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
(FORMERLY, FIRST XEROX LIFE INSURANCE COMPANY)
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED SEPTEMBER 5, 1996, FOR THE
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACT WHICH IS DESCRIBED
HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT: One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois
60181-4644, (800) 831-5433.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER 5, 1996.
TABLE OF CONTENTS
Page
COMPANY
EXPERTS
LEGAL OPINIONS
DISTRIBUTION
PERFORMANCE INFORMATION
Total Return
Historical Unit Values
Reporting Agencies
Hypothetical Information - Money Market Fund
Hypothetical Information - Public Fund Performance
Hypothetical Information - Private Accounts
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. ("XFS"). The acquisition of Cova Life included related
companies, including the Company ("Acquisition"). 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 $235
billion of life insurance in force and approximately $9.6 billion in assets.
It provides life and health insurance, retirement plans, and related financial
services to individuals and groups.
In conjunction with the Acquisition, Cova Life also entered into a financing
reinsurance transaction that caused OakRe Life Insurance Company ("OakRe"), a
Missouri licensed insurer and a wholly-owned XFS subsidiary, to assume the
benefits and risks of existing single premium deferred annuity deposits
(SPDAs) which aggregated to $3,059 million at December 31, 1994. In exchange,
Cova Life transferred specifically identified assets to OakRe which had a
carrying value of $3,150.4 million at December 31, 1994. Ownership of OakRe
was retained by XFS subsequent to the Acquisition. The receivable from OakRe
to Cova Life that was created by this transaction will be liquidated over the
remaining crediting rate guaranty periods (which will be substantially all
expired in five years) by the transfer of cash in the amount of the then
current account value, less a recapture fee to OakRe on policies retained
beyond their 30-day no-fee surrender window by Cova Life, upon the next
crediting reset date of each annuity policy. Cova Life may then retain and
assume the benefits and risks of those deposits thereafter.
All of Cova Life's deposit obligations are fully guaranteed by General
American and the receivable from OakRe equal to the SPDA obligations are
guaranteed by OakRe's parent, XFS. In the event that both OakRe and XFS
default on the receivable, Cova Life may draw funds from a standby bank
irrevocable letter of credit established by XFS in the amount of $500 million.
In substance, the structure of the Acquisition allowed the seller, XFS, to
retain substantially all of the existing financial benefits and risks of the
existing business, while General American obtained the corporate licenses,
marketing and administrative capabilities of Cova Life, and access to the
retention of the policyholder deposit base that persists beyond the next
crediting rate reset date.
EXPERTS
The statutory financial statements of the Company 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. These
practices differ in some respects from generally accepted accounting
principles. These financial statements do not include any adjustments that
might result from the differences.
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 investment advisory fee for the underlying investment
portfolio being advertised and any applicable Contract Maintenance Charges and
Withdrawal Charges.
The hypothetical value of a Contract purchased for the time periods described
in the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Contract Maintenance Charges and any applicable Withdrawal Charge to arrive at
the ending hypothetical value. The average annual total return is then
determined by computing the fixed interest rate that a $1,000 purchase payment
would have to earn annually, compounded annually, to grow to the hypothetical
value at the end of the time periods described. The formula used in these
calculations is:
n
P ( 1 + T) = ERV
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.
HYPOTHETICAL INFORMATION - MONEY MARKET FUND
Although the Accumulation Units which invest in the General American Capital
Company Money Market Fund and the Lord Abbett Series Fund, Inc. Growth and
Income Portfolio have no investment performance history as yet, each of these
funds has been in existence for some time and consequently has an investment
performance history. In order to demonstrate how actual investment experience
of the Money Market Fund and the Growth and Income Portfolio affects
Accumulation Unit values, hypothetical performance information was developed.
The information is based upon the historical experience of the Money Market
Fund and is for the periods shown. The prospectus contains a chart of
hypothetical 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 hypothetical
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 hypothetical
performance figures for the Accumulation Units which reflect the insurance
charges as well as the portfolio expenses. There are also hypothetical
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 hypothetical
performance may also show figures when no withdrawal is assumed.
HYPOTHETICAL INFORMATION - PUBLIC FUND PERFORMANCE
Lord, Abbett & Co. is the sub-adviser for the Bond Debenture investment
portfolio. This portfolio is newly-organized and does not yet have its own
performance record. However, it has the same investment objective and follows
substantially the same investment strategies as a mutual fund advised by the
same sub-adviser whose shares are sold to the public (Public Fund).
Set forth in the prospectus is the historical performance of this Public Fund.
Investors should not consider this performance data as an indication of the
future performance of this portfolio. The performance figures reflect the
deduction of the historical fees and expenses paid by the Public Fund and not
those to be paid by the investment portfolio. The figures do not reflect the
deduction of the insurance charges and the contract maintenance charge.
Investors should refer to the prospectus for the Contracts for information
pertaining to those charges. The results shown reflect the reinvestment of
dividends and distributions, and were calculated in the same manner that will
be used by the investment portfolio to calculate its own performance.
The performance of the Public Fund is commonly measured as total return. An
average annual compounded rate of return ("T") may be computed by using the
redeemable value at the end of a specified period ("ERV") of a hypothetical
initial investment of $1,000 ("P") over a period of time ("n") according to
the formula:
n
P ( 1 + T) = ERV
The table contained in the prospectus shows the average annualized total
returns for the fiscal year ended December 31, 1995, of a 1-year, 5-year and
10-year investment in the Public Fund.
In order to demonstrate how the performance of the Public Fund would affect
Accumulation Unit values, the prospectus contains hypothetical performance
information. In determining the hypothetical performance of the Accumulation
Units, the actual performance of the Public Fund was used.
The performance of the Accumulation Units 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 Accumulation Units is calculated
for the specified period of time by assuming an initial Purchase Payment of
$1,000 allocated to the investment portfolio and a deduction of all charges
and deductions. The hypothetical performance figures for the Accumulation
Units assume the deduction of the fees and expenses anticipated to actually be
paid by the investment portfolio, but use the actual performance results of
the Public Fund. There are hypothetical performance figures for the
Accumulation Units which reflect the insurance charges as well as the fees and
expenses of the investment portfolio. There are also hypothetical performance
figures for the Accumulation Units which reflect the insurance charges, the
contract maintenance charge, the withdrawal charge and the fees and expenses
of the investment portfolio. The percentage increases (decreases) are
determined by subtracting the initial Purchase Payment from the ending value
and dividing the remainder by the beginning value.
HYPOTHETICAL INFORMATION - PRIVATE ACCOUNTS
J.P. Morgan Investment Management Inc. is the sub-adviser for the Select
Equity, Large Cap Stock, Small Cap Stock, and Quality Bond investment
portfolios. These portfolios are newly formed and have no performance history.
They have investment objectives, policies and strategies substantially similar
to those employed by the sub-adviser with respect to certain private accounts
(Private Accounts) represented in the Active Equity Composite, the Structured
Stock Selection Composite, the Small Cap Directly Invested Composite and the
Public Bond Composite, respectively. Thus the performance information derived
from these Private Accounts is deemed relevant to the investor.
Set forth in the prospectus is the hypothetical performance information
derived from the historical composite performance of these Private Accounts
included in the Active Equity Composite, the Structured Stock Selection
Composite, the Small Cap Directly Invested Composite and the Public Bond
Composite. Investors should not consider this performance data as an
indication of the future performance of the comparable investment portfolios.
The actual composite performance figures of the Private Accounts are
time-weighted rates of return which include all income and accrued income and
realized and unrealized gains or losses, but do not reflect the deduction of
investment advisory fees actually charged to the Private Accounts.
The table contained in the prospectus shows the average annualized total
returns for the fiscal year ended December 31, 1995, of a 1-year, 5-year and
10 year (where available) or since inception investment in the composite of
comparable Private Accounts adjusted to reflect the deduction of the
investment advisory fees and expenses which are anticipated to be paid by the
respective investment portfolios.
In order to demonstrate how the actual investment experience of these Private
Accounts would affect Accumulation Unit values, the hypothetical composite
performance information was developed. The composite information is based
upon the performance of the composites of comparable Private Accounts with
substantially similar investment objectives, policies and strategies as the
respective portfolios reduced by the investment advisory fees and expenses
which are anticipated to be paid by the respective investment portfolios. The
hypothetical performance of these Accumulation Units is calculated for a
specified period of time by assuming an initial Purchase Payment of $1,000
allocated to the investment portfolios. There are hypothetical performance
figures for the Accumulation Units which reflect the actual performance
results of the composites of comparable Private Accounts, adjusted to reflect
the deduction of the fees and expenses anticipated to be paid by the
investment portfolio and the insurance charges. There are also hypothetical
performance figures for the Accumulation Units which reflect the insurance
charges, the contract maintenance charge, the withdrawal charge and the actual
performance results of the composites of comparable Private Accounts, adjusted
to reflect the deduction of the fees and expenses anticipated to be paid by
the investment portfolio. 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 of the comparable investment portfolios may be at variance
from the composite performance of the Private Accounts because such accounts
are not mutual funds and are not subject to the various requirements and
limitations applicable to mutual funds under the Investment Company Act of
1940 and the Internal Revenue Code.
There is no performance information for the International Equity Portfolio,
which is also managed by J.P. Morgan Investment Management Inc., in the
Prospectus.
The future performance of the investment portfolios will vary and the
hypothetical results shown are not necessarily representative of future
results.
TAX STATUS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS.
MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER
TAX LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is
not taxed on increases in the value of a Contract until distribution occurs,
either in the form of a lump sum payment or as annuity payments under the
Annuity Option selected. For a lump sum payment received as a total withdrawal
(total surrender), the recipient is taxed on the portion of the payment that
exceeds the cost basis of the Contract. For Non-Qualified Contracts, this cost
basis is generally the purchase payments, while for Qualified Contracts there
may be no cost basis. The taxable portion of the lump sum payment is taxed at
ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments
based on a fixed annuity option is determined by multiplying the payment by
the ratio that the cost basis of the Contract (adjusted for any period or
refund feature) bears to the expected return under the Contract. The exclusion
amount for payments based on a variable annuity option is determined by
dividing the cost basis of the Contract (adjusted for any period certain or
refund guarantee) by the number of years over which the annuity is expected to
be paid. Payments received after the investment in the Contract has been
recovered (i.e. when the total of the excludable amount equals the
investment in the Contract) are fully taxable. The taxable portion is taxed at
ordinary income tax rates. For certain types of Qualified Plans there may be
no cost basis in the Contract within the meaning of Section 72 of the Code.
Owners, Annuitants and Beneficiaries under the Contracts should seek competent
financial advice about the tax consequences of any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury
Department ("Treasury Department"), adequately diversified. Disqualification
of the Contract as an annuity contract would result in the imposition of
federal income tax to the Owner with respect to earnings allocable to the
Contract prior to the receipt of payments under the Contract. The Code
contains a safe harbor provision which provides that annuity contracts such as
the Contract meet the diversification requirements if, as of the end of each
quarter, the underlying assets meet the diversification standards for a
regulated investment company and no more than fifty-five percent (55%) of the
total assets consist of cash, cash items, U.S. Government securities and
securities of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas.
Reg.1.817-5), which established diversification requirements for the
investment portfolios underlying variable contracts such as the Contract. The
Regulations amplify the diversification requirements for variable contracts
set forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (1) no more than 55% of the value of the total
assets of the portfolio is represented by any one investment; (2) no more than
70% of the value of the total assets of the portfolio is represented by any
two investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, "each United States
government agency or instrumentality shall be treated as a separate issuer."
The Company intends that all investment portfolios underlying the Contracts
will be managed in such a manner as to comply with these diversification
requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time it cannot be determined
whether additional guidance will be provided and what standards may be
contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available,
would cause the Owner to be considered as the owner of the assets of the
Separate Account resulting in the imposition of federal income tax to the
Owner with respect to earnings allocable to the Contract prior to receipt of
payments under the Contract.
In the event any forthcoming guidance or ruling is considered to set forth a
new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owners
being retroactively determined to be the owners of the assets of the Separate
Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from
such combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the Owner is a non-natural
person, e.g., a corporation or certain other entities. Such Contracts
generally will not be treated as annuities for federal income tax purposes.
However, this treatment is not applied to a Contract held by a trust or other
entity as an agent for a natural person nor to Contracts held by Qualified
Plans. Purchasers should consult their own tax counsel or other tax adviser
before purchasing a Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Owner are subject to federal income tax withholding. Generally,
amounts are withheld from periodic payments at the same rate as wages and at
the rate of 10% from non-periodic payments. However, the Owner, in most cases,
may elect not to have taxes withheld or to have withholding done at a
different rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a
mandatory 20% withholding for federal income tax. The 20% withholding
requirement generally does not apply to: a) a series of substantially equal
payments made at least annually for the life or life expectancy of the
participant or joint and last survivor expectancy of the participant and a
designated beneficiary or for a specified period of 10 years or more; or b)
distributions which are required minimum distributions; or c) the portion of
the distributions not includible in gross income (i.e. returns of after-tax
contributions). Participants should consult their own tax counsel or other
tax adviser regarding withholding requirements.
TAX TREATMENT OF WITHDRAWALS - NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate
purchase payments made, any amount withdrawn will be treated as coming first
from the earnings and then, only after the income portion is exhausted, as
coming from the principal. Withdrawn earnings are includible in gross income.
It further provides that a ten percent (10%) penalty will apply to the income
portion of any premature distribution. However, the penalty is not imposed on
amounts received: (a) after the taxpayer reaches age 59 1/2; (b) after the
death of the Owner; (c) if the taxpayer is totally disabled (for this purpose
disability is as defined in Section 72(m)(7) of the Code); (d) in a series of
substantially equal periodic payments made not less frequently than annually
for the life (or life expectancy) of the taxpayer or for the joint lives (or
joint life expectancies) of the taxpayer and his or her Beneficiary; (e) under
an immediate annuity; or (f) which are allocable to purchase payments made
prior to August 14, 1982.
The above information does not apply to Qualified Contracts. However, separate
tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals - Qualified Contracts" below.)
QUALIFIED PLANS
The Contracts offered herein 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 Contract Owner
and his or her spouse and dependents if the Contract Owner has received
unemployment compensation for at least 12 weeks. This exception will no longer
apply after the Contract Owner 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, 1995, 1994 and 1993
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
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, 1995 and 1994, and the 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, 1995. 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 in note 2, the accompanying financial statements have been
prepared in conformity with accounting practices prescribed or permitted by
the State of New York Department of Insurance. These practices differ in some
respects from generally accepted accounting principles. Accordingly, the
financial statements referred to above are not intended to present, and in our
opinion do not present fairly, the financial position, results of operations,
and cash flow in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and
capital stock and surplus of First Cova Life Insurance Company as of December
31, 1995 and 1994, and the results of its operations and its cash flow for
each of the years in the three-year period ended December 31, 1995, on the
basis of accounting described in note 2.
April 15, 1996
FIRST COVA LIFE INSURANCE COMPANY
Statutory Statements of Admitted Assets, Liabilities,
and Capital Stock and Surplus
December 31, 1995 and 1994
<TABLE>
<CAPTION>
ADMITTED ASSETS 1995 1994
- --------------------------------------------------------- ------------ ------------
<S> <C> <C>
Bonds $154,785,930 163,744,844
Mortgage loans on real estate 10,059,682 -
Policy loans 16,922,627 15,645,926
Cash on hand and on deposit 21,446 (183,927)
Short-term investments 3,119,160 6,971,000
------------ ------------
Total cash and investments 184,908,845 186,177,843
Federal income tax recoverable - 361,694
Investment income due and accrued 2,584,922 3,191,777
Other assets 2,696 13
------------ ------------
Total admitted assets $187,496,463 189,731,327
------------ ------------
LIABILITIES AND CAPITAL STOCK AND SURPLUS
- ---------------------------------------------------------
Aggregate reserve for life policies and annuity contracts 159,232,113 157,321,533
Supplementary contracts without life contingencies 25,347 -
Life policy and annuity contract claims 296,837 157,134
General expenses due or accrued 47,586 95,961
Taxes, licenses, and fees due or accrued
excluding federal income taxes 233,343 440,158
Federal income taxes 45,000 -
Remittances and items not allocated 62 10,094
Interest maintenance reserve 1,407,616 5,844,332
Asset Valuation Reserve 1,185,008 830,336
Payable to parent, subsidiaries, and affiliates 58,912 11,208
Reinsurance payable 3,161,595 2,308,667
Checks outstanding 274,310 -
------------ ------------
Total liabilities 165,967,729 167,019,423
------------ ------------
Common capital stock, $10 par value.
Authorized 200,000 shares; issued
and outstanding 200,000 shares 2,000,000 2,000,000
Gross paid-in and contributed surplus 11,501,272 10,501,272
Unassigned surplus 8,027,462 10,210,632
Total capital stock and surplus 21,528,734 22,711,904
------------ ------------
Total liabilities and capital stock and surplus $187,496,463 189,731,327
------------ ------------
</TABLE>
See accompanying notes to statutory financial statements
FIRST COVA LIFE INSURANCE COMPANY
Statutory Statements of Operations
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Income:
Premium and annuity considerations $ 126,602 19,259,281 136,375,300
Considerations for supplementary contracts
without life contingencies 32,526 - -
Net investment income 12,526,475 14,267,469 10,586,167
Amortization of interest maintenance
reserve (210,681) 278,726 397,801
------------ ----------- -----------
Total 12,474,922 33,805,476 147,359,268
------------ ----------- -----------
Expense:
Death benefits 2,101,255 1,571,941 1,064,163
Annuity benefits 359,487 46,038 -
Surrender benefits and other fund withdrawals 9,184,900 4,448,864 1,821,775
Interest on policy or contract funds 9,097 6,143 2,385
Increase in aggregate reserves for life
policies and annuity contracts 1,910,580 24,000,789 133,320,744
Payment on supplementary contracts without
life contingencies 5,838 - -
Increase in reserve for supplementary
contracts without life contingencies 25,347 - -
Commissions and expense allowances on
reinsurance assumed 439,112 555,205 213,390
Commissions on premiums and annuity
considerations 2,460 658,827 175,670
General insurance expenses 664,633 1,057,081 613,735
Insurance, taxes, licenses, and fees,
excluding federal income taxes 810,899 473,845 308,103
------------ ----------- -----------
Total 15,513,608 32,818,733 137,519,965
------------ ----------- -----------
Income (loss) from operations before federal
income taxes and realized capital gains (3,038,686) 986,743 9,839,303
Federal income tax expense (benefit),
excluding tax on capital gains (1,006,592) (1,045,049) 1,602,659
------------ ----------- -----------
Net gain (loss) from operations before
realized capital gains (2,032,094) 2,031,792 8,236,644
------------ ----------- -----------
Realized capital gains (losses) (net of tax
benefit of $3,509,040 in 1995, tax
expense of $122,826 in 1994, and tax
expense of $3,607,541 in 1993 and net
of amounts transferred to the IMR of
$(4,647,397), $162,816 and $6,358,041
in 1995, 1994 and 1993, respectively) - - -
------------ ----------- -----------
Net income (loss) $(2,032,094) 2,031,792 8,236,644
------------ ----------- -----------
</TABLE>
See accompanying notes to statutory financial statements
FIRST COVA LIFE INSURANCE COMPANY
Statutory Statements of Capital Stock and Surplus
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Common 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 10,501,272 10,501,272 4,000,000
Capital contribution 1,000,000 - 6,501,272
------------ ----------- -----------
Balance at end of year 11,501,272 10,501,272 10,501,272
------------ ----------- -----------
Unassigned surplus:
Balance at beginning of year 10,210,632 8,498,465 906,742
Net income (loss) (2,032,094) 2,031,792 8,236,644
Change in non-admitted assets 203,596 98,589 (302,185)
Change in Asset Valuation Reserve (354,672) (418,214) (342,736)
------------ ----------- ----------
Balance at end of year 8,027,462 10,210,632 8,498,465
------------ ----------- ----------
Total capital stock and surplus $21,528,734 22,711,904 20,999,737
------------ ----------- -----------
</TABLE>
See accompanying notes to statutory financial statements.
FIRST COVA LIFE INSURANCE COMPANY
Statutory Statements of Cash Flow
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ----------- ------------
<S> <C> <C> <C>
Premium and annuity considerations $ 126,602 19,259,281 136,375,300
Other premiums, considerations, and
deposits 32,526 - -
Investment income received, excluding
realized gains/losses and net of
investment expenses 13,036,731 14,540,436 6,052,977
------------- ----------- ------------
13,195,859 33,799,717 142,428,277
------------- ----------- ------------
Life and accident and health claims paid 1,955,156 1,541,350 944,017
Surrender benefits and other fund
withdrawals paid 9,184,900 4,448,864 1,821,775
Other benefits to policyholders,
primarily annuity benefits 380,819 45,783 2,385
Commissions, other expenses, and taxes
paid, excluding Federal income tax 1,169,881 2,637,951 936,159
Federal income taxes paid (recovered),
excluding tax on capital gains (1,413,286) (472,742) 1,392,047
Net increase in policy loans and
premium notes 1,276,701 2,081,756 13,564,170
12,554,171 10,282,962 18,660,553
------------- ----------- ------------
Net cash from operations 641,688 23,516,755 123,767,724
------------- ----------- ------------
Proceeds from bond sales 156,912,941 54,622,631 70,194,768
Proceeds from mortgage loans 111,873 - -
Net gains/(losses) on cash and
short-term investments (19,990) - 7,988
Taxes recovered (paid) on capital
losses (gains) 2,526,724 (208,136) (3,487,953)
Capital and surplus paid-in 1,000,000 - 6,501,272
Other cash provided 1,378,538 1,144,173 3,287,422
------------- ----------- -----------
Total investments proceeds and other
cash provided 161,910,086 55,558,668 76,503,497
------------- ----------- ------------
Cost of bonds acquired 156,014,905 77,674,404 199,556,033
Cost of mortgage loans acquired 10,170,620 - -
Other cash applied 12,716 2,002,738 265,004
------------- ----------- ------------
Total investments acquired and other
cash applied 166,198,241 79,677,142 199,821,037
------------- ----------- ------------
Net change in cash and short-term
investments $ (3,646,467) (601,719) 450,184
Cash and short-term investments at
beginning of year 6,787,073 7,388,792 6,938,608
------------- ----------- ------------
Cash and short-term investments at
end of year $ 3,140,606 6,787,073 7,388,792
------------- ----------- ------------
</TABLE>
See accompanying notes to statutory financial statements
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
December 31, 1995, 1994 and 1993
(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 Company's 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 Company's 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.
Approximately 99% of the Company's sales have been through two specific
distributors, Dime Agency and Advest Balanced Capital during 1993, 1994 and
1995.
(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 1995, 1994 and 1993 are in
conformity with prescribed practices.
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 Company's investments is subject to the risk that
interest rates will change and cause a temporary increase or decrease in the
liquidation value of debt securities. To the extent that fluctuations in
interest rates cause the cash 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
(Continued)
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
which attempt to control the risks presented by differences in the probable
cash flows and reinvestment of assets with the timing of crediting rate
changes in the Company's policies and contracts. Changes in the estimated
prepayments of mortgage-backed securities also may cause retrospective changes
in the amortization period of 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:
Bonds not backed by other loans are valued at amortized cost using the
interest method.
Loan-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).
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 and annuity considerations 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.
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(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. The Company will file a consolidated federal income tax
return for the first five months of 1995 with the Company's former ultimate
owner, Xerox Corporation, a New York corporation, along with Xerox
Corporation's other eligible subsidiaries.
For the last seven months of 1995, the Company will file a consolidated
federal income tax return with its parent company, CFSLIC.
The method of allocation between the companies for the first five months of
1995, as well as for the last seven months, are both subject to written
agreement, approved 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.
The actual federal income tax expense differed from the expected tax expense
computed by applying the U.S. federal statutory rate to the 1995, 1994 and
1993 net gain from operations before federal income taxes as follows (000's
omitted):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax (benefit) expense $(1,064) 35.0% $ 345 35.0% $ 3,444 35.0%
Tax basis reserve adjustment 847 (27.9) 80 8.1 38 0.4
IMR amortization 74 (2.4) (98) (9.9) (139) (1.4)
Proxy tax on insurance acquisition costs (455) 15.0 1 .1 410 4.2
Adjustment for prior years - - (444) (45.0) - -
Intangible Amortization (126) 4.1 - - - -
Tax-exempt income, net - - (963) (97.7) - -
Coinsurance from affiliate - - - - (2,093) (21.3)
Other (283) 9.3 34 3.5 (57) (0.6)
$(1,007) 33.1% $(1,045) (105.9)% $ 1,603 16.3%
======== ====== ======== ======== ======== ======
</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.
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(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 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 General American Investment 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 1995, 1994
and 1993 were $349,771, $348,262 and $344,896, 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.
(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:
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
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, 1995, fair value of the Company's mortgage loans
approximate the carrying value.
INVESTMENT CONTRACTS:
The Company's 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 Company's liabilities under investment type contracts are
estimated as the amount payable on demand. 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.
(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, 1995, 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 1995 are given below.
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
<TABLE>
<CAPTION>
1995 1994 Valuation Withdrawal
Type Reserve Reserve basic/rate characteristic
- ---------------------- ------------- ------------ ---------------------------------- -----------------------
<S> <C> <C> <C> <C>
Structured Settlements $ - 518,456 Group conversion excess mortality No withdrawal permitted
Structured Settlements 997,873 969,933 1983 IAM 8.25% No withdrawal permitted
SPDA - 1 year 11,711,777 11,651,080 CARVM 5.75% - 7.00% Fixed surrender charge
SPDA - 5 year 13,103,310 12,659,501 CARVM 7.00% - 8.00% Withdrawal limited to
10% per year
Ordinary Life 104,780 103,032 1958 CSO 3.5% NL Fixed surrender charge
Ordinary Life 31,786 28,057 1980 CSO CRVM Fixed surrender charge
Ordinary Life 207,602 191,334 1980 CSO 4.5% NO Fixed surrender charge
Ordinary Life 1,600 1,642 Group conversion excess mortality Fixed surrender charge
Ordinary Life 2,544 2,423 Guaranteed insurability Fixed surrender charge
Ordinary Life 19,738,477 20,265,767 1958 CSO ALB 5.5% NL Fixed surrender charge
Group Life 32,132,826 33,214,196 1958 CSO ALB 5.5% NL Fixed surrender charge
Ordinary Life 19,945,505 20,043,530 1980 CSO ANB Male 5.5% NL Fixed surrender charge
Group Life 20,927,470 21,070,781 1980 CSO ANB Male 5.5% NL Fixed surrender charge
Ordinary Life 17,864,242 17,761,006 1980 CSO ANB Female 5.5% NL Fixed surrender charge
Group Life 20,210,970 19,928,114 1980 CSO ANB Female 5.5% NL Fixed surrender charge
Immediate payment of
claim reserves 3,597,536 727,559 - -
Miscellaneous 6,867 6,921 - -
Reinsurance ceded (1,353,052) (1,821,799) - -
$159,232,113 157,321,533
------------- ------------
</TABLE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(11) INVESTMENTS
The cost or amortized cost and estimated fair value of bonds at December 31,
1995 and 1994 is as follows (000's omitted):
<TABLE>
<CAPTION>
1995
-----------
Cost or Gross Gross Estimated
amortized unrealized unrealized fair Carrying
cost gains losses value value
---------- ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Bonds:
Governments $ 737 6 - 743 737
States, territories,
and possessions - - - - -
Political subdivisions - - - - -
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
---------- ---------- ----------- --------- --------
1994
-----------
Cost or Gross Gross Estimated
amortized unrealized unrealized fair Carrying
cost gains losses value value
---------- ---------- ----------- --------- --------
Bonds:
Governments $ 708 - (74) 634 708
States, territories,
and possessions 10,945 294 - 11,239 10,945
Political subdivisions 7,314 729 - 8,043 7,314
Nonguaranteed bonds -
U.S. government 50,226 - (5,443) 44,783 50,226
Public utilities 26,069 151 (2,468) 23,752 26,069
Industrial and
Miscellaneous 68,483 13 (6,844) 61,652 68,483
---------- ---------- ----------- --------- --------
Total bonds $ 163,745 1,187 (14,829) 150,103 163,745
---------- ---------- ----------- --------- --------
</TABLE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
The amortized cost and estimated fair value of bonds at December 31, 1995, 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>
Estimated
Carrying fair
value value
(in thousands of dollars)
<S> <C> <C>
Due in one year or less $ 5,318 5,378
Due after one year through five years 15,293 15,773
Due after five years through ten years 50,352 52,041
Due after ten years 10,735 10,945
Mortgage-backed securities 73,088 73,977
Total $ 154,786 158,114
============== =========
</TABLE>
Approximately 60% of the Company's bonds are of highest quality, 39% are of
high quality, and 1% 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, 1995 or 1994 as
the Company intends to hold the investments until such time as no significant
loss would result.
The fair value of mortgage loans on real estate were $10,059,682, which
approximates their unpaid principle balance. The Company has no impaired
loans and no valuation allowances established for potential losses on mortgage
loans at December 31, 1995.
The components of net investment income were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Income on bonds 7,907 12,999 9,553
Income on mortgage loans 373 - -
Income on short-term investments 3,132 332 396
Income on cash on deposit - - -
Income on policy loans 1,281 1,182 791
Miscellaneous interest - - 6
Total investment income 12,693 14,513 10,746
Investment expenses (167) (246) (160)
Net investment income 12,526 14,267 10,586
Realized capital gains/(losses) were:
follows:
Bonds (8,136) 286 9,958
Short-term investments (20) - 8
Net realized gains/(losses) on investments (8,156) 286 9,966
</TABLE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Proceeds from sales 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. Included in these amounts were gains of $293,977 and losses of $0
on non-investment grade securities.
Proceeds from sales 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.
Proceeds from sales of investments in bonds in 1993 were $70,194,768. Gross
gains of $9,957,595 and gross losses of $0 were realized on those sales.
Bonds with a book value of approximately $771,867 at December 31, 1995 were
deposited with governmental authorities as required by law.
As of December 31, 1995 the Company held the following individual securities
which exceeded 10% of shareholders' equity:
<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 Res Funding Mtg Svcs 1993-S26 A8 4,012,328
American Airlines 5,398,931 Union Acceptance Corp Senior Notes 4,000,000
Develop Div Rlty 5,090,900 Independent Natl Mtg Corp 1995-M A2 3,997,516
Price Costco Inc 5,061,616 Pru Home Mtg Sec 1993 Ser 31-A10 3,782,629
Kirby Corp 5,044,336 Sears Mtg Securities 1993-7 T5 3,725,555
Swire Pacific Finance Ltd 5,003,560 S-B Properties Ltd Commercial Mtg 3,684,850
CS First Bost Fin Co Sr Sec 1995-A 144A 5,000,000 Cary Robert Falk 3,184,414
Washington Water Power Co 5,000,000 Shawmutt National Bank 3,154,147
Advanta Corp 4,917,535 Salem Real Estate Commercial Mtg 2,204,252
RJR Nabisco Inc 4,871,332 John Hancock Capital Corp Comm Paper 2,164,645
Salomon Inc 4,834,305
</TABLE>
As of December 31, 1994 the Company held the following individual securities
which exceeded 10% of shareholders' equity:
<TABLE>
<CAPTION>
Long-term Debt Amortized Long-term Debt Amortized
Securities Cost Securities Cost
<S> <C> <C> <C>
Phillips Petroleum $11,120,220 Washington Water Power Co $5,000,000
Countrywide Mtg 1994 Ser L-AB 10,603,498 American Airlines Etc 1991 Ser B2 5,000,000
DQU II Funding 9,086,596 Advanta Corp 4,828,795
Louisiana Power & Light (Waterford 3) 6,000,000 New York City 4,684,550
United Airlines 1991 Etc Ser A2 6,000,000 Res Funding Corp 1993 Ser S26-A8 4,013,228
Oryx Energy 5,982,618 System Energy Resources 4,000,000
California St Dept Water Cent VLY E 5,945,402 Pru Home Mtg Sec 1993 Ser 31-A10 3,787,810
G E Capital Mtg 1994 Ser 4-A3 5,444,357 Shawmutt National Bank 3,186,830
Chase Mtg Fin Corp 1993 Ser J2-A8 5,015,800 Calhoun County Michigan 2,629,585
Alaska Hsg Finance Corp 5,000,000 First USA Bank 2,500,000
</TABLE>
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(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, 1995 and 1994 approximated $134.4
million and $133.0 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, 1995 and 1994 were
$1,353,052 and $1,303,343 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, 1995 the Company's Total Adjusted
Capital and Authorized Control Level - RBC were $22,713,742 and $1,883,600,
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 1995 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, 1995. Management
believes that such assessments would not have a material adverse impact on the
financial statements.
(17) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Generally accepted accounting principles (GAAP) differ in certain respects
from the accounting practices prescribed or permitted by insurance regulatory
authorities (statutory accounting principles).
FIRST COVA LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
Major differences arise from premium and annuity considerations being recorded
as revenue when collected on a statutory basis whereas premiums on a GAAP
basis are recorded as deposits and revenue is composed of sales loads, policy
fees and surrender charges.
Under GAAP, reinsurance ceded recoverables are recorded as assets whereas
statutory accounting permits reinsurance recoverables to be netted against the
related direct liabilities.
Other 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 and
capital contributions in the form of notes receivable from an affiliated
company are not recognized 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.
(18) 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.
