January 1, 1995 to May 31, 1995 (the pre-sale period) and June 1,
1995 to December 31, 1995 (the post-sale period). These periods are
considered to be separate and distinct accounting periods under GAAP as the
Company was sold on June 1, 1995 (see note 1) causing the Companys GAAP
balance sheet and income statement to be restated according to purchase
accounting.
(Continued)
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> 1996 1995 1994
Capital stock and surplus
As reported under statutory accounting practices $23,143 $21,529 $ 22,712
Deferred acquisition costs 48 -- 1,564
Reserves for policies and contracts 4,829 4,423 665
Asset valuation reserve 1,470 1,185 830
Interest maintenance reserve 1,461 1,408 5,844
Unrealized appreciation/(depreciation) of investments (1,470) 3,328 (13,642)
Deferred income taxes 325 (610) 4,084
Present value of future profits 5,572 5,249 --
Goodwill 2,254 2,377 405
Other, net (5) -- 204
-------- ---------
As reported under generally accepted
accounting principles $37,627 $38,889 $ 22,666
======== ======== =========
</TABLE>
In preparing the statutory 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. Investment valuation
is most affected by the use of estimates and assumptions.
The market value of the Companys 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
flow of assets and liabilities to change, the Company might have to liquidate
assets prior to their maturity and recognize a gain or a 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 Companys policies and contracts.
Changes in the estimated prepayments of mortgage-backed securities also may
cause retrospective changes in the amortization period of such securities and
the related recognition of income.
(3) BASIS OF VALUATION AND INCOME RECOGNITION OF INVESTED ASSETS
Asset values are generally stated as follows:
Investments are valued as prescribed by the NAIC.
Bonds not backed by other loans are valued at amortized cost using the
interest method.
Mortgage-backed bonds, included in bonds, are valued at amortized cost.
Amortization of the discount or premium from the purchase of these securities
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 originally anticipated and the
actual prepayments received and currently anticipated. When such differences
occur, 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).
(Continued)
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
Mortgage loans and policy loans are stated at the aggregate unpaid principal
value. Short-term investments are carried at cost which approximates market
value.
Investment income is recorded when earned. Realized capital gains and losses
on the sales of investments are determined on the basis of specific costs of
investments and are credited or charged to income net of federal income taxes.
(4) REVENUE AND EXPENSE RECOGNITION
Premiums, annuity considerations and deposit-type funds are credited to
revenue when collected. Expenses, including acquisition costs related to
acquiring new business, are charged to operations as incurred.
(5) ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
Life insurance companies are required to establish an Asset Valuation Reserve
(AVR) and an Interest Maintenance Reserve (IMR). The AVR provides for a
standardized statutory investment valuation reserve for bonds, preferred
stocks, short-term investments, mortgage loans, common stocks, real estate,
and other invested assets. The IMR is designed to defer net realized capital
gains and losses presumably resulting from changes in the level of interest
rates in the market and to amortize them into income over the remaining life
of the bond or mortgage loan sold. The IMR represents the unamortized portion
not yet taken into income.
(6) FEDERAL INCOME TAXES
Federal income taxes are charged to operations based on income that is
currently taxable. No charge to operations is made nor liability established
for the tax effect of timing differences between financial reporting and
taxable income.
For 1996, the Company will file a consolidated federal income tax return with
its parent company, CFSLIC.
The method of allocation between the companies is both subject to written
agreement and approval by the Board of Directors. Allocation is to be based
upon separate return calculations, adjusted for any tax deferred intercompany
transactions, with current credit for net losses to the extent recoverable in
the consolidated return. Intercompany tax balances are to be settled not
later than thirty days after related returns are filed.
Amounts payable or recoverable related to periods before June 1, 1995 are
subject to an indemnification agreement with Xerox Corporation which has the
effect that the Company is not at risk for any income taxes nor entitled to
recoveries related to those periods.
(Continued)
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
The actual federal income tax expense differed from the expected tax expense
computed by applying the U.S. federal statutory rate to the 1996, 1995 and
1994 net gain from operations before federal income taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $ 795 35.0% $(1,064) 35.0% $ 345 35.0%
Tax basis reserve adjustment (30) (1.3) 847 (27.9) 80 8.1
IMR amortization 72 3.2 74 (2.4) (98) (9.9)
Proxy tax on insurance acquisition costs 4 0.2 (455) 15.0 1 .1
Adjustment for prior years -- -- - - (444) (45.0)
Intangible Amortization (376) (16.6) (126) 4.1 - -
Tax-exempt, income, net -- -- - - (963) (97.7)
Other (21) (0.9) (283) 9.3 34 3.5
$ 444 19.6% $(1,007) 33.1% $(1,045) (105.9)%
====== ====== ======== ====== ======== ========
</TABLE>
The Budget Reconciliation Act of 1990 requires life insurers to capitalize and
amortize a "proxy" amount of policy acquisition costs beginning in 1990.
This proxy amount is based on a percentage of the life insurance company's
premium income and not on actual policy acquisition costs.
(7) INFORMATION CONCERNING PARENT AND AFFILIATES
The Company was organized under the laws of the State of New York on December
31, 1992 and became licensed to do business in the State of New York on March
12, 1993. The Company is a wholly owned subsidiary of CFSLIC (formerly Xerox
Financial Services Life Insurance Company), a Missouri domiciled life
insurance company. On December 31, 1992 Xerox Financial Services Life
Insurance Company acquired Wausau Underwriters Life Insurance Company (Wausau
Life), a stock life insurance company organized under the laws of the state of
Wisconsin and licensed to transact life insurance in Wisconsin and New York.
On April 16, 1993 Wausau Life was merged into the Company, with the Company as
the surviving corporation.
The Company has entered into a service agreement and an investment accounting
service agreement with its parent, CFSLIC. The Company has also entered into
an investment services agreement with Conning Asset Management Company, a
Missouri corporation and an affiliate of the Company, pursuant to which the
Company receives investment advice. Under the terms of the agreements, the
companies (Service Providers) perform various services for the Company which
include investment, underwriting, claims, and certain administrative
functions. The Service Providers are reimbursed for their services. Expenses
and fees paid to affiliated companies during 1996, 1995 and 1994 were
$337,994, $349,771 and $348,262, respectively.
(8) CAPITAL STOCK AND SURPLUS RESTRICTIONS
The amount of dividends which can be paid by State of New York insurance
companies to shareholders is subject to prior approval of the Insurance
Commissioner. There have been no other restrictions placed on the unassigned
surplus funds.
(Continued)
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS 107), extends 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 or market conditions 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, could not be realized in the immediate settlement of the
instruments. SFAS 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND ACCRUED
INVESTMENT INCOME:
The carrying value amounts reported in the balance sheets for these
instruments approximate their fair values.
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES):
Fair value for bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values 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 11
for fair value disclosures). Fair values for mortgages are based on
management estimates and incorporate independent appraisals of underlying
property. As of December 31, 1996 and 1995, fair value of the Company's
mortgage loans are equivalent to the carrying value.
INVESTMENT CONTRACTS:
The Companys policy contracts require the beneficiaries 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 Companys liabilities under investment type contracts are
estimated as the amount payable on demand. As of December 31, 1996 the cash
surrender value of policyholder funds on deposit was $154,674,632 and the
carrying value was $158,304,214. As of December 31, 1995 the cash surrender
value of policyholder funds on deposit was $155,449,472 and the carrying value
was $159,232,113.
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
(10) LIFE AND ANNUITY ACTUARIAL RESERVES
There are no deferred fractional premiums on any policies sold or currently in
force. There are no premiums beyond the date of death. There are no required
reserves for the waiver of deferred fractionals or refund of premiums beyond
the date of death.
Substandard policies are valued using a modification of the standard valuation
tables based on the substandard rating. The modification is 25% additional
mortality increase of the standard table for each table rating.
As of December 31, 1996, the Company had no insurance in force for which the
gross premiums were less than the net premiums according to the standard
valuation set by the State of New York.
The tabular interest has been determined from the basic data for the
calculation of policy reserves.
Tabular interest for funds not involving life contingencies for each valuation
rate and contractual guaranteed rate was determined as the statutory amount
required to support the required statutory reserve based on the Commissioner's
annuity reserve valuation method. Generally it is 1/100 of the product of
such valuation rate of interest times the mean funds at the beginning and end
of the valuation period or issue date of the policy if less.
The life and annuity actuarial reserves as provided in the accompanying
statutory financial statements segregated by type and valuation
characteristics for 1996 and 1995 are given below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995 Valuation Withdrawal
Type Reserve Reserve basic/rate characteristic
- ---------------------- ------------- ------------- ---------------------------------- -----------------------
Structured Settlements 1,027,146 997,873 1983 IAM 8.25% No withdrawal permitted
SPDA - 1 year 11,817,558 11,711,777 CARVM 5.75% - 7.00% Fixed surrender charge
SPDA - 5 year 14,320,006 13,103,310 CARVM 7.00% - 8.00% Withdrawal limited to
10% per year
Ordinary Life 107,415 104,780 1958 CSO 3.5% NL Fixed surrender charge
Ordinary Life 35,730 31,786 1980 CSO CRVM Fixed surrender charge
Ordinary Life 228,258 207,602 1980 CSO 4.5% NO Fixed surrender charge
Ordinary Life 1,600 1,600 Group conversion excess mortality Fixed surrender charge
Ordinary Life 2,717 2,544 Guaranteed insurability Fixed surrender charge
Ordinary Life 19,536,154 20,281,286 1958 CSO ALB 5.5% NL Fixed surrender charge
Group Life 31,528,014 33,016,478 1958 CSO ALB 5.5% NL Fixed surrender charge
Ordinary Life 20,453,429 20,494,006 1980 CSO ANB Male 5.5% NL Fixed surrender charge
Group Life 21,642,264 21,502,975 1980 CSO ANB Male 5.5% NL Fixed surrender charge
Ordinary Life 18,394,161 18,355,509 1980 CSO ANB Female 5.5% NL Fixed surrender charge
Group Life 20,612,630 20,766,772 1980 CSO ANB Female 5.5% NL Fixed surrender charge
Miscellaneous 7,060 6,867 - -
Reinsurance ceded (1,409,928) (1,353,052) - -
$158,304,214 $159,232,113
------------- -------------
</TABLE>
(Continued)
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
(11) INVESTMENTS
The cost or amortized cost and estimated fair value of bonds at December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1996
------------
Cost or Gross Gross Estimated
amortized unrealized unrealized fair Carrying
cost gains losses value value
---------- --------------- ------------ ---------- ---------
(In thousands)
Bonds:
Governments $ 764 -- $ (33) $ 731 $ 764
Nonguaranteed bonds -
U.S. government 41,241 60 (175) 41,126 41,241
Public utilities 7,789 19 (231) 7,577 7,789
Industrial and
miscellaneous 105,916 421 (1,531) 104,806 105,916
Total bonds $ 155,710 $ 500 $ (1,970) $ 154,240 $ 155,710
1995
------------
Cost or Gross Gross Estimated
amortized unrealized unrealized fair Carrying
cost gains losses value value
---------- --------------- ------------ ---------- ---------
(In thousands)
Bonds:
Governments $ 737 $ 6 - $ 743 $ 737
Nonguaranteed bonds -
U.S. government 42,749 1,247 (33) 43,963 42,749
Public utilities 5,000 175 -- 5,175 5,000
Industrial and
miscellaneous 106,300 2,521 (588) 108,233 106,300
Total bonds $ 154,786 $ 3,949 $ (621) $158,114 $ 154,786
---------- --------------- ------------ ---------- ---------
</TABLE>
(Continued)
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
The amortized cost and estimated fair value of bonds at December 31, 1996, by
contractual maturity, are shown in the following table. 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 may require monthly principal
installments and mortgages may prepay principal.
<TABLE>
<CAPTION>
<S> <C> <C>
1996
Estimated
Carrying fair
value value
(in thousands)
Due in one year or less $ 35 $ 35
Due after one year through five years 16,298 16,331
Due after five years through ten years 44,238 44,255
Due after ten years 19,534 19,082
Mortgage-backed securities 75,605 74,537
Total $ 155,710 $ 154,240
</TABLE>
Approximately 60% of the Company's bonds are of highest quality, 38% are of
high quality, and 2% are of medium quality based on NAIC rating methodology.
No provision was made for possible decline in the market value of individual
bonds, other than the establishment of AVR, as of December 31, 1996 or 1995 as
the Company intends to hold the investments until such time as no significant
loss would result.
The components of net investment income were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Income on bonds $11,274 $ 7,907 $12,999
Income on mortgage loans 940 373 -
Income on short-term investments 106 3,132 332
Income on cash on deposit 4 - -
Income on policy loans 1,281 1,281 1,182
Miscellaneous interest 4 - -
Total investment income 13,609 12,693 14,513
Investment expenses (102) (167) (246)
Net investment income $13,507 $12,526 $14,267
Realized capital gains/(losses) were:
follows:
Bonds (264) (8,136) 286
Short-term investments -- (20) -
Net realized gains/(losses) on
investments $ (264) $(8,156) $ 286
</TABLE>
(Continued)
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
Proceeds from sales, redemptions and paydowns of investments in bonds during
1996 were $40,506,099. Gross gains of $51,375 and gross losses of $315,006
were realized on those sales.
Proceeds from sales, redemptions and paydowns of investments in bonds during
1995 were $156,912,944. Gross gains of $1,830,297 and gross losses of
$9,966,745 were realized on those sales.
Proceeds from sales, redemptions and paydowns of investments in bonds during
1994 were $54,622,631. Gross gains of $941,714 and gross losses of $656,072
were realized on those sales.
Bonds with a book value of approximately $798,853 at December 31, 1996 were
deposited with governmental authorities as required by law.
As of December 31, 1996 the Company held the following individual securities
which exceeded 10% of capital and surplus:
<TABLE>
<CAPTION>
Long-term Debt Amortized Long-term Debt
Amortized
Securities Cost Securities Cost
<S> <C> <C> <C>
FNMA Remic Tr 1996-50 A1 $10,456,218 FHLMC Mc Mtg Prt Crt Ser 1506-G $4,938,895
FNMA Remic Tr 1992-159 Pk 9,821,020 RJR Nabisco Inc. 4,883,946
Countryside Mtg 1993-12 A4 8,908,245 Salomon Inc. 4,851,563
FNMA Remic Tr 1993 Ser 54-J 6,640,606 Telecommunications Inc. 4,728,227
Time Warner 5,498,588 Nabisco, Inc. 4,492,403
American Airlines 5,182,956 Res Funding Mtg Svcs 1993-S26 A8 4,010,400
Develope Div Rlty 5,072,488 Union Acceptance Corp Senior Notes 4,000,000
Kirby Corp. 5,035,559 Independent Natl Mtg 1995-M A2 3,997,956
Swire Pacific Finance Ltd. 5,003,214 Pru Home Mtg Sec 1993-31 A10 3,776,815
CS First Bost. Fin. Co. Sr Sec
1995-A 144AAA 5,000,000 Sears Mtg Securities 1993-7 T5 3,741,402
American Trans Air 1996-1 5,000,000 FHLMC MC Mtg Prt Crt Ser 1266-F 3,458,909
Washington Water Power Co. 5,000,000 Enserch Exploration 3,000,000
FNMA Remic Tr 1992 Ser 124-PH 4,956,255 First USA Bank 2,966,918
Alcoa Aluminio 4,947,725
</TABLE>
As of December 31, 1995 the Company held the following individual securities
which exceeded 10% of capital and surplus:
<TABLE>
<CAPTION>
Long-term Debt Amortized Long-term Debt Amortized
Securities Cost Securities Cost
<S> <C> <C> <C>
Countrywide Mtg 1993-12 A4 $8,849,196 Telecommunications Inc. $4,707,031
Capital Desjardin Inc. 144A 6,000,000 Nabisco, Inc. 4,491,761
Time Warner 5,572,607 FHLMC MC Mtg Prt Crt Ser 1266-F 4,065,730
American Airlines 5,398,931 Res Funding Mtg Svcs 1993-S26 A8 4,012,328
Develop Div Rlty 5,090,900 Union Acceptance Corp Senior Notes 4,000,000
Price Costco Inc. 5,061,616 Independent Natl Mtg Corp 1995-M A2 3,997,516
Kirby Corp. 5,044,336 Pru Home Mtg Sec 1993 Ser 31-A10 3,782,629
Swire Pacific Finance Ltd. 5,003,560 Sears Mtg Securities 1993-7 T5 3,725,555
CS First Bost Fin Co SR Sec 1995-A 144A 5,000,000 S-B Properties Ltd. Commerrcial Mtg 3,684,850
Washington Water Power Co. 5,000,000 Cary Robert Falk 3,184,414
Advanta Corp. 4,917,535 Shawmutt National Bank 3,154,147
RJR Nabisco Inc. 4,871,332 Salem Real Estate Commercial Mtg 2,204,252
Salomon Inc. 4,834,305 John Hancock Capital Corp Comm Paper 2,164,645
</TABLE>
(Continued)
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
(12) NON-ADMITTED ASSETS
Assets must be included in the statements of assets and liabilities at
admitted asset value, and non-admitted assets, principally agents balances,
must be excluded through a charge against unassigned surplus.
(13) REINSURANCE
In 1993 the Company entered into a reinsurance treaty with its parent,
CFSLIC. The underlying block of business assumed was single premium whole life
policies. Reserves assumed at December 31, 1996 and 1995 approximated $132.2
million and $134.4 million, respectively.
Wausau Life maintained a closed block of whole life policies and
structured settlements which were ceded 100% to Nationwide Life Insurance
Company as of the purchase date of Wausau Life, December 31, 1992. Total
reserves ceded to Nationwide at December 31, 1996 and 1995 were $1,409,928 and
$1,353,052 respectively.
(14) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In December 1992, the National Association of Insurance Commissioners
issued guidelines regarding the accrual of postretirement health care
benefits. The effective date of implementation was January 1, 1993. The
effects of implementing these guidelines are not considered material.
(15) RISK-BASED CAPITAL
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 Companys Total Adjusted
Capital and Authorized Control Level - RBC were $24,612,658 and $1,906,236,
respectively. At this level of adjusted capital, no action is required.
(16) GUARANTY FUND ASSESSMENTS
The Company participates, along with all life insurance companies
licensed in New York, in an association formed to guarantee benefits to
policyholders of insolvent life insurance companies. Under the state law, 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.
The Company has not established an estimated liability for unassessed
guarantee fund claims incurred prior to December 31, 1996 as management
believes that such assessments are not material to the financial statements.
(Continued)
<PAGE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Years ended December 31, 1996, 1995 and 1994
(17) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business the Company is involved in various
legal actions for which it establishes reserves where appropriate. In the
opinion of the Company's management, based upon the advice of legal counsel,
the resolution of such litigation is not expected to have a material adverse
effect on the statutory financial statements. Under an indemnification
agreement with Xerox Corporation, the Company is not liable for any
litigation expenses arising from events occurring prior to the sale of the
Company on June 1, 1995.
Schedule of Selected Financial Data from Annual Statement
