-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KfucZAZlA7rlR3Hi/SNIy8kkvfiNZVJCbUVZ/GK89xofSQBJSFk1FkBH7yQlIVRc /A7rYeXg7oS8qOUMPHrLWg== 0000950109-98-002857.txt : 19980504 0000950109-98-002857.hdr.sgml : 19980504 ACCESSION NUMBER: 0000950109-98-002857 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19980430 EFFECTIVENESS DATE: 19980430 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDIAN LIFE & HEALTH INSURANCE CO SEPARATE ACCOUNT IV CENTRAL INDEX KEY: 0000866252 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 430378030 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-36073 FILM NUMBER: 98605631 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-06144 FILM NUMBER: 98605632 BUSINESS ADDRESS: STREET 1: 20 MOORES RD CITY: FRAZER STATE: PA ZIP: 19355 BUSINESS PHONE: 2156485000 MAIL ADDRESS: STREET 1: 20 MOORES ROAD CITY: FRAZER STATE: PA ZIP: 19355 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL HOME LIFE ASSURANCE CO SEPARATE ACCOUNT IV DATE OF NAME CHANGE: 19920703 485BPOS 1 485BPOS PROVIDIAN LIFE & HEALTH INS SEP ACCOUNT IV AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998. REGISTRATION NO. 33-36073 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. Post-Effective Amendment No. 11 [X] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 12 [X] PROVIDIAN LIFE & HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV (Exact Name of Registrant) Providian Life & Health Insurance Company (Name of Depositor) 20 Moores Road Frazer, Pennsylvania 19355 (Address of Depositor's Principal Executive Office) Depositor's Telephone Number: (800) 523-7900 Providian Life & Health Insurance Company Kimberly A. Scouller, Esquire Providian Center P.O. Box 32830 400 West Market Street Louisville, KY 40232 (Name and Address of Agent for Service) Copy to: Michael Berenson, Esquire Ann B. Furman Jorden Burt Boros Cicchetti Berenson & Johnson LLP 1025 Thomas Jefferson St. N.W. Suite 400 E Washington, DC 20007-0805 It is proposed that this filing will become effective (check appropriate box): [X] Immediately upon filing pursuant to paragraph (b) of Rule 485. [_] On pursuant to paragraph (b)(1)(v) of Rule 485. [_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485. [_] On pursuant to paragraph (a)(1) of Rule 485. [_] 75 days after filing pursuant to paragraph (a)(2) of Rule 485. [_] On pursuant to paragraph (a)(2) of Rule 485. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PURSUANT TO RULE 481 SHOWING LOCATION IN PART A (PROSPECTUS) AND PART B (STATEMENT OF ADDITIONAL INFORMATION) OF REGISTRATION STATEMENT OF INFORMATION REQUIRED BY FORM N-4 PART A
ITEM OF FORM N-4 PROSPECTUS CAPTION 1. Cover Page........................ Cover Page 2. Definitions....................... Glossary 3. Synopsis.......................... Highlights; Fee Table 4. Condensed Financial Information... Condensed Financial Information 5. General Description of Registrant, Depositor, and Portfolio Providian Life & Health Insurance Companies......................... Company; Providian Life & Health Insurance Company Separate Account IV; The Vanguard Variable Insurance Fund; Voting Rights 6. Deductions and Expenses........... Charges and Deductions; Taxes; Vanguard Variable Insurance Fund; Expenses 7. General Description of Variable Annuity Contracts................. Contract Features; Distribution at Death Rules; Voting Rights; Allocation of Purchase Payments; Exchanges Among the Portfolios; Additions, Deletions, or Substitutions of Investments 8. Annuity Period.................... Annuity Payment Options 9. Death Benefit..................... Death of Annuitant Prior to Annuity Date 10. Purchases and Contract Value...... Contract Application and Purchase Payments; Accumulated Value 11. Redemptions....................... Full and Partial Withdrawals; Annuity Payment Options; Free Look Period 12. Taxes............................. Federal Tax Considerations 13. Legal Proceedings................. Part B: Legal Proceedings 14. Table of Contents for the Statement of Additional Table of Contents for the Information....................... Vanguard Variable Annuity Plan Contract Statement of Additional Information PART B ITEM OF STATEMENT OF ADDITIONAL FORM N-4 INFORMATION CAPTION 15. Cover Page........................ Cover Page 16. Table of Contents................. Table of Contents 17. General Information and History... The Company 18. Services.......................... Part A: Auditors; Safekeeping of Account Assets; Distribution of the Contract 19. Purchase of Securities Being Offered........................... Distribution of the Contract 20. Underwriters...................... Distribution of the Contract 21. Calculation of Performance Data... Performance Information; Additional Performance Measures 22. Annuity Payments.................. Computations of Variable Annuity Income Payments 23. Financial Statements.............. Financial Statements
PROVIDIAN LIFE & HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV PROSPECTUS FOR THE VANGUARD VARIABLE ANNUITY PLAN CONTRACT OFFERED BY PROVIDIAN LIFE & HEALTH INSURANCE COMPANY (A MISSOURI STOCK COMPANY) APRIL 30, 1998 The Vanguard Variable Annuity Plan Contract (the "Contract"), offered through Providian Life & Health Insurance Company (the "Company"), provides a vehicle for investing on a tax-deferred basis in nine Portfolios offered by The Vanguard Group, Inc. The Contract is intended for retirement savings or other long-term investment purposes. The minimum Initial Purchase Payment for the Contract is $5,000; there are no sales loads. The Contract is a flexible-premium deferred variable annuity that provides a Free Look Period for a minimum of 10 days (30 days or more in some instances), during which you may cancel your investment in the Contract. Your Purchase Payments for the Contract may be allocated among nine Subaccounts of Providian Life & Health Insurance Company Separate Account IV (the "Separate Account"). Assets of each Subaccount are invested in corre- sponding Portfolios of Vanguard Variable Insurance Fund (the "Fund"), an open- end, diversified investment company offered by The Vanguard Group, Inc. The Fund currently offers nine Portfolios: the Money Market Portfolio, the High- Grade Bond Portfolio, the High Yield Bond Portfolio, the Balanced Portfolio, the Equity Income Portfolio, the Equity Index Portfolio, the Growth Portfolio, the International Portfolio, and the Small Company Growth Portfolio. Net Pur- chase Payments are automatically allocated to the Money Market Portfolio until the end of your Free Look Period, and are subsequently allocated according to your instructions. The Contract's Accumulated Value varies with the investment performance of the Portfolios you select. You bear all investment risk and investment results for the Portfolios are not guaranteed. The Contract offers a number of ways of withdrawing monies at a future date, including a lump-sum payment and several Annuity Payment Options. Full or par- tial withdrawals from the Contract may be made at any time before the Annuity Date, although in many instances withdrawals made prior to age 59 1/2 are sub- ject to a 10% penalty tax (and a portion may be subject to ordinary income taxes). If you elect an Annuity Payment Option, Annuity Payments may be re- ceived on a fixed or variable basis. You also have significant flexibility in choosing the Annuity Date on which Annuity Payments begin. This Prospectus sets forth the information you should know before investing in the Contract; it must be accompanied by the current Prospectus for Vanguard Variable Insurance Fund. Please read both Prospectuses carefully and retain them for future reference. A Statement of Additional Information for the Con- tract Prospectus, which has the same date as this Prospectus, has also been filed with the Securities and Exchange Commission, is incorporated herein by reference and is available free by writing to Vanguard Variable Annuity Cen- ter, P.O. Box 1103, Valley Forge, PA 19482-1103. The Table of Contents of the Statement of Additional Information is included at the end of this Prospectus. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 1 - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page HIGHLIGHTS.......... 3 Fee Table........... 6 Glossary............ 9 Condensed Financial Information........ 12 Financial State- ments.............. 12 Yield and Total Re- turn............... 12 The Company and the Separate Account... 13 Vanguard Variable Insurance Fund..... 14 CONTRACT FEATURES... 16
Page Free Look Period.... 16 Contract Application and Purchase Payments........... 16 Allocation of Purchase Payments.. 18 Charges and Deduc- tions.............. 18 Accumulated Value... 20 Dividends and Capi- tal Gains Treat- ment............... 21 Annuity Express(TM). 21 Exchanges Among the Portfolios......... 21
Page Full and Partial Withdrawals........ 22 Minimum Balance Requirements....... 23 Designation of a Beneficiary........ 24 Death of Annuitant Prior to Annuity Date............... 24 Annuity Date........ 25 Annuity Payment Op- tions.............. 25 FEDERAL TAX CONSIDERATIONS..... 28 General Information. 32
- ------------------------------------------------------------------------------- The Contract is not available in all States. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. 2 HIGHLIGHTS REFER TO THE GLOSSARY (PAGE 9) FOR A DEFINITION OF ALL CAPITALIZED TERMS. VANGUARD VARIABLE The Contract provides a vehicle for investing on a tax- ANNUITY PLAN deferred basis in nine Portfolios offered by The Van- CONTRACT guard Group, Inc. Monies may be subsequently withdrawn from the Contract either as a lump sum or as an annuity income. Because Accumulated Values and, to the extent Variable Annuity Payments are selected, Annuity Payments depend on the investment performance of the selected Portfolios, you bear all investment risk for monies in- vested under the Contract. The investment performance of the Portfolios is not guaranteed. - ------------------------------------------------------------------------------- WHO SHOULD INVEST The Contract is designed for investors seeking long- term, tax-deferred accumulation of funds, generally for retirement but also for other long-term investment pur- poses. The tax-deferred feature of the Contract is most attractive to investors in high federal and state mar- ginal tax brackets who have exhausted other avenues of tax deferral, such as "pre-tax" contributions to employ- er-sponsored retirement or savings plans. The Contract is intended for long- term investors. - ------------------------------------------------------------------------------- INVESTMENT CHOICES Your investment in the Contract may be allocated among several Subaccounts of the Separate Account. The Subaccounts in turn invest exclusively in the nine Port- folios of Vanguard Variable Insurance Fund. The Fund, a member of The Vanguard Group of Investment Companies, offers nine Portfolios: the Money Market Portfolio, the High-Grade Bond Portfolio, the High Yield Bond Portfo- lio, the Balanced Portfolio, the Equity Income Portfo- lio, the Equity Index Portfolio, the Growth Portfolio, the International Portfolio, and the Small Company Growth Portfolio. The assets of each Portfolio are sepa- rate, and each Portfolio has distinct investment objec- tives and policies as described in the accompanying Fund Prospectus. PAGE 14 - ------------------------------------------------------------------------------- FREE LOOK PERIOD The Contract provides a Free Look Period for a minimum of 10 days (30 or more days in some instances as speci- fied in your Contract) during which you may cancel your investment in the Contract. To cancel your investment, please return your Contract to us. When we receive the Contract, you will be reimbursed for all Purchase Pay- ments and any corresponding appreciation credited to your account. PAGE 16 - ------------------------------------------------------------------------------- HOW TO INVEST To invest in the Contract, please complete the accompa- nying application form. The minimum Initial Purchase Payment is $5,000; the minimum Portfolio balance is $1,000; and subsequent Purchase Payments must be at least $250. You may make subsequent Purchase Payments at any time before the Contract's Annuity Date, as long as the Annuitant or Joint Annuitant specified in the Con- tract is living. Please note that when purchasing a Con- tract, the Annuitant you name, and the Joint Annuitant if applicable, must be 75 years of age or less. PAGE 16 - ------------------------------------------------------------------------------- 3 ALLOCATION OF Your Net Purchase Payments are initially allocated to PURCHASE PAYMENTS the Money Market Portfolio when your Contract is issued. At the end of the Free Look Period, and a 5-day grace period, the then-current Accumulated Value of your Con- tract is allocated among the Portfolios of the Fund in accordance with your application instructions. Requests to change the allocation of subsequent Net Purchase Pay- ments may be made in writing, or by telephone if you have signed the proper section of the Application. PAGE 18 - ------------------------------------------------------------------------------- CHARGES AND The Contract imposes no sales charges. The costs of the DEDUCTIONS UNDER Contract include mortality and expense risk charges, THE CONTRACT maintenance and administrative charges which cover the cost of administering the Contract, and management, ad- visory and other fees, which reflect the costs of Van- guard Variable Insurance Fund. There are no charges un- der the Contract for withdrawals, although withdrawals made prior to age 59 1/2 may be subject to a 10% penalty tax. PAGE 18 - ------------------------------------------------------------------------------- EXCHANGES You may make exchanges among the Fund's Portfolios sub- ject to certain restrictions on excess exchange activi- ty. These restrictions do not apply, however, to non- substantive exchanges or to the Money Market Portfolio. No fee is imposed for exchanges. Exchanges must be for at least $250, or, if less, for the entire value of the Portfolio from which the exchange is made. PAGE 21 - ------------------------------------------------------------------------------- FULL AND PARTIAL You may withdraw all or part of the Accumulated Value of WITHDRAWALS the Contract before the earlier of the Annuity Date or the Annuitant's death (or the Joint Annuitant's death, if later). You may establish systematic withdrawals from your Contract, and receive distributions at regular in- tervals. Withdrawals made prior to age 59 1/2 may be subject to a 10% penalty tax. PAGE 22 - ------------------------------------------------------------------------------- DEATH BENEFIT If the Annuitant specified in your Contract dies prior to the Annuity Date, the Annuitant's named Beneficiary will receive the Death Benefit under the Contract. The Death Benefit is the greater of the then-current Accumu- lated Value of the Contract or the sum of all Purchase Payments (less any partial withdrawals and premium tax- es). Your Beneficiary may elect to receive these pro- ceeds as a lump sum or as Annuity Payments. PAGE 24 - ------------------------------------------------------------------------------- ANNUITY PAYMENT Beginning on the Annuity Date, you may withdraw monies OPTIONS from the Contract in the form of an annuity income. As the Contract Owner you may elect one of several Annuity Payment Options. The Options provide a wide range of flexibility in choosing an annuity payment schedule that meets your particular needs. Annuity Payments may be re- ceived for a designated period or for life (for either a single or joint life), with or without a guaranteed num- ber of payments. Annuity Payments can be fixed, or can vary with the investment performance of a Portfolio of the Fund. You may elect a lump-sum payment prior to the Annuity Date in lieu of Annuity Payments. PAGE 25 - ------------------------------------------------------------------------------- 4 CONTRACT AND If you have questions about your Contract, please tele- POLICYHOLDER phone the Vanguard Variable Annuity Center (1-800-462- INFORMATION 2391). Please have ready the Contract number and the Contract Owner's name when you call. As Contract Owner, you will receive periodic statements confirming any transactions that take place, as well as quarterly statements and an Annual Report. - ------------------------------------------------------------------------------- 5 FEE TABLE The following table illustrates all expenses that you would incur as a Contract Owner, except for Premium Taxes that may be assessed by your state (see "Charges and Deductions"). The expenses and fees shown are for the Fund's and the Separate Account's 1997 fiscal years. The purpose of this table is to assist you in under- standing the various costs and expenses that you would bear directly or indirectly as a purchaser of the Con- tract. The fee table reflects ALL expenses for both the Separate Account and the Fund. For a complete discussion of contract costs and expenses, see "Charges and Deduc- tions."
SEPARATE OWNER TRANSACTION EXPENSES ACCOUNT ------------------------------------------------------------------- Sales Load Imposed on Purchases........................... None Redemption Fees........................................... None Exchange Fees............................................. None ------------------------------------------------------------------- Annual Contract Maintenance Fee*.......................... $25
* Applies to Contracts valued at less than $25,000 at the time of initial purchase and on the last Business Day of each year.
SEPARATE ANNUAL SEPARATE ACCOUNT EXPENSES ACCOUNT --------------------------------------------------------------------- Mortality and Expense Risk Charge**......................... .28% Administrative Expense Charge............................... .10% --- TOTAL ANNUAL SEPARATE ACCOUNT EXPENSES.................... .38% ===
** This charge is currently reduced to 0.28% of all as- sets when net assets attributable to the Separate Ac- count (and Separate Account B of First Providian Life & Health Insurance Company) exceed $2.5 billion. This charge is further reduced to 0.27% of all assets when net assets attributable to the Separate Account (and Separate Account B of First Providian Life & Health In- surance Company) exceed $5 billion. See "Mortality and Expense Risk Charge."
HIGH- HIGH SMALL MONEY GRADE YIELD EQUITY EQUITY COMPANY ANNUAL FUND OPERATING MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - ---------------------------------------------------------------------------------------------------------------------- Management & Administrative Expenses.............. .15% .21% .21% .19% .23% .20% .20% .22% .23% Investment Advisory Fees.................. .02 .02 .06 .10 .10 .00 .15 .16 .12 12b-1 Distribution Fees.................. None None None None None None None None None Other Expenses Distribution Costs.... .03 .02 .02 .02 .02 .02 .02 .02 .01 Miscellaneous Expenses. .01 .04 .02 .01 .02 .01 .01 .06 .03 ---- ---- ---- ---- ---- ---- ---- ---- ---- Total Other Expenses... .04 .06 .04 .03 .04 .03 .03 .08 .04 ---- ---- ---- ---- ---- ---- ---- ---- ---- TOTAL FUND OPERATING EXPENSES............. .21% .29% .31% .32% .37% .23% .38% .46% .39% ==== ==== ==== ==== ==== ==== ==== ==== ====
6
HIGH- HIGH SMALL MONEY GRADE YIELD EQUITY EQUITY COMPANY MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH TOTAL EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - ----------------------------------------------------------------------------------------------------------------------- Total Separate Account Expenses............... .38% .38% .38% .38% .38% .38% .38% .38% .38% Total Fund Operating Expenses............... .21 .29 .31 .32 .37 .23 .38 .46 .39 --- --- --- --- --- --- --- --- --- GRAND TOTAL, SEPARATE ACCOUNT AND FUND OPERATING EXPENSES.... .59% .67% .69% .70% .75% .61% .76% .84% .77% === === === === === === === === ===
The following example illustrates the expenses that you would incur on a $1,000 purchase payment over various periods, assuming (1) a 5% annual rate of return and (2) redemption at the end of each period. As noted in the table above, the Contract imposes no redemption fees of any kind. Your expenses are identical whether you continue the Contract or withdraw the entire value of your Contract at the end of the applicable period as a lump sum or under one of the Contract's Annuity Payment Options.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- Money Market Portfolio............. $ 6 $19 $33 $ 75 High-Grade Bond Portfolio.......... 7 22 38 85 High Yield Bond Portfolio.......... 7 22 38 86 Balanced Portfolio................. 7 23 40 89 Equity Income Portfolio............ 8 24 42 94 Equity Index Portfolio............. 6 20 35 78 Growth Portfolio................... 8 25 43 96 International Portfolio............ 9 27 47 105 Small Company Growth Portfolio..... 8 25 43 97
The Annual Contract Maintenance Fee is reflected in this example as a percentage equal to the total amount of fees collected during a year divided by the total average net assets of the Portfolios during the same year. The fee is assumed to remain the same in each year of the above periods. The fee is prorated to reflect only the remaining portion of the calendar year of purchase. Thereafter, the fee is deducted on the last business day of the year for the following year, on a pro rata basis, from each of the Portfolios you have chosen. For a complete discussion of Contract costs and expenses, see "Charges and Deductions." THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EX- PENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN, SUBJECT TO THE GUARANTEES IN THE CONTRACT. --------------------------------------------------------- AUTOMATED QUOTES The Vanguard Tele-Account Service provides access to Accumulation Unit Values (to two decimal places) and total returns for all Portfolios, and yield information for the Money Market, High-Grade Bond, and High Yield Bond Portfolios of the Vanguard Variable Annuity Plan. Contract Owners may utilize this service for 24-hour access to Plan Portfolio information. To access the service you may call Tele-Account at 1-800-662-6273 (ON- BOARD) and follow the step-by-step instructions, or speak with a Vanguard associate at 1-800-522-5555 to request a brochure that explains how to use the service. 7 Vanguard's website also has Accumulation Unit Values (to two decimal places) for all Portfolios. This service can be utilized from www.vanguard.com by double-clicking on fund prices. - ------------------------------------------------------------------------------- 8 GLOSSARY ACCUMULATION UNIT--A measure of your ownership interest in the Contract prior to the Annuity Date. Analogous, though not identical, to a share owned in a mutual fund account. ACCUMULATION UNIT VALUE--The value of each Accumulation Unit which is calculated each Valuation Period. Analo- gous, though not identical, to the share price (net as- set value) of a mutual fund. ACCUMULATED VALUE--The value of all amounts accumulated under the Contract prior to the Annuity Date, equivalent to the Accumulation Units multiplied by the Accumulation Unit Value. Analogous to the current market value of a mutual fund account. ANNUITANT--The person or persons whose life is used to determine the duration of any Annuity Payments and, sub- ject to the provision dealing with Joint Annuitants, upon whose death, prior to the Annuity Date, benefits under the Contract are paid. ANNUITY DATE--The date on which Annuity Payments begin. The Annuity Date is always the first day of the month you specify. ANNUITY PAYMENT--One of a series of payments made under an Annuity Payment Option. ANNUITY PAYMENT OPTION--One of several ways in which a series of payments are made after the Annuity Date. Un- der a FIXED ANNUITY OPTION, the dollar amount of each Annuity Payment does not change over time. Annuity Pay- ments are based on the Contract's Accumulated Value as of the Annuity Date. Under a VARIABLE ANNUITY OPTION, the dollar amount of each Annuity Payment may change over time, depending upon the investment experience of the Portfolio or Portfolios you choose. ANNUITY UNIT--Unit of measure used to calculate Variable Annuity Payments. BENEFICIARY--The person to whom any benefits are due upon the Annuitant's death. BUSINESS DAY--A day when the New York Stock Exchange is open for trading. COMPANY ("We", "Us", "Our")--Providian Life & Health In- surance Company, a Missouri stock company. CONTRACT ANNIVERSARY--Any anniversary of the Contract Date. CONTRACT DATE--The date of issue of this Contract. CONTRACT OWNER ("You", "Your")--The person or persons designated as the Contract Owner in the Contract appli- cation. The term shall also include any person named as Joint Owner. A Joint Owner shares ownership in all re- spects with the Owner. The Owner has the right to assign ownership to a person or party other than himself. CONTRACT YEAR--A period of 12 months starting with the Contract Date or any Contract Anniversary. 9 DEATH BENEFIT--The greater of the then-current Accumu- lated Value or the sum of all Purchase Payments (less any partial withdrawals and premium taxes). FREE LOOK PERIOD--The period during which the Contract can be cancelled and treated as void from the Contract Date. FUND--Vanguard Variable Insurance Fund, Inc., an open- end, diversified investment company, offered by The Van- guard Group, Inc., in which the Separate Account in- vests. JOINT ANNUITANT--The person other than the Annuitant who may be designated by the Contract Owner and on whose life Annuity Payments may also be based. NET PURCHASE PAYMENT--Any Purchase Payment less the ap- plicable Premium Tax, if any. NON-QUALIFIED CONTRACT--A Contract other than a Quali- fied Contract. Contributions to such a Contract are made with after-tax dollars. OWNER'S DESIGNATED BENEFICIARY--The person designated to receive the Contract Owner's interest in the Contract if the Contract Owner dies before the entire interest in the Contract is distributed, as explained in the "IRS- Required Distribution" section. PAYEE--The Contract Owner, Annuitant, Beneficiary, or any other person, estate, or legal entity to whom bene- fits are to be paid. PORTFOLIO--The separate investment Portfolios of the Vanguard Variable Insurance Fund. The Fund currently of- fers nine Portfolios: the Money Market Portfolio, the High-Grade Bond Portfolio, the High Yield Bond Portfo- lio, the Balanced Portfolio, the Equity Income Portfo- lio, the Equity Index Portfolio, the Growth Portfolio, the International Portfolio, and the Small Company Growth Portfolio. In this Prospectus, Portfolio will also be used to refer to the Subaccount that invests in the corresponding Portfolio. PREMIUM TAX--A regulatory tax that may be assessed by your state on the Purchase Payments made into your Con- tract. The amount which we must pay as Premium Tax will be deducted from each Purchase Payment or from your Ac- cumulated Value as it is incurred by us. PROOF OF DEATH--(a) A certified death certificate; (b) a certified decree of a court of competent jurisdiction as to the finding of death; (c) a written statement by a medical doctor who attended the deceased; or (d) any other proof satisfactory to the Company. PURCHASE PAYMENT--Any premium payment--any amount you invest in the Contract. The minimum Initial Purchase Payment is $5,000; each Additional Purchase Payment must be at least $250. Purchase Payments may be made at any time prior to the Annuity Date as long as the Annuitant is living. QUALIFIED CONTRACT--A Contract that qualifies as an in- dividual retirement annuity under Section 408(b) of the Internal Revenue Code of 1986, as amended. 10 SEPARATE ACCOUNT--Providian Life & Health Insurance Com- pany Separate Account IV. The Separate Account consists of assets that are segregated by Providian Life & Health Insurance Company and invested in the Vanguard Variable Insurance Fund. The Separate Account is independent of the general assets of the Company. SUBACCOUNT--That portion of the Separate Account that invests in shares of the Fund's Portfolios. Each Subaccount will only invest in a single Portfolio. The investment performance of each Subaccount is linked di- rectly to the in- vestment performance of one of the nine Portfolios of the Fund. VALUATION PERIOD--A period between two successive Busi- ness Days commencing at the close of business of the first Business Day and ending at the close of business of the following Business Day. - ------------------------------------------------------------------------------- 11 CONDENSED FINAN- The Accumulation Unit Values and the number of Accumula- CIAL INFORMATION tion Units outstanding for each Subaccount in 1991 through 1997 are as follows:
FOR THE PERIOD APRIL 29, 1991 THROUGH DECEMBER 31, 1997* ---------------------------------------------------------------------------------------- HIGH SMALL MONEY HIGH-GRADE YIELD EQUITY EQUITY COMPANY MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH ---------------------------------------------------------------------------------------- Accumulation unit value as of: Start Date*............ 1.000 10.000 10.000 10.000 10.000 10.000 10.000 10.000 10.000 12/31/91............... 1.032 11.027 . 10.802 . 11.275 . . . 12/31/92............... 1.064 11.656 . 11.514 . 12.039 . . . 12/31/93............... 1.091 12.695 . 12.961 10.488 13.144 10.569 . . 12/31/94............... 1.130 12.290 . 12.815 10.304 13.224 10.964 10.128 . 12/31/95............... 1.191 14.437 . 16.885 14.239 18.073 15.089 11.678 . 12/31/96............... 1.250 14.882 10.871 19.532 16.820 22.098 19.057 13.319 9.725 12/31/97............... 1.314 16.219 12.135 23.946 22.503 29.301 24.034 13.708 10.970 Number of units outstanding as of: 12/31/91............... 32,495 2,122 . 3,395 . 2,311 . . . 12/31/92............... 75,564 4,417 . 8,682 . 9,645 . . . 12/31/93............... 109,190 6,592 . 16,164 6,411 12,971 4,879 . . 12/31/94............... 154,415 6,589 . 16,429 6,089 13,676 8,004 6,818 . 12/31/95............... 183,867 8,684 . 17,021 7,355 16,292 11,857 8,146 . 12/31/96............... 246,219 9,395 3,042 17,307 9,260 19,360 15,744 12,435 5,362 12/31/97............... 282,813 12,403 7,810 19,528 13,361 24,886 18,975 14,597 11,350 (UNITS ARE SHOWN IN THOUSANDS)
* Date of commencement of operations for the High-Grade Bond and Equity Index Subaccounts was 4/29/91, for the Money Market Subaccount was 5/2/91, for the Balanced Subaccount was 5/23/91, for the Equity Income and Growth Subaccounts was 6/7/93, for the International Subaccount was 6/3/94, and for the High Yield Bond and Small Company Growth Subaccounts was 6/3/96. - ------------------------------------------------------------------------------- FINANCIAL The audited statutory-basis financial statements of the STATEMENTS Company and the financial statements of the Separate Ac- count (as well as the Independent Auditors' Reports thereon) are contained in the Statement of Additional Information. - ------------------------------------------------------------------------------- YIELD AND TOTAL From time to time a Portfolio of the Fund may advertise RETURN its yield and total return investment performance for various periods, including quarter-to-date, year-to- date, one year, three year, five year and since incep- tion. Advertised yields and total returns will be calcu- lated according to standardized methods prescribed by the Securities and Exchange Commission ("SEC"), so all charges and expenses attributable to the Contract will be included. Including these fees has the effect of de- creasing the advertised performance of a Portfolio, so that a Portfolio's investment performance will not be directly comparable to that of an ordinary mutual fund. The Company may also advertise total return or other performance data in non-standard formats which do not reflect the Annual Contract Maintenance Fee. 12 Please refer to the Statement of Additional Information for a description of the method used to calculate a Portfolio's yield and total return, and a list of the indexes and other benchmarks used in evaluating a Port- folio's performance. The performance measures discussed above are not in- tended to indicate or predict future performance. - ------------------------------------------------------------------------------- THE COMPANY AND The Company is a stock life insurance company incorpo- THE SEPARATE rated under the laws of Missouri on August 6, 1920, with ACCOUNT administrative offices at 20 Moores Road, Frazer, Penn- sylvania 19355. The Company is principally engaged in PROVIDIAN LIFE & offering life insurance, annuity contracts, and accident HEALTH INSURANCE and health insurance and is admitted to do business in COMPANY 49 states, the District of Columbia and Puerto Rico. As of December 31, 1997, the Company had statutory as- sets of approximately $11 billion. The Company is a wholly owned indirect subsidiary of AEGON USA, Inc., which conducts substantially all of its operations through subsidiary companies engaged in the insurance business or in providing non-insurance financial servic- es. All of the stock of AEGON USA, Inc. is indirectly owned by AEGON n.v. of the Netherlands. AEGON n.v., a holding company, conducts its business through subsidi- ary companies engaged primarily in the insurance busi- ness. --------------------------------------------------------- PROVIDIAN LIFE & The Separate Account was established by the Company as a HEALTH INSURANCE separate account under the laws of the State of Missouri COMPANY SEPARATE on July 16, 1990, pursuant to a resolution of the ACCOUNT IV Company's Board of Directors. The Separate Account is a unit investment trust registered with the SEC under the Investment Company Act of 1940 (the "1940 Act"). Such registration does not signify that the SEC supervises the management or the investment practices or policies of the Separate Account. The assets of the Separate Account are owned by the Com- pany and the obligations under the Contract are obliga- tions of the Company. These assets are held separately from the other assets of the Company and are not charge- able with liabilities incurred in any other business op- eration of the Company (except to the extent that assets in the Separate Account exceed the reserves and other liabilities of the Separate Account). The Company will always keep assets in the Separate Account with a value at least equal to the total Accumulated Value under the Contracts. Income, gains and losses incurred on the as- sets in the Separate Account, whether or not realized, are credited to or charged against the Separate Account without regard to other income, gains or losses of the Company. Therefore, the investment performance of the Separate Account is entirely independent of the invest- ment performance of the Company's general account assets or any other separate account maintained by the Company. The Separate Account has nine Subaccounts, each of which invests solely in a corresponding Portfolio of the Fund. Additional Subaccounts may be established at the discre- tion of the Company. The Separate Account meets the def- inition of a "separate account" under Rule O-1(e)(1) of the 1940 Act. - ------------------------------------------------------------------------------- 13 VANGUARD VARIABLE Vanguard Variable Insurance Fund is an open-end diversi- INSURANCE FUND fied investment company intended exclusively as an in- vestment vehicle for variable annuity or variable life insurance contracts offered by insurance companies. The Fund is a member of The Vanguard Group of Investment Companies, a family of more than 30 investment companies with more than 94 distinct portfolios and assets in ex- cess of $360 billion. Through their jointly-owned sub- sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain at cost virtu- ally all of their corporate management, administrative, shareholder accounting and distribution services. The Fund offers nine Portfolios--a money market portfo- lio, a high-grade bond portfolio, a high yield bond portfolio, a balanced portfolio, an equity income port- folio, an equity index portfolio, a growth portfolio, an international portfolio, and a small company growth portfolio--each with distinct investment objectives and policies. THE MONEY MARKET PORTFOLIO seeks to provide current in- come consistent with the preservation of capital and li- quidity. The Portfolio also seeks to maintain a stable net asset value of $1.00 per share. The Portfolio in- vests primarily in high-quality money market instruments issued by financial institutions, non-financial corpora- tions, the U.S. Government, state and municipal govern- ments and their agencies or instrumentalities, as well as repurchase agreements collateralized by such securi- ties. The Portfolio also invests in Eurodollar obliga- tions (dollar-denominated obligations issued outside the U.S. by foreign banks or foreign branches of domestic banks) and Yankee obligations (dollar-denominated obli- gations issued in the U.S. by foreign banks). Vanguard's Fixed Income Group serves as this Portfolio's investment adviser. THE HIGH-GRADE BOND PORTFOLIO seeks to parallel the in- vestment results of the Lehman Brothers Aggregate Bond Index. The Portfolio invests primarily in a diversified portfolio of U.S. Government and corporate bonds, and mortgage-backed securities. Vanguard's Fixed Income Group serves as this Portfolio's investment adviser. THE HIGH YIELD BOND PORTFOLIO seeks to provide a high level of current income by investing in lower-rated debt securities, which may be regarded as having speculative characteristics and are commonly referred to as "junk bonds." Under normal circumstances, at least 80% of the Portfolio's assets will be invested in high-yield corpo- rate debt obligations rated at least B by Moody's In- vestors Service, Inc. or Standard & Poor's Corporation or, if unrated, of comparable quality as determined by the Portfolio's adviser, Wellington Management Company. THE BALANCED PORTFOLIO seeks the conservation of princi- pal, a reasonable income return and profits without un- due risk. The Portfolio invests in a diversified portfo- lio of common stocks and bonds, with common stocks expected to represent 60% to 70% of the Portfolio's to- tal assets and bonds to represent 30% to 40%. Wellington Management Company serves as this Portfolio's investment adviser. 14 THE EQUITY INCOME PORTFOLIO seeks to provide a high level of current income by investing principally in div- idend-paying equity securities. Newell Associates serves as this Portfolio's investment adviser. THE EQUITY INDEX PORTFOLIO seeks to parallel the invest- ment results of the Standard & Poor's 500 Composite Stock Price Index (S&P 500). The Portfolio invests in common stocks included in the S&P 500. Vanguard's Core Management Group serves as this Portfolio's investment adviser. THE GROWTH PORTFOLIO seeks to provide long-term capital appreciation by investing primarily in equity securities of seasoned U.S. companies with above-average prospects for growth. Lincoln Capital Management Company serves as this Portfolio's investment adviser. THE INTERNATIONAL PORTFOLIO seeks to provide long-term capital appreciation. The Portfolio invests primarily in equity securities of companies based outside the United States. Schroder Capital Management International, Inc. serves as this Portfolio's investment adviser. THE SMALL COMPANY GROWTH PORTFOLIO seeks to provide long term growth in capital by investing primarily in equity securities of small companies deemed to have favorable prospects for growth. These securities are primarily common stocks but may also include securities convert- ible into common stock. Granahan Investment Management serves as this Portfolio's investment adviser. There is no assurance that a Portfolio will achieve its stated objective. ADDITIONAL INFORMATION CONCERNING THE INVESTMENT OBJEC- TIVES AND POLICIES OF THE PORTFOLIOS AND THE INVESTMENT ADVISORY SERVICES, TOTAL EXPENSES AND CHARGES CAN BE FOUND IN THE CURRENT PROSPECTUS FOR THE FUND, WHICH AC- COMPANIES THIS PROSPECTUS. THE FUND PROSPECTUS SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE CONCERNING THE ALLOCATION OF PURCHASE PAYMENTS TO A PORTFOLIO. The Portfolios may be made available to registered sepa- rate accounts offering variable annuity and variable life products of the Company as well as other insurance companies. Although we believe it is unlikely, a mate- rial conflict could arise between the interests of the Separate Account and one or more of the other partici- pating separate accounts. In the event of a material conflict, the affected insurance companies agree to take any necessary steps, in- cluding removing their separate account from the Fund if required by law, to resolve the matter. See the Fund's Prospectus for more information. Administrative services are provided by The Vanguard Group, Inc., The Vanguard Variable Annuity Center, 100 Vanguard Boulevard, Malvern, PA 19355. In California, The Vanguard Group, Inc. provides administrative serv- ices under the name Vanguard Administrators. In addi- tion, The Continuum Company, Inc., 301 West 11th Street, Kansas City, MO 64105, provides some subadministrative services. - ------------------------------------------------------------------------------- 15 CONTRACT FEATURES The rights and benefits under the Contract are described below and in the Contract. The Company reserves the right to make any modification to conform the Contract to, or give the Contract Owner the benefit of, any fed- eral or state statute or any rule or regulation of the United States Treasury Department. --------------------------------------------------------- FREE LOOK PERIOD A Free Look Period exists for a minimum of 10 days after the Contract Owner receives the Contract (30 or more days in some instances as set forth in your Contract) plus 5 days for mailing. The Contract permits the Con- tract Owner to cancel the Contract during the Free Look Period by returning the Contract to Vanguard Variable Annuity Center, P.O. Box 1103, Valley Forge, PA 19482- 1103. Withdrawals are not permitted during the Free Look Period. Upon cancellation, the Contract is treated as void from the Contract Date and the Contract Owner will receive the greater of the Purchase Payments made under the Contract or the Accumulated Value of the Contract as of the day the Contract is received by the Company. - ------------------------------------------------------------------------------- CONTRACT Individuals wishing to purchase a Non-Qualified Contract APPLICATION AND should send a completed application and your Initial PURCHASE PAYMENTS Purchase Payment to the Vanguard Variable Annuity Cen- ter. Your Initial Purchase Payment must be equal to or greater than the $5,000 minimum investment requirement. Furthermore, the named Annuitant and Joint Annuitant must be 75 years of age or less. The Contract will be issued and the Initial Net Purchase Payment will be credited within two Business Days after acceptance of the application and the Initial Purchase Payment. Acceptance is subject to the application being received in good order, and the Company reserves the right to reject any application or Initial Purchase Pay- ment. If the Initial Purchase Payment cannot be credited be- cause the application is incomplete, the Company will contact the applicant in writing, explain the reason for the delay and will refund the Initial Purchase Payment within five Business Days. As soon as the necessary re- quirements are fulfilled the Purchase Payment will be credited. Additional Purchase Payments may be made at any time prior to the Annuity Date, as long as the Annuitant or Joint Annuitant, if applicable, is living. Additional Purchase Payments must be for at least $250. Additional Purchase Payments received prior to the close of the New York Stock Exchange (generally 4:00 p.m. Eastern time) are credited to the Accumulated Value of the Contract as of the close of business that same day. In order to prevent lengthy processing delays caused by the clearing of foreign checks, we will only accept a foreign check which has been drawn in U.S. dollars and has been issued by a foreign bank with a U.S. correspon- dent bank. The Contracts are available on a non-qualified basis and as individual retirement annuities (IRAs) that qualify for special federal income tax treatment. Generally, Qualified Contracts may be purchased only in connection with a 16 "rollover" of funds from another qualified plan or IRA and contain certain other restrictive provisions limit- ing the timing and amount of payments to and distribu- tions from the Qualified Contract. Total Purchase Payments may not exceed $1,000,000 with- out prior approval of the Company. PURCHASING BY WIRE CORESTATES BANK, N.A. ABA 031000011 MONEY SHOULD BE DEPOSIT ACCOUNT NUMBER 1412652173 WIRED TO: PROVIDIAN LIFE & HEALTH INSURANCE COM- PANY PLEASE CALL: CONTRACT NUMBER 1-800-462-2391 CONTRACT REGISTRATION BEFORE WIRING To assure proper receipt, please be sure your bank in- cludes the contract number Vanguard has assigned you. For an Initial Purchase Payment, please complete the Vanguard Variable Annuity Plan Application and mail it to the Vanguard Variable Annuity Center, P.O. Box 1103, Valley Forge, PA 19482-1103 prior to completing wire ar- rangements. Note: Federal funds wire purchase orders will be accepted only when the New York Stock Exchange and Custodian Bank are open for business. --------------------------------------------------------- SECTION 1035 You may exchange your Accumulated Value under an exist- EXCHANGES ing annuity contract to the Vanguard Variable Annuity Plan. Section 1035 of the Internal Revenue Code of 1986, as amended (the "Code"), provides, in general, that no gain or loss shall be recognized on the exchange of one annuity contract for another. To complete a "1035 Ex- change" simply provide all the requested information on the 1035 Exchange Form and mail it, along with the ap- plication and your current contract, to the Variable An- nuity Center. As an accommodation to owners of Vanguard Variable Annuity Plan contracts, and in accordance with the Code, we will accept, under certain conditions, the consolidation of two or more Vanguard Variable Annuity Plan contracts into one. Such exchanges will be accepted on a case by case basis in order to provide contract owners with consolidated account reporting. In addition, if applicable, contract owners will be responsible for only one Annual Contract Maintenance Fee. Under no cir- cumstances will an exchange of an existing Vanguard Variable Annuity Plan contract for an identical new Van- guard Variable Annuity Plan contract be allowed. Special rules and procedures apply to Code Section 1035 transac- tions, particularly if the Contract being exchanged was issued prior to August 14, 1982. Prospective Contract Owners wishing to take advantage of Code Section 1035 should consult their tax advisers. Please note, that an outstanding loan on the contract that you wish to transfer may create a tax consequence. Therefore, you are encouraged to settle any outstanding loans with your current insurance company prior to ini- tiating a 1035 Exchange into the Plan. - ------------------------------------------------------------------------------- 17 ALLOCATION OF The Contract Owner specifies on the Contract Application PURCHASE PAYMENTS how Purchase Payments will be allocated. The Contract Owner may allocate each Purchase Payment to one or more of the Portfolios as long as such portions are whole number percentages and any allocation made is at least 10% and at least $1,000. Allocation instructions for future Purchase Payments may be changed by the Contract Owner by sending a written notice to the Vanguard Variable Annuity Center. You may sign the proper section of the Application to establish an option that allows you to provide allocation instruc- tions by telephone. This option includes the ability to change your investment by eliminating a Contract Portfo- lio from your allocations or by adding a new Contract Portfolio to your list. Please note that you must main- tain a minimum of $1,000 in each Portfolio to which you have allocated assets. During the Free Look Period (which is assumed for this purpose to be 10 to 30 days (or more in some instances as specified in your contract) after the issuance of the Contract), the Initial Net Purchase Payment and addi- tional Purchase Payments received during the Free Look Period will be allocated to the Money Market Portfolio. Upon expiration of the Free Look Period, the Accumulated Value will remain in the Money Market Portfolio for an additional 5-day grace period to allow for mail deliv- ery. Upon the expiration of the Free Look Period and the 5-day grace period (15 to 35 days), the Accumulated Value will then be allocated among the Portfolios in ac- cordance with the Contract Owner's instructions. - ------------------------------------------------------------------------------- CHARGES AND The projected expenses for the Contract are substan- DEDUCTIONS tially below the costs of other variable annuity con- tracts. For example, based on a $25,000 contract the av- erage expense ratio of other variable annuity contracts was 2.09% as of December 31, 1997, compared to 0.71% for the Vanguard Variable Annuity Plan (source for competi- tors' data: Morningstar Performance Report January 1998). No sales load is deducted from the Initial Purchase Payment or any Additional Purchase Payments. In addition, there are no sales charges imposed upon withdrawals. --------------------------------------------------------- MORTALITY AND The Company imposes a charge as compensation for bearing EXPENSE RISK certain mortality and expense risks under the Contracts. CHARGE The annual charge is assessed daily based on the com- bined net assets of the Separate Account and Separate Account B of First Providian Life & Health Insurance Company in the Fund according to the following schedule: RATE FOR NET ASSETS ALL ASSETS --------------------------------- ---------- Up to $2.5 Billion 0.30% Over $2.5 Billion and Up To $5 Billion 0.28% Over $5 Billion 0.27% The Company guarantees that these mortality and expense risk breakpoints will never increase. If this charge is insufficient to cover actual costs and assumed risks, the loss will fall on the Company. Conversely, if the charge proves more than sufficient, any excess will be added to the Company surplus. 18 The mortality risk borne by the Company under the Con- tracts, where one of the life Annuity Payment Options was selected, is to make monthly annuity payments (de- termined in accordance with the annuity tables and other provisions contained in the Contract) regardless of how long all Annuitants may live. We also assume mortality risk as a result of our guarantee of a minimum Death Benefit in the event the Annuitant dies prior to the An- nuity Date. The expense risk borne by the Company under the Con- tracts is the risk that the charges for administrative expenses which are guaranteed for the life of the Con- tract may be insufficient to cover the actual costs of issuing and ad- ministering the Contract. --------------------------------------------------------- ADMINISTRATIVE An annual administrative charge of .10% of the net asset CHARGE & value of the Separate Account is assessed daily along MAINTENANCE FEE with an annual maintenance fee of $25 for Contracts val- ued at less than $25,000 at the time of initial purchase and on the last Business Day of each year. It is impor- tant to note that fluctuation in Accumulation Unit Val- ues due to changes in the market values of securities may cause an investor's Contract's value to fall below $25,000. The annual maintenance fee is deducted propor- tionately from each Contract's Accumulated Value; there- fore, the $25 fee is assessed per Contract, not per Portfolio chosen. Your Initial Purchase Payment of less than $25,000 is reduced by an initial maintenance fee which is pro-rated to reflect only the remaining portion of the calendar year of purchase. Thereafter, the fee is deducted on the last Business Day of the year for the following year, on a pro rata basis from each of the Portfolios you have chosen. These deductions represent reimbursement for the costs expected to be incurred over the life of the Contract for issuing and maintaining each Contract and the Separate Account. Please note that Contracts valued at $25,000 or more as of the last Busi- ness Day of the year will not be assessed the $25 main- tenance fee for the following year. --------------------------------------------------------- TAXES The Contract Owner will, where such taxes are imposed by state law, pay Premium Taxes that currently range up to 3.5%. These taxes will be deducted from the Accumulated Value or Purchase Payments as incurred by the Company. As of the date of this Prospectus, the following state assesses a Premium Tax on all Initial and subsequent Purchase Payments:
NON- QUALIFIED QUALIFIED ------------------------------------------------------------------- South Dakota................................... 0% 1.25%
As of the date of this Prospectus, the following states assess a Premium Tax against the Accumulated Value if the Owner chooses an Annuity Payment Option instead of receiving a lump sum distribution:
NON- QUALIFIED QUALIFIED ------------------------------------------------------------------- California..................................... .50% 2.35% District of Columbia........................... 2.25% 2.25% Kentucky....................................... 2.00% 2.00%
19
NON- QUALIFIED QUALIFIED ------------------------------------------------------------------- Maine.......................................... 0% 2.00% Nevada......................................... 0% 3.50% West Virginia.................................. 1.00% 1.00% Wyoming........................................ 0% 1.00%
Under present laws, the Company will incur state or lo- cal taxes (other than Premium Taxes described above) in several states. At present, the Company does not charge the Contract Owner for these other taxes. If there is a change in state or local tax laws, charges for such taxes may be made. The Company does not expect to incur any federal income tax liability attributable to invest- ment income or capital gains retained as part of the re- serves under the Contracts. (See "Federal Tax Considera- tions," page 28.) Based upon these expectations, no charge is currently being made to the Separate Account for corporate federal income taxes that may be attribut- able to the Separate Account. The Company will periodically review the question of a charge to the Separate Account for corporate federal in- come taxes related to the Separate Account. Such a charge may be made in future years for any federal in- come taxes incurred by the Company. This might become necessary if the tax treatment of the Company is ulti- mately determined to be other than what the Company cur- rently believes it to be, if there are changes made in the federal income tax treatment of annuities at the corporate level, or if there is a change in the Company's tax status. In the event that the Company should incur federal income taxes attributable to in- vestment income or capital gains retained as part of the reserves under the Contracts, the Accumulated Value of the Contract would be correspondingly adjusted by any provision or charge for such taxes. --------------------------------------------------------- VANGUARD VARIABLE The value of the assets in the Separate Account will re- INSURANCE FUND flect the fees and expenses paid by the Fund. A complete EXPENSES description of these expenses is found in the "Fee Ta- ble" section of this Prospectus and in the "Management of the Fund" Section of the Fund's Prospectus and in the Fund's Statement of Additional Information. - ------------------------------------------------------------------------------- ACCUMULATED VALUE At the commencement of the Contract, the Accumulated Value equals the Initial Net Purchase Payment. Thereaf- ter, on any Business Day the Accumulated Value equals the Accumulated Value from the previous Business Day in- creased by: i) any Additional Net Purchase Payments re- ceived by the Company and ii) any increase in the Accu- mulated Value due to investment results of the selected Portfolio(s) that occur during the Valuation Period; and reduced by: i) any decrease in the Accumulated Value due to investment results of the selected Portfolio(s), ii) a daily charge to cover the mortality and expense risks assumed by the Company, iii) any charge to cover the cost of administering the Contract, iv) any partial withdrawals, and v) Premium Taxes, if any, that occur during the Valuation Period. 20 The Accumulated Value is expected to change from Valua- tion Period to Valuation Period, reflecting the invest- ment experience of the selected Portfolios of the Fund as well as the daily deduction of charges. When your Net Purchase Payments are allocated to a selected Portfolio, they result in a particular number of Accumulation Units being credited to your Contract. The number of Accumula- tion Units credited is determined by dividing the dollar amount allocated to each Portfolio by the Accumulation Unit Value for that Portfolio as of the end of the Valu- ation Period in which the payment is received. The Accu- mulation Unit Value varies each Valuation Period (i.e., each day that there is trading on the New York Stock Ex- change) with the net rate of return of the Portfolio. The net rate of return reflects the investment perfor- mance of the Portfolio for the Valuation Period and is net of asset charges to the Portfolio. - ------------------------------------------------------------------------------- DIVIDENDS AND All dividends and capital gains earned will be CAPITAL GAINS reinvested and reflected in the Accumulation Unit Value. TREATMENT Only in this way can these earnings remain tax deferred. - ------------------------------------------------------------------------------- ANNUITY EXPRESS(TM) The Annuity Express service allows you to transfer funds automatically from your checking or statement savings account to one or more Portfolios in your Contract. You may purchase into existing Portfolios (if the $1,000 minimum balance requirement has been met) monthly, quar- terly, semiannually, or annually. The minimum automatic purchase is $50 and the maximum is $100,000. - ------------------------------------------------------------------------------- EXCHANGES AMONG Should your investment goals change, you may exchange THE PORTFOLIOS the Accumulated Value among the Portfolios of the Fund. Requests for exchanges received by mail or by telephone prior to the close of the New York Stock Exchange (gen- erally 4:00 p.m. Eastern time) are processed at the close of business that same day. Requests received after the close of the Exchange are processed the next Busi- ness Day. The Contract's exchange privilege is not intended to af- ford Contract Owners a way to speculate on short-term movements in the market. Accordingly, in order to pre- vent excessive use of the exchange privilege that may potentially disrupt the management of the Fund and in- crease transaction costs, the Separate Account has es- tablished a policy of limiting excessive exchange activ- ity. Because excessive exchanges can potentially disrupt the management of the Portfolios and increase transaction costs, exchange activity is limited to two substantive exchanges (at least 30 days apart) from each Portfolio (except the Money Market Portfolio) during any 12-month period. "Substantive" means either a dollar amount large enough to have a negative impact on a Portfolio or a se- ries of movements between Portfolios. This restriction does not limit non-substantive exchanges and does not apply to exchanges from the Money Market Portfolio. All exchanges must be for at least $250, or, if less, the Accumulated Value in the Portfolio. However, the Company and the Fund reserve the right to revise or terminate the exchange privilege, limit the amount of or reject any exchange, as deemed necessary, at any time. --------------------------------------------------------- 21 AUTOMATIC The Automatic Exchange Service allows you to move money EXCHANGES automatically among the Portfolios of the Fund. You may exchange fixed amounts or percentages of your Portfolio balance either monthly, quarterly, semiannually or annu- ally into existing (the $1,000 minimum balance require- ment has been met) Portfolios. Exchanges at regular in- tervals or "dollar-cost averaging" can be used, for example, to move money from a money market portfolio into a stock or bond portfolio. The minimum exchange amount is $250. The Automatic Exchange Service may be established by completing a Vanguard Variable Annuity Plan Automatic Exchange Service Application Form or writing a letter of instruction. You may change the transfer amount or cancel this service in writing or by telephone, if you have established telephone authoriza- tion on your Contract. Please note that the Automatic Exchange Service cannot be used to establish a new Port- folio, and will not be activated until the Free Look Pe- riod has expired. --------------------------------------------------------- TELEPHONE To establish the telephone exchange privilege on your EXCHANGES Contract, please complete the appropriate section of the Plan Application. The Company, the Fund, and Vanguard shall not be responsible for the authenticity of ex- change instructions received by telephone. Reasonable procedures will be undertaken to confirm that instruc- tions communicated by telephone are genuine. Prior to the acceptance of any request, the caller will be asked by a customer service representative for his or her con- tract number and social security number. All calls will be recorded, and this information will be verified with the Contract Owner's records prior to processing a transaction. Furthermore, all transactions performed by a service representative will be verified with the Con- tract Owner through a written confirmation statement. The Company, the Fund, and Vanguard shall not be liable for any loss, cost or expense for action on telephone instructions that are believed to be genuine in accor- dance with these procedures. Every effort will be made to maintain the exchange privilege. However, the Company and the Fund reserve the right to revise or terminate its provisions, limit the amount of or reject any ex- change, as deemed necessary, at any time. - ------------------------------------------------------------------------------- FULL AND PARTIAL At any time before the Annuity Date and while the Annui- WITHDRAWALS tant or Joint Annuitant is living, the Contract Owner may make a partial or full withdrawal of the Contract to receive all or part of the Accumulated Value by sending a written request to the Vanguard Variable Annuity Cen- ter. Full or partial withdrawals may only be made before the Annuity Date and all partial withdrawal requests must be for at least $250. (See "Federal Tax Considera- tions," page 28.) You can make a withdrawal by writing to the Vanguard Variable Annuity Center. Your written request should in- clude your Contract number, social security number, withdrawal amount, the signature of all owners, and fed- eral tax withholding election (IF NO WITHHOLDING ELEC- TION IS CHOSEN, WE WILL BE REQUIRED TO WITHHOLD 10%). Your proceeds will normally be distributed within two Business Days after the receipt of the request but in no event will it be later than seven calendar days, subject to postponement in certain circumstances (see "Deferment of Payment" page 27). --------------------------------------------------------- 22 SYSTEMATIC You may establish an automatic withdrawal of a specific WITHDRAWALS amount, a percentage of the balance, or accumulated earnings from your Contract, and receive distributions on a monthly, quarterly, semiannual, or annual schedule. Once established, a check will be sent to your Contract address, bank account or as you direct. Please note that each systematic withdrawal, like any other partial withdrawal, is subject to federal income taxes on the earnings, and may be subject to a 10% tax imposed by the IRS on withdrawals made prior to age 59 1/2. A minimum Contract balance of $10,000, and Portfolio balance of $1,000 are required to establish a systematic withdrawal program for your Contract. The minimum auto- matic withdrawal amount is $250. Changes to the with- drawal amount, percentage, or the frequency of distribu- tions may be made by telephone. Any other changes, including a change in the destination of the check, must be requested in writing, and should include signatures of all Contract owners. To cancel the systematic with- drawal program, the Contract owner(s) needs to submit a letter of instruction with the appropriate signatures. To establish a systematic withdrawal program for your Contract, simply complete the Vanguard Variable Annuity Plan Systematic Withdrawal Program Application Form. Please note that the completed form must be signed by all Contract owners, and must be signature guaranteed if you are directing the withdrawal checks to an address other than the Contract address. Payments under the Contract of any amounts derived from premiums paid by check may be delayed until such time as the check has cleared your bank. If, at the time the Contract Owner requests a full or partial withdrawal, he or she has not provided the Company with a written elec- tion not to have federal income taxes withheld, the Com- pany must by law withhold such taxes from the taxable portion of any full or partial withdrawal and remit that amount to the federal government. Moreover, the Internal Revenue Code provides that a 10% penalty tax will be im- posed on certain early withdrawals. (See "Federal Tax Considerations," page 28.) Since the Contract Owner assumes the investment risk with respect to amounts allocated to the Separate Ac- count, the total amount paid upon withdrawal of the Con- tract (taking into account any prior withdrawals) may be more or less than the total Purchase Payments made. - ------------------------------------------------------------------------------- MINIMUM BALANCE Due to the relatively high cost of maintaining smaller REQUIREMENTS accounts, the Company reserves the right to transfer the balance in any Portfolio account that falls below $1,000, due to a partial withdrawal or exchange, to the remaining Port- folios held under that Contract, on a pro rata basis. In the event that the entire value of the Contract falls below $1,000, you may be notified that the Accumulated Value of your account is below the Contract's minimum requirement. You would then be al- lowed 60 days to make an additional investment before the account is liquidated. Proceeds would be promptly paid to the Contract Owner. The full proceeds would be taxable as a withdrawal. A full withdrawal will result in an automatic termination of the Contract. - ------------------------------------------------------------------------------- 23 DESIGNATION OF A The Contract Owner may select one or more Beneficiaries, BENEFICIARY who would receive benefits upon the death of the Annui- tant, and name them in the application. The Beneficiary(ies), as named on the application, will serve as the beneficiary designation. Thereafter, while the Annuitant or Joint Annuitant is living, the Contract Owner may change the Beneficiary by written notice. Such change will take effect on the date the notice is signed by the Contract Owner but will not affect any payment made or other action taken before the Company acknowl- edges the notice. The Contract Owner may also make the designation of Beneficiary irrevocable by sending writ- ten notice to, and obtaining approval from, the Company. Changes in the Beneficiary may then be made only with the consent of the designated irrevocable Beneficiary. If the Annuitant dies prior to the Annuity Date, the following will apply unless the Contract Owner has made other provisions: (a) If there is more than one Beneficiary, each will share in the Death Benefits equally; (b) If one or two or more Beneficiaries has already died, that share of the Death Benefit will be paid equally to the survivor(s); (c) If no Beneficiary is living, the proceeds will be paid to the Contract Owner; (d) If a Beneficiary dies at the same time as the Annui- tant, the proceeds will be paid as though the Bene- ficiary had died first. If a Beneficiary dies within 15 days after the Annuitant's death and before the Company receives due proof of the Annuitant's death, proceeds will be paid as though the Beneficiary had died first. If a Beneficiary who is receiving Annuity Payments dies, any remaining Payments Certain will be paid to that Beneficiary's named Beneficiary(ies) when due. If no Beneficiary survives the Annuitant, the right to any amount payable will pass to the Contract Owner. If the Contract Owner is the Annuitant, this right will pass to his or her estate. If a Life Annuity with Period Certain Option was elect- ed, and if the Annuitant dies on or after the Annuity Date, any unpaid Payments Certain will be paid to the Beneficiary. - ------------------------------------------------------------------------------- DEATH OF ANNUITANT Subject to the provisions dealing with Joint Annuitants, PRIOR TO ANNUITY if the Annuitant dies prior to the Annuity Date, an DATE amount will be paid as proceeds to the Beneficiary. If the Annuitant or Joint Annuitant dies prior to the Annu- ity Date, the survivor shall become the sole Annuitant. The Death Benefit is calculated and is payable upon re- ceipt of due Proof of Death of the Annuitant as well as proof that the Annuitant died prior to the Annuity Date. Upon receipt of this proof, the Death Benefit will be paid within seven days, or as soon thereafter as the Company has sufficient information about the Beneficiary to make the pay-ment. The Beneficiary may receive the amount payable in a lump sum cash benefit or under one of the Annuity Payment Options. 24 A lump sum cash benefit will equal the greater of: (a) the Accumulated Value as of the date of due Proof of Death and proof that the Annuitant died prior to the An- nuity Date or (b) the sum of Purchase Payments less the sum of all partial withdrawals and premium taxes. An An- nuity Payment will be based on the greater of: (a) the Accumulated Value ten Business Days prior to the Annuity Date elected by the Beneficiary and approved by the Com- pany or (b) the sum of Purchase Payments less the sum of all partial withdrawals and Premium Taxes. The Contract Owner may elect an Annuity Payment Option for the Bene- ficiary or, if no such election was made by the Contract Owner and a cash benefit has not been paid, the Benefi- ciary may make this election after the Annuitant's death. For a discussion of the consequences of the death of the Contract Owner, if different from the Annuitant, see "Distribution-at-Death Rules," page 30. - ------------------------------------------------------------------------------- ANNUITY DATE The Contract Owner may specify an Annuity Date in the application, which can be no later than the first day of the month after the Annuitant's 85th birthday, without the Company's prior approval. If no Annuity Date is specified in the application, the Annuitant will begin receiving Annuity Payments on the first day of the month after ten full years from the date of this Contract, or the first day of the month which follows the Annuitant's 65th birthday, whichever is later. The Annuity Date is the date that Annuity Payments are scheduled to commence under the Contract, unless the Contract has been surren- dered or an amount has been paid as proceeds to the des- ignated Beneficiary prior to that date. The Contract Owner may advance or defer the Annuity Date. However, the Annuity Date may not be advanced to a date prior to 30 days after the date of receipt of a written request or, without the Company's prior approv- al, deferred to a date beyond the Annuitant's 85th birthday. An Annuity Date may only be changed by written request during the Annuitant's or Joint Annuitant's lifetime and must be made at least 30 days before the then-scheduled Annuity Date. The Annuity Date and Annu- ity Payment Options available for Qualified Contracts may also be controlled by endorsements, the plan or ap- plicable law. - ------------------------------------------------------------------------------- ANNUITY PAYMENT All Annuity Payment Options (except the Designated Pe- OPTIONS riod Annuity Option) are offered as "Variable Annuity Options." This means that Annuity Payments, after the initial payment, will reflect the investment experience of the Portfolio or Portfolios chosen by the Contract Owner. All Annuity Payment Options are offered as "Fixed Annuity Options." This means that the amount of each payment will be set on the Annuity Date and will not change. If you choose a Fixed Option, your investment will be moved out of the underlying Vanguard Portfolios and into the general account of Providian Life & Health Insurance Company. If you do not wish to receive your payments on an annuity basis, you may take a lump sum payment at anytime before the annuity date. The lump sum value is equal to the Accumulation Value. The following Annuity Payment Options are available under the Con- tract: 25 LIFE ANNUITY--Available as either a Fixed or Variable Option. Monthly Annuity Payments are paid for the life of an Annuitant, ceasing with the last Annuity Payment due prior to the Annuitant's death. JOINT AND LAST SURVIVOR ANNUITY--Available as either a Fixed or Variable Option. Monthly Annuity Payments are paid for the life of two Annuitants and thereafter for the life of the survivor, ceasing with the last Annuity Payment due prior to the survivor's death. LIFE ANNUITY WITH PERIOD CERTAIN--Available as either a Fixed or Variable Option. Monthly Annuity Payments are paid for the life of an Annuitant, with a Period Certain of not less than 120, 180, or 240 months, as elected. INSTALLMENT OR UNIT REFUND LIFE ANNUITY--Available as either a Fixed (Installment Refund) or Variable (Unit Refund) Option. Monthly Annuity Payments are paid for the life of an Annuitant, with a Period Certain deter- mined by dividing the Accumulated Value by the First An- nuity Payment. DESIGNATED PERIOD ANNUITY--Only available as a Fixed Op- tion. Monthly Annuity Payments are paid for a Period Certain as elected, which may be from 10 to 30 years. In the event that an Annuity Payment Option is not se- lected, the Company will make monthly Annuity Payments that will go on for as long as the Annuitant lives (120 payments guaranteed) in accordance with the Life Annuity with Period Certain Option and the annuity benefit sec- tions of the Contract. That portion of the Accumulated Value that has been held in a Portfolio prior to the An- nuity Date will be applied under a Variable Annuity Op- tion based on the performance of that Portfolio. Subject to approval by the Company, the Contract Owner may se- lect any other Annuity Payment Option then being offered by the Company. Annuity Payments are guaranteed to be not less than as provided by the Annuity Tables for the first payment under a Variable Option and each payment under a Fixed Option. The minimum payment, however, is $100 ($20 for Massachusetts Contract Owners). If the Ac- cumulated Value is less than $5,000, or less than $2,000 for Texas and Massachusetts Contract Owners, the Company has the right to pay that amount in a lump sum. From time-to-time, the Company may require proof that the An- nuitant, Joint Annuitant, or Contract Owner is living. Annuity Payment Options are not available to: (1) an as- signee; or (2) any other than a natural person, except with the consent of the Company. The Company may, at the time of election of an Annuity Payment Option, offer more favorable rates in lieu of the guaranteed rates specified in the Annuity Tables found in the Contract. The value of Variable Annuity Payments will reflect the investment experience of the chosen Portfolio. On or af- ter the Annuity Date, the Annuity Payment Option is ir- revocable. Only one Annuity Option may be chosen from among those made available by the Company per each Port- folio. The annuity tables, which are contained in the Contract and are used to calculate the value of Variable Annuity Payments, are based on an assumed interest rate of 4%. If the actual net investment experience exactly equals the assumed interest rate, 26 then the Variable Annuity Payments will remain the same (equal to the first Annuity Payment). However, if actual investment experience exceeds the assumed interest rate, the Variable Annuity Payments will increase; conversely, they will decrease if the actual experience is lower. If an Annuity Payment Option is chosen that depends on the continuation of the life of the Annuitant or of a Joint Annuitant, proof of birth date may be required be- fore Annuity Payments begin. For Annuity Payment Options involving life income, the actual age of the Annuitant or of a Joint Annuitant will affect the amount of each payment. Since payments to older Annuitants are expected to be fewer in number, the amount of each Annuity Pay- ment shall be greater. If at the time of any Annuity Payment the Contract Owner has not provided the Company with a written election not to have federal income taxes withheld, the Company must by law withhold such taxes from the taxable portion of such Annuity Payment and remit that amount to the fed- eral government. The value of all payments, both fixed and variable, will be greater for shorter guaranteed periods than for longer guaranteed periods, and greater for life annui- ties than for joint and survivor annuities, because they are expected to be made for a shorter period. After the Annuity Date, the Contract Owner may change the Portfolio funding the Variable Annuity Payments, ei- ther by written request or by calling the Vanguard Vari- able Annuity Center (1-800-462-2391). Because excessive exchanges can potentially disrupt the management of the Portfolios and increase transaction costs, exchange ac- tivity is limited to two substantive exchanges (at least 30 days apart) from the Portfolios (except the Money Market Portfolio) during any 12-month period. "Substan- tive" means either a dollar amount large enough to have a negative impact on a Portfolio or a series of move- ments between Portfolios. The method of computation of Variable Annuity Payments is described in more detail in the Statement of Additional Information. If you choose an Annuity Payment Option and the postal or other delivery service is unable to deliver checks to the Payee's address of record, no interest will accrue on amounts represented by uncashed Annuity Payment checks. It is the Payee's responsibility to keep the Company informed of the Payee's current address of record. --------------------------------------------------------- DEFERMENT OF Payment of any cash withdrawal or lump-sum death benefit PAYMENT due from the Separate Account will occur within seven days from the date the election becomes effective, ex- cept that the Company may be permitted to defer such payment if: (1) the New York Stock Exchange is closed for other than usual weekends or holidays, or trading on the Exchange is otherwise restricted; or (2) an emer- gency exists as defined by the SEC, or the SEC requires that trading be restricted; or (3) the SEC permits a de- lay for the protection of Contract Owners. - ------------------------------------------------------------------------------- 27 FEDERAL TAX CONSIDERATIONS INTRODUCTION The ultimate effect of federal income taxes on the amounts paid for the Contract, on the investment returns on assets held under a Contract, on Annuity Payments, and on the economic benefits to the Contract Owner, An- nuitant or Beneficiary, depends on the Company's tax status and upon the tax status of the individuals con- cerned. The following discussion is general in nature and is not intended as tax advice. You should consult a tax adviser regarding the tax consequences of purchasing a Contract. No attempt is made to consider any applica- ble state or other tax laws. Moreover, the discussion is based upon the Company's understanding of the federal income tax laws as they are currently interpreted. No representation is made regarding the likelihood of con- tinuation of the federal income tax laws, the Treasury Regulations, or the current interpretations by the In- ternal Revenue Service. We reserve the right to make uniform changes on the Contract to the extent necessary to continue to qualify the Contract as an annuity. For a discussion of federal income taxes as they relate to the Fund, please see the accompanying Prospectus for the Fund. --------------------------------------------------------- TAXATION OF Section 72 of the Code governs taxation of annuities. In ANNUITIES IN general, a Contract Owner is not taxed on increases in GENERAL value under a Contract until some form of withdrawal or distribution is made under it. However, under certain cir- cumstances, the increase in value may be subject to current federal income tax. (See "Contracts Owned by Non-Natural Persons" and "Diversification Standards", page 31.) Section 72 provides that the proceeds of a full or par- tial withdrawal from a Contract prior to the Annuity Date will be treated as taxable income to the extent the amounts held under the Contract exceed the "investment in the Contract", as that term is defined in the Code. The "investment in the Contract" can generally be de- scribed as the cost of the Contract, and generally con- stitutes all purchase payments paid for the Contract less any amounts received under the Contract that are excluded from the individual's gross in- come. The tax- able portion is taxed at ordinary income tax rates. For purposes of this rule, a pledge or assignment of a Con- tract is treated as a payment received on account of a partial withdrawal of a Contract. Upon receipt of a full or partial withdrawal or an Annu- ity Payment under the Contract, you will be taxed if the value of the Contract exceeds the investment in the Con- tract. Ordinarily, the taxable portion of such payments will be taxed at ordinary income tax rates. Partial withdrawals are generally taken out of earnings first and then your purchase payments in the Contract. For Fixed Annuity Payments, in general, the taxable por- tion of each payment is determined by using a formula known as the "exclusion ratio", which establishes the ratio that the investment in the Contract bears to the total expected amount of Annuity Payments for the term of the Contract. That ratio is then applied to each pay- ment to determine the non-taxable portion of the pay- ment. The remaining portion of each payment is taxed at ordinary income tax rates. For Variable Annuity Pay- ments, in general, the taxable portion is determined by a formula that establishes a specific dollar amount of each payment 28 that is not taxed. The dollar amount is determined by dividing the investment in the Contract by the total number of expected periodic payments. The remaining por- tion of each payment is taxed at ordinary income tax rates. Once the excludible portion of Annuity Payments to date equals the investment in the Contracts, the bal- ance of the Annuity Payments will be fully taxable. Generally, the entire amount distributed from a Quali- fied Contract is taxable to the Owner. In the case of Qualified Contracts with after tax contributions, the Owner is entitled to exclude the portion of each with- drawal or annuity payment constituting a return of after tax contributions. Once all of your after tax contribu- tions have been returned to you on a non-taxable basis, subsequent withdrawals or annuity payments are fully taxable as ordinary income. Since the Company has no knowledge of the amount of after tax contributions you have made, you will need to make this computation in the preparation of your federal income tax return. Withholding of federal income taxes on all distributions is required unless the recipient elects not to have any amounts withheld and properly notifies the Company of that election. In certain situations, taxes will be withheld on distributions to nonresident aliens at a 30% flat rate unless an exemption from withholding applies under the applicable tax treaty. With respect to amounts withdrawn or distributed before the taxpayer reaches age 59 1/2, a penalty tax is im- posed equal to 10% of the taxable portion of amounts withdrawn or distributed. However, the penalty tax will not apply to withdrawals: (i) made on or after the death of the Contract Owner (or where the Contract Owner is not an individual, the death of the primary Annuitant, who is defined as the individual the events in whose life are of primary importance in affecting the timing and payment under the Contract); (ii) attributable to the taxpayer's becoming disabled within the meaning of Code Section 72(m)(7); (iii) that are part of a series of substantially equal periodic payments made at least annually for the life (or life expectancy) of the tax- payer, or joint lives (or joint life expectancies) of the taxpayer and his Beneficiary; (iv) from a qualified plan; (v) allocable to investment in the Contract before August 14, 1982; (vi) under a qualified funding asset (as defined in Code Section 130(d)); (vii) under an im- mediate annuity contract as defined in Section 72(u)(4); or (viii) that are purchased by an employer on termina- tion of certain types of qualified plans and that are held by the employer until the employee separates from service. Other tax penalties may apply to certain dis- tributions as well as to certain contributions and other transactions under a qualified contract. If the penalty tax does not apply to a withdrawal as a result of the application of item (iii) above, and the series of payments are subsequently modified (other than by reason of death or disability), the tax for the year in which the modification occurs will be increased by an amount (as determined under Treasury Regulations) equal to the penalty tax that would have been imposed but for item (iii) above, plus interest for the deferral period. The foregoing rule applies if the modification takes place (a) before the close of the period that is five years from the date of the first payment and after the taxpayer attains age 59 1/2, or (b) before the taxpayer reaches age 59 1/2. The tax penalty may also 29 not apply to distributions from Qualified Contracts is- sued under Section 408(b) of the Code used to pay quali- fied higher education expenses or the acquisition costs (up to $10,000) involved in the purchase of a principal residence by a first-time homebuyer. --------------------------------------------------------- THE COMPANY'S TAX The Company is taxed as a life insurance company under STATUS Part I of Subchapter L of the Code. Since the Separate Account is not a separate entity from the Company and its operations form a part of the Company, it will not be taxed separately as a "regulated investment company" under Subchapter M of the Code. Investment income and realized capital gains on the assets of the Separate Ac- count are reinvested and taken into account in determin- ing the Accumulation Value. Under existing federal in- come tax law, the Separate Account's investment income, including realized net capital gains, is not taxed to the Company. The Company reserves the right to make a deduction for taxes should they be imposed with respect to such items in the future. --------------------------------------------------------- DISTRIBUTION-AT- In order to be treated as an annuity contract, a con- DEATH RULES tract must, generally, provide the following two distri- bution rules: (a) if any Contract Owner dies on or after the Annuity Date and before the entire interest in the Contract has been distributed, the remaining portion of such interest must be distributed at least as rapidly as the method in effect on the Contract Owner's death; and (b) if any Contract Owner dies before the Annuity Date, the entire interest in the Contract must generally be distributed within five years after the date of death. To the extent such interest is payable to a Designated Beneficiary, however, such interest may be annuitized over the life of that Designated Beneficiary or over a period not extending beyond the life expectancy of that Beneficiary, so long as distributions commence within one year after the Contract Owner's death. If the Desig- nated Beneficiary is the spouse of the Contract Owner, the Contract (together with the deferred tax on the ac- crued and future income thereunder) may be continued un- changed in the name of the spouse as Contract Owner. The term Designated Beneficiary means the natural person named by the Contract Owner as a beneficiary and to whom ownership of the Contract passes by reason of the Con- tract Owner's death. If the Contract Owner is not an individual, death of the "primary Annuitant" (as defined under the Code) is treated as the death of the Contract Owner. The primary Annuitant is the individual who is of primary importance in affecting the timing or the amount of payout under a Contract. In addition, when the Contract Owner is not an individual, a change in the primary Annuitant is treated as the death of the Contract Owner. Finally, in the case of Joint Contract Owners, the dis- tribution will be required at the death of the first of the Contract Owners. --------------------------------------------------------- TRANSFERS OF Any transfer of a Non-Qualified Contract prior to the ANNUITY CONTRACTS Annuity Date for less than full and adequate considera- tion will generally trigger tax on the gain in the Con- tract to the Contract Owner at the time of such trans- fer. The investment in the Contract of the transferee will be increased by any amount in - 30 cluded in the Contract Owner's income. This provision, however, does not apply to those transfers between spouses or incident to a divorce which are governed by Code Section 1041(a). - ------------------------------------------------------------------------------- CONTRACTS OWNED BY Where the Contract is held by a non-natural person (for NON-NATURAL example, a corporation), the Contract is generally not PERSONS treated as an annuity contract for federal income tax purposes, and the income on that Contract (generally the increase in the net Accumulated Value less the payments) is includible in taxable income each year. The rule does not apply where the non-natural person is only a nominal owner such as a trust or other entity acting as an agent for a natural person. The rule also does not apply where the Contract is acquired by the estate of a decedent, where the Contract is a qualified funding asset for structured settlements, where the Contract is purchased by an employer on behalf of an employee upon termination of a qualified plan, and in the case of an immediate an- nuity as defined under the Code. --------------------------------------------------------- ASSIGNMENTS A transfer of ownership of a Contract or the designation of an Annuitant or other Beneficiary who is not also the Contract Owner may result in tax consequences to the Contract Owner, Annuitant or Beneficiary that are not discussed herein. A Contract Owner contemplating such a transfer or assignment of a Contract should contact a tax adviser with respect to the potential tax effects of such a transaction. --------------------------------------------------------- MULTIPLE CONTRACTS All non-qualified annuity contracts issued by the same RULE company (or affiliate) to the same Contract Owner during any calendar year are to be aggregated and treated as one contract for purposes of determining the amount in- cludible in the taxpayer's gross income. Thus, any amount received under any Contract prior to the Con- tract's Annuity Date, such as a partial withdrawal, will be taxable (and possibly subject to the 10% penalty tax) to the extent of the combined income in all such con- tracts. The Treasury Department has specific authority to issue regulations that prevent the avoidance of Code Section 72(e) through the serial purchase of annuity Contracts or otherwise. In addition, there may be other situations in which the Treasury may conclude that it would be appropriate to aggregate two or more Contracts purchased by the same Contract Owner. The aggregation rules do not apply to immediate annuities as defined un- der Section 72(u)(4) of the Code. Accordingly, a Con- tract Owner should consult a tax adviser before purchas- ing more than one Contract or other annuity contracts. --------------------------------------------------------- DIVERSIFICATION To comply with certain diversification regulations (the STANDARDS "Regulations"), which were issued in final form on March 2, 1989, under Code Section 817(h), after a start up pe- riod, each Subaccount of the Separate Account will be required to diversify its investments. The Regulations generally require that on the last day of each quarter of a calendar year, no more than 55% of the value of each Subaccount of the Separate Account is represented by any one investment, no more than 70% is represented by any two investments, no more than 80% is represented by any three investments, and no more than 90% is repre- sented 31 by any four investments. A "look-through" rule applies that suggests that each Subaccount of the Separate Ac- count will be tested for compliance with the percentage limitations by looking through to the assets of the Portfolio of the Fund in which each such division in- vests. All securities of the same issuer are treated as a single investment. As a result of the 1988 Act, each government agency or instrumentality will be treated as a separate issuer for purposes of those limitations. In connection with the issuance of temporary diversifi- cation regulations in 1986, the Treasury announced that such regulations did not provide guidance concerning the extent to which Contract Owners may direct their invest- ments to particular divisions of a separate account. It is possible that regulations or revenue rulings may be issued in this area at some time in the future. It is not clear, at this time, what these regulations or rul- ings would provide. It is possible that when the regula- tions or rulings are issued, the Contracts may need to be modified in order to remain in compliance. For these reasons, the Company reserves the right to modify the Contracts, as necessary, to prevent the Contract Owner from being considered the owner of assets of the Sepa- rate Account. We intend to comply with the Regulations to assure that the Contracts continue to be treated as annuity con- tracts for federal income tax purposes. --------------------------------------------------------- QUALIFIED Qualified Contracts to provide for retirement may gener- INDIVIDUAL ally be purchased only in connection with a "rollover" RETIREMENT of funds from another individual retirement annuity ANNUITIES (IRA) or qualified plan. IRA Contracts must contain spe- cial provisions and are subject to limitations on con- tributions and the timing of when distributions can be made. Tax penalties may apply to contributions in excess of specified limits, loans or reassignments, distribu- tions that do not meet specified requirements, or in other circumstances. Anyone desiring to purchase a Qual- ified Contract should consult a personal tax adviser. - ------------------------------------------------------------------------------- GENERAL The Company retains the right, subject to any applicable INFORMATION law, to make certain changes. The Company reserves the right to eliminate the shares of any of the Portfolios ADDITIONS, and to substitute shares of another Portfolio of the DELETIONS, OR Fund, or of another registered open-end management in- SUBSTITUTIONS OF vestment company, if the shares of the Portfolios are no INVESTMENTS longer available for investment, or, if in the Company's judgment, investment in any Portfolio would be inappro- priate in view of the purposes of the Separate Account. To the extent required by the 1940 Act, substitutions of shares attributable to a Contract Owner's interest in a Portfolio will not be made until SEC approval has been obtained and the Contract Owner has been notified of the change. New Portfolios may be established when marketing, tax, investment, or other conditions so warrant. Any new Portfolios will be made available to existing Contract Owners on a basis to be determined by the Company. The Company may also eliminate one or more Portfolios if marketing, tax, investment or other conditions so war- rant. In the event of any such substitution or change, the Company may, by appropriate endorsement, make such changes in the Contracts as may be necessary 32 or appropriate to reflect such substitution or change. Furthermore, if deemed to be in the best interests of persons having voting rights under the Contracts, the Separate Account may be operated as a management company under the 1940 Act or any other form permitted by law, may be deregistered under such Act in the event such registration is no longer required, or may be combined with one or more other separate accounts. --------------------------------------------------------- DISTRIBUTOR OF THE The Vanguard Group, Inc., through its wholly-owned sub- CONTRACTS sidiary, Vanguard Marketing Corp., is the principal dis- tributor of the Contract. For these services, the Fund paid a fee of less than .02% of the Fund's average net assets for the 1997 fiscal year. This fee is guaranteed not to exceed .20% of the Fund's average month-end net assets. A complete description of these services is found in the "Management of the Fund" section of the Fund's Prospectus and in the Fund's Statement of Addi- tional Information. The principal business address for The Vanguard Group, Inc. is The Vanguard Variable Annu- ity Center, 100 Vanguard Boulevard, Malvern, PA 19355. --------------------------------------------------------- VOTING RIGHTS The Fund does not hold regular meetings of shareholders. The Directors of the Fund may call special meetings of shareholders as may be required by the 1940 Act or other applicable law. To the extent required by law, the Port- folio shares held in the Separate Account will be voted by the Company at shareholder meetings of the Fund in accordance with instructions received from persons hav- ing voting interests in the corresponding Portfolio. Fund shares as to which no timely instructions are re- ceived or shares held by the Company as to which Con- tract Owners have no beneficial interest will be voted in proportion to the voting instructions that are re- ceived with respect to all Contracts participating in that Portfolio. Voting instructions to abstain on any item to be voted upon will be applied on a pro rata ba- sis to reduce the votes eligible to be cast. The number of votes that are available to a Contract Owner will be calculated separately for each Portfolio of the Separate Account. That number will be determined by applying his or her percentage interest, if any, in a particular Portfolio to the total number of votes at- tributable to the Portfolio. Prior to the Annuity Date, the Contract Owner holds a voting interest in each Portfolio to which the Accumu- lated Value is allocated. The number of votes which are available to a Contract Owner will be determined by di- viding the Accumulated Value attributable to a Portfo- lio by the net asset value per share of the applicable Portfolio. After the Annuity Date, the person receiving Annuity Payments under any variable annuity option has the voting interest. The number of votes after the Annu- ity Date will be determined by dividing the reserve for such Contract allocated to the Portfolio by the net as- set value per share of the corresponding Portfolio. Af- ter the Annuity Date, the votes attributable to a Con- tract decrease as the reserves allocated to the Portfolio decrease. In determining the number of votes, fractional shares will be recognized. The number of votes of the Portfolio that are available will be determined as of the date coincident with the date established by that Portfolio for determining shareholders eligible to vote at the meeting of the Fund. Voting instruc- 33 tions will be solicited by written communication prior to such meeting in accordance with procedures estab- lished by the Fund. --------------------------------------------------------- YEAR 2000 MATTERS In March 1997, the Company adopted and currently has in place a Year 2000 Assessment and Planning Project (the "Plan") to review and analyze existing hardware and software systems, as well as voice and data communica- tions systems, to determine if they are Year 2000 com- patible. The Plan provides for a management process that ensures that when a particular system, or software ap- plication, is determined to be "non-compliant" the proper steps are in place to either remedy the "non-com- pliance" or cease using the particular system or soft- ware. The Plan also provides that the Chief Information Officer report to the Board of Directors as to the sta- tus of the efforts under the Plan on a regular and rou- tine basis. The Company has engaged the services of a third-party provider that is specialized in Year 2000 issues to work on the project. The Plan has four specific objectives: (1) to develop an inventory of all applications; (2) to evaluate all ap- plications in the inventory to determine the most pru- dent manner to move them to Year 2000 compliance, if re- quired; (3) to estimate budgets, resources and schedules for the migration of the "affected" applications to Year 2000 compliance; and (4) to define testing and deploy- ment requirements to successfully manage validation and re-deployment of any changed code. It is anticipated that all compliance issues will be resolved by December 1998. As of the date of this Prospectus, the Company has iden- tified and made available what it believes are the ap- propriate resources of hardware, people, and dollars, including the engagement of outside third parties, to assure that the Plan will be completed. The Year 2000 computer problem, and its resolution, is complex and multifaceted, and the success of a response plan cannot be conclusively known until the Year 2000 is reached (or an earlier date to the extent that the sys- tems or equipment addresses Year 2000 data prior to the Year 2000). Even with appropriate and diligent pursuit of a well conceived response plan, including testing procedures, there is no certainty that any company will achieve complete success. Further, notwithstanding its efforts or results, the Company's ability to function unaffected to and through the year 2000 may be adversely affected by actions (or failures to act) of third par- ties beyond its knowledge or control. --------------------------------------------------------- AUDITORS Ernst & Young LLP serves as independent auditors for the Separate Account and the Company and will audit their financial statements annually. --------------------------------------------------------- LEGAL MATTERS Jorden Burt Boros Cicchetti Berenson & Johnson LLP of Washington, DC, has provided legal advice relating to the federal securities laws applicable to the issue and sale of the Contracts. All matters of Missouri law per- taining to the validity of the Contract and the Company's right to issue such Contracts have been passed upon by Kimberly A. Scouller, Esquire, on behalf of the Company. - ------------------------------------------------------------------------------- 34 TABLE OF CONTENTS FOR THE VANGUARD VARIABLE ANNUITY PLAN CONTRACT STATEMENT OF ADDITIONAL INFORMATION
PAGE ---- THE CONTRACT............................................................ B-2 Computation of Variable Annuity Income Payments........................ B-2 Exchanges.............................................................. B-3 Joint Annuitant........................................................ B-3 GENERAL MATTERS......................................................... B-3 Non-Participating...................................................... B-3 Misstatement of Age or Sex............................................. B-3 Assignment............................................................. B-3 Annuity Data........................................................... B-4 Annual Report.......................................................... B-4 Incontestability....................................................... B-4 Ownership.............................................................. B-4 DISTRIBUTION OF THE CONTRACT............................................ B-4 PERFORMANCE INFORMATION................................................. B-4 Money Market Subaccount Yields......................................... B-4 30-Day Yield for Non-Money Market Subaccounts.......................... B-5 Standardized Average Annual Total Return for Non-Money Market Subaccounts........................................................... B-5 ADDITIONAL PERFORMANCE MEASURES......................................... B-7 Non-Standardized Total Return and Non-Standardized Average Annual Total Return................................................................ B-7 Non-Standardized Total Return Year-to-Date............................. B-8 Non-Standardized One Year Return....................................... B-8 SAFEKEEPING OF ACCOUNT ASSETS........................................... B-9 THE COMPANY............................................................. B-9 STATE REGULATION........................................................ B-9 RECORDS AND REPORTS..................................................... B-9 LEGAL PROCEEDINGS....................................................... B-10 OTHER INFORMATION....................................................... B-10 FINANCIAL STATEMENTS.................................................... B-10 Audited Financial Statements........................................... B-10
35 PROVIDIAN LIFE & HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV STATEMENT OF ADDITIONAL INFORMATION FOR THE VANGUARD VARIABLE ANNUITY PLAN CONTRACT OFFERED BY PROVIDIAN LIFE & HEALTH INSURANCE COMPANY (A MISSOURI STOCK COMPANY) ADMINISTRATIVE OFFICES 20 MOORES ROAD FRAZER, PENNSYLVANIA 19355 ---------------- This Statement of Additional Information expands upon subjects discussed in the current Prospectus for the Vanguard Variable Annuity Plan Contract (the "Contract") offered by Providian Life & Health Insurance Company (the "Company"). You may obtain a copy of the Prospectus dated April 30, 1998; by calling 1-800-522-5555, or writing to Vanguard Variable Annuity Center, P.O. Box 1103, Valley Forge, PA 19482-1103. Terms used in the current Prospectus for the Contract are incorporated in this Statement. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT. APRIL 30, 1998
TABLE OF CONTENTS PAGE ----------------- ---- THE CONTRACT............................................................ B-2 Computation of Variable Annuity Income Payments........................ B-2 Exchanges.............................................................. B-3 Joint Annuitant........................................................ B-3 GENERAL MATTERS......................................................... B-3 Non-Participating...................................................... B-3 Misstatement of Age or Sex............................................. B-3 Assignment............................................................. B-3 Annuity Data........................................................... B-4 Annual Report.......................................................... B-4 Incontestability....................................................... B-4 Ownership.............................................................. B-4 DISTRIBUTION OF THE CONTRACT............................................ B-4 PERFORMANCE INFORMATION................................................. B-4 Money Market Subaccount Yields......................................... B-4 30-Day Yield for Non-Money Market Subaccounts.......................... B-5 Standardized Average Annual Total Return for Non-Money Market Subaccounts........................................................... B-5 ADDITIONAL PERFORMANCE MEASURES......................................... B-7 Non-Standardized Total Return and Non-Standardized Average Annual Total Return................................................................ B-7 Non-Standardized Total Return Year-to-Date............................. B-8 Non-Standardized One Year Return....................................... B-8 SAFEKEEPING OF ACCOUNT ASSETS........................................... B-9 THE COMPANY............................................................. B-9 STATE REGULATION........................................................ B-9 RECORDS AND REPORTS..................................................... B-9 LEGAL PROCEEDINGS....................................................... B-10 OTHER INFORMATION....................................................... B-10 FINANCIAL STATEMENTS.................................................... B-10 Audited Financial Statements........................................... B-10
B-1 THE CONTRACT In order to supplement the description in the Prospectus, the following provides additional information about the Contract which may be of interest to Contract Owners. COMPUTATION OF VARIABLE ANNUITY INCOME PAYMENTS Variable Annuity Income Payments are computed as follows. First, the Accumulated Value (or the portion of the Accumulated Value used to provide variable payments) is applied under the Annuity Table contained in the Contract corresponding to the Annuity Option elected by the Contract Owner and based on an assumed interest rate of 4%. This will produce a dollar amount which is the first monthly payment. The Company may, at the time Annuity Income Payments are computed, offer more favorable rates in lieu of the guaranteed rates specified in the Annuity Table. The amount of each Annuity Payment after the first is determined by means of Annuity Units. The number of Annuity Units is determined by dividing the first Annuity Payment by the Annuity Unit value for the selected Subaccount ten Business Days prior to the Annuity Date. The number of Annuity Units for the Subaccount then remains fixed, unless an exchange of Annuity Units (as set forth below) is made. After the first Annuity Payment, the dollar amount of each subsequent Annuity Payment is equal to the number of Annuity Units multiplied by the Annuity Unit value for the Subaccount ten Business Days before the due date of the Annuity Payment. The Annuity Unit value for each Subaccount was initially established at $10.00 on the day money was first deposited in that Subaccount. The Annuity Unit value for any subsequent Business Day is equal to (a) times (b) times (c), where: (a) the Annuity Unit value for the immediately preceding Business Day; (b) the Net Investment Factor for the day; (c) the investment result adjustment factor (.99989255 per day), which rec- ognizes an assumed interest rate of 4% per year used in determining the Annuity Payment amounts. The Net Investment Factor is a factor applied to a Subaccount that reflects daily changes in the value of the Subaccount due to: (a) any increase or decrease in the value of the Subaccount due to invest- ment results; (b) a daily charge for the mortality and expense risks assumed by the Com- pany corresponding to an annual rate according to the following sched- ule:
RATE FOR NET ASSETS* ALL ASSETS ----------- ---------- Up to $2.5 Billion............................................... 0.30% Over $2.5 Billion and Up To $5 Billion........................... 0.28% Over $5 Billion.................................................. 0.27%
* Based on the combined net assets of the Separate Account and Separate Account B of First Providian Life & Health Insurance Company. (c) a daily charge for the cost of administering the Contract corresponding to an annual charge of .10%. (d) an annual charge of $25 for maintenance of Contracts valued at less than $25,000 at time of initial purchase and on the last business day of each year. The Annuity Tables contained in the Contract are based on the 1983 Table "A" Mortality Table projected for mortality improvement to the year 2000 using Projection Scale G and an interest rate of 4% a year; except that in Massachusetts and Montana, the Annuity Tables contained in the Contract are based on a 60% female/40% male blending of the above, for all annuitants of either gender. B-2 EXCHANGES After the Annuity Date, if a Variable Annuity Option has been chosen, the Contract Owner may, by making a written request or by calling the Variable Annuity Center, exchange the current value of the existing Subaccount to Annuity Units of any other Subaccount then available. The request for the exchange must be received, however, at least 10 Business Days prior to the first payment date on which the exchange is to take effect. This exchange shall result in the same dollar amount of Annuity Payment on the date of exchange. The Contract Owner is limited to two substantive exchanges (at least 30 days apart) from a Portfolio (except the Money Market Portfolio) in any Contract Year, and the value of the Annuity Units exchanged must provide a monthly Annuity Payment of at least $100 at the time of the exchange. "Substantive" means either a dollar amount large enough to have a negative impact on a Portfolio or a series of movements between Portfolios. Exchanges will be made using the Annuity Unit value for the Subaccounts on the date the request for exchange is received by the Company. On the exchange date, the Company will establish a value for the current Subaccount by multiplying the Annuity Unit value by the number of Annuity Units in the existing Subaccount, and compute the number of Annuity Units for the new Subaccount by dividing the Annuity Unit value of the new Subaccount into the value previously calculated for the existing Subaccount. JOINT ANNUITANT The Contract Owner may, in the Contract Application or by written request at least 30 days prior to the Annuity Date, name a Joint Annuitant. Such Joint Annuitant must meet the Company's underwriting requirements. If approved by the Company, the Joint Annuitant shall be named on the Contract Schedule or added by endorsement. An Annuitant or Joint Annuitant may not be replaced. The Annuity Date shall be determined based on the date of birth of the Annuitant. If the Annuitant or Joint Annuitant dies prior to the Annuity Date, the survivor shall be the sole Annuitant. Another Joint Annuitant may not be designated. Payment to a Beneficiary shall not be made until the death of the surviving Annuitant. GENERAL MATTERS NON-PARTICIPATING The Contracts are non-participating. No dividends are payable and the Contracts will not share in the profits or surplus earnings of the Company. MISSTATEMENT OF AGE OR SEX The Company may require proof of age and sex before making Annuity Payments. If the Annuitant's stated age, sex or both in the Contract are incorrect, the Company will change the Annuity Benefits payable to those which the Purchase Payments would have purchased for the correct age and sex. In the case of correction of the stated age or sex after payments have commenced, the Company will: (1) in the case of underpayment, pay the full amount due with the next payment; or (2) in the case of overpayment, deduct the amount due from one or more future payments. ASSIGNMENT Any Nonqualified Contract may be assigned by the Contract Owner prior to the Annuity Date and during the Annuitant's lifetime. The Company is not responsible for the validity of any assignment. No assignment will be recognized until the Company receives written notice thereof. The interest of any Beneficiary which the assignor has the right to change shall be subordinate to the interest of an assignee. Any amount paid to the assignee shall be paid in one sum, notwithstanding any settlement agreement in effect at the time assignment was executed. The Company shall not be liable as to any payment or other settlement made by the Company before receipt of written notice. B-3 ANNUITY DATA The Company will not be liable for obligations which depend on receiving information from a Payee until such information is received in a form satisfactory to the Company. ANNUAL REPORT Once each Contract Year, the Company will send the Contract Owner an annual report of the current Accumulated Value allocated to each Subaccount; and any Purchase Payments, charges, exchanges or withdrawals during the year. This report will also give the Contract Owner any other information required by law or regulation. The Contract Owner may ask for a report like this at any time. INCONTESTABILITY This Contract is incontestable from the Contract Date, subject to the "Misstatement of Age or Sex" provision. OWNERSHIP The Owner of the Contract on the Contract Date is the Annuitant, unless otherwise specified in the application. The Owner may specify a new Owner by written notice at any time thereafter. The term Owner also includes any person named as a Joint Owner. A Joint Owner shares ownership in all respects with the Owner. During the Annuitant's lifetime all rights and privileges under this Contract may be exercised solely by the Owner. Upon the death of the Owner(s), Ownership is retained by the surviving Joint Owner or passes to the Owner's Designated Beneficiary, if one has been designated by the Owner. If no Owner's Designated Beneficiary is designated or if no Owner's Designated Beneficiary is living, the Owner's Designated Beneficiary is the Owner's estate. From time to time the Company may require proof that the Owner is still living. DISTRIBUTION OF THE CONTRACT The Vanguard Group, Inc. through its wholly-owned subsidiary, Vanguard Marketing Corporation, is the principal distributor of the Contracts. For these services, the Fund paid a fee .02% of the Funds' average net assets for its 1997 fiscal year. This fee is guaranteed not to exceed .20% of the Fund's average month-end net assets. A complete description of these services is found in the "Management of the Fund" section of the Fund's Prospectus and in the Fund's Statement of Additional Information. PERFORMANCE INFORMATION Performance information for the Subaccounts including the yield and effective yield of the Money Market Subaccount, the yield of the remaining Subaccounts, and the total return of all Subaccounts, may appear in reports or promotional literature to current or prospective Contract Owners. MONEY MARKET SUBACCOUNT YIELDS Current yield for the Money Market Subaccount will be based on the change in the value of a hypothetical investment (exclusive of capital changes) over a particular 7-day period, less a pro-rata share of Subaccount expenses accrued over that period (the "base-period"), and stated as a percentage of the investment at the start of the base period (the "base period return"). The base period return is then annualized by multiplying by 365/7, with the resulting yield figure carried to at least the nearest hundredth of one percent. Calculation of "effective yield" begins with the same "base period return" used in the calculation of yield, which is then annualized to reflect weekly compounding pursuant to the following formula: Effective Yield = [(Base Period Return + 1)/365/7/] - 1 B-4 The yield of the Money Market Subaccount for the 7-day period ended December 31, 1997, was 5.24%. 30-DAY YIELD FOR NON-MONEY MARKET SUBACCOUNTS Quotations of yield for the remaining Subaccounts will be based on all investment income per Unit earned during a particular 30-day period, less expenses accrued during the period ("net investment income"), and will be computed by dividing net investment income by the value of a Unit on the last day of the period, according to the following formula: YIELD = 2[(a - b + 1)/6/ - 1] ----- c X d Where: [a] equals the net investment income earned during the period by the Series attributable to shares owned by a Subaccount [b] equals the expenses accrued for the period (net of reimbursements) [c] equals the average daily number of Units outstanding during the period [d] equals the maximum offering price per Accumulation Unit on the last day of the period Yield on the Subaccount is earned from the increase in net asset value of shares of the Series in which the Subaccount invests and from dividends declared and paid by the Series, which are automatically reinvested in shares of the Series. The yield of each Subaccount for the 30-day period ended December 31, 1997, is set forth below. Yields are calculated daily for each Subaccount. Premiums and discounts on asset-backed securities are not amortized. High-Grade Bond Subaccount........................................... 5.73% High Yield Bond Subaccount........................................... 8.14% Balanced Subaccount.................................................. 3.26% Equity Income Subaccount............................................. 2.33% Equity Index Subaccount.............................................. 1.15% Growth Subaccount.................................................... 0.41% International Subaccount............................................. -- Small Company Growth Subaccount...................................... 0.15%
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FOR NON-MONEY MARKET SUBACCOUNTS When advertising performance of the Subaccounts, the Company will show the "Standardized Average Annual Total Return," calculated as prescribed by the rules of the SEC, for each Subaccount. The Standardized Average Annual Total Return is the effective annual compounded rate of return that would have produced the cash redemption value over the stated period had the performance remained constant throughout. The calculation assumes a single $1,000 payment made at the beginning of the period and full redemption at the end of the period. It reflects the deduction of all applicable sales loads, the Annual Contract Maintenance Fee and all other Portfolio, Separate Account and Contract level charges except Premium Taxes, if any. In calculating performance information, the Annual Contract Maintenance Fee is reflected as a percentage equal to the total amount of fees collected during a year divided by the total average net assets of the Portfolios during the same year. The fee is assumed to remain the same in each year of the applicable period. The fee is prorated to reflect only the remaining portion of the calendar year of purchase. Thereafter, the fee is deducted on the last business day of the year for the following year, on a pro rata basis, from each of the Portfolios you have chosen. B-5 Quotations of average annual total return for any Subaccount will be expressed in terms of the average annual compounded rate of return of a hypothetical investment in a Contract over a period of one, three, five and 10 years (or, if less, up to the life of the Subaccount) and year-to-date and quarter-to-date, calculated pursuant to the formula: P(1 + T)/n/ = ERV Where: (1) [P] equals a hypothetical Initial Purchase Payment of $1,000 (2) [T] equal an average annual total return (3) [n] equals the number of years (4) [ERV] equals the ending redeemable value of a hypothetical $1,000 Pur- chase Payment made at the beginning of the period (or fractional por- tion thereof) The following tables show the average annual total return for the Subaccounts for the period beginning at the inception of each Subaccount and ending on December 31, 1997.
YEAR YEAR ENDED SINCE 1 YEAR 3 YEARS 5 YEARS TO DATE 12/31/97 INCEPTION* ------ ------- ------- ------- ---------- ---------- High-Grade Bond Subaccount............... 8.97% 5.11% 4.26% 8.97% 8.97% 4.13% High Yield Bond Subaccount............... 11.62% -- -- 11.62% 11.62% 13.04% Balanced Subaccount....... 22.58% 23.14% 15.73% 22.58% 22.58% 14.08% Equity Income Subaccount.. 33.77% 29.71% -- 33.71% 33.71% 19.39% Equity Index Subaccount... 32.58% 30.34% 19.43% 32.58% 32.58% 17.43% Growth Subaccount......... 26.10% 29.88% -- 26.10% 26.10% 21.13% International Subaccount.. 2.91% 10.59% -- 2.91% 2.91% 9.18% Small Company Growth Subaccount............... 12.79% -- -- 12.79% 12.79% 6.03%
- -------- *Since Inception: Equity Index Subaccount and High-Grade Bond Subaccount--April 29, 1991 Balanced Subaccount--May 23, 1991 Equity Income Subaccount and Growth Subaccount--June 7, 1993 International Subaccount--June 3, 1994 High Yield Bond Subaccount and Small Company Growth Subaccount--June 3, 1996
MONTH- QUARTER 6 MONTHS TO-DATE TO-DATE TO-DATE ------- ------- -------- High-Grade Bond Subaccount............................. 1.03% 2.74% 6.05% High Yield Bond Subaccount............................. 1.29% 2.27% 6.04% Balanced Subaccount.................................... 1.61% 2.77% 9.06% Equity Income Subaccount............................... 2.62% 5.93% 14.22% Equity Index Subaccount................................ 1.07% 2.72% 10.27% Growth Subaccount...................................... 1.53% 4.05% 7.28% International Subaccount............................... 0.50% -9.61% -11.42% Small Company Growth Subaccount........................ -1.00% -8.22% 9.59%
All total return figures reflect the deduction of the administrative charge, and the mortality and expense risk charge. The SEC requires that an assumption be made that the Contract Owner surrenders the entire Contract at the end of the 1, 5 and 10 year periods (or, if less, up to the life of the Subaccount) for which performance is required to be calculated. B-6 Performance information for a Subaccount may be compared, in reports and promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market Institutional Averages, or other indices that measure performance of a pertinent group of securities so that investors may compare a Subaccount's results with those of a group of securities widely regarded by investors as representative of the securities markets in general; (ii) other groups of variable annuity separate accounts or other investment products tracked by Lipper Analytical Services, a widely-used independent research firm which ranks mutual funds and other investment companies by overall performance, investment objectives, and assets, or tracked by other services, companies, publications, or persons who rank such investment companies on overall performance or other criteria; and (iii) the Consumer Price Index (measure for inflation) to assess the real rate of return from an investment in the Contract. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for administrative and management costs and expenses. Performance information for any Subaccount reflects only the performance of a hypothetical Contract under which Accumulation Value is allocated to a Subaccount during a particular time period on which the calculations are based. Performance information should be considered in light of the investment objectives and policies, characteristics and quality of the portfolio of the Fund in which the Subaccount invests, and the market conditions during the given time period, and should not be considered as a representation of what may be achieved in the future. Reports and marketing materials may, from time to time, include information concerning the rating of Providian Life & Health Insurance Company as determined by A.M. Best, Moody's, Standard & Poor's or other recognized rating services. Reports and promotional literature may also contain other information including (i) the ranking of any Subaccount derived from rankings of variable annuity separate accounts or other investment products tracked by Lipper Analytical Services or by other rating services, companies, publications, or other persons who rank separate accounts or other investment products on overall performance or other criteria, and (ii) the effect of tax- deferred compounding on a Subaccount's investment returns, or returns in general, which may be illustrated by graphs, charts, or otherwise, and which may include a comparison, at various points in time, of the return from an investment in a Contract (or returns in general) on a tax-deferred basis (assuming one or more tax rates) with the return on a taxable basis. ADDITIONAL PERFORMANCE MEASURES NON-STANDARDIZED TOTAL RETURN AND NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN The Company may show Non-Standardized Total Return (i.e., the percentage change in the value of an Accumulation Unit) for one or more Subaccounts with respect to one or more periods. The Company may also show Non-Standardized Average Annual Total Return (i.e., the average annual change in Accumulation Unit Value) with respect to one or more periods. For one year and periods less than one year, the Non-Standardized Total Return and the Non-Standardized Average Annual Total Return are effective annual rates of return and are equal. For periods greater than one year, the Non-Standardized Average Annual Total Return is the effective annual compounded rate of return for the periods stated. Because the value of an Accumulation Unit reflects the Separate Account and Portfolio expenses (See Fee Table in the Prospectus), the Non- Standardized Total Return and Non- Standardized Average Annual Total Return also reflect these expenses. However, these percentages do not reflect the Annual Contract Maintenance Fee or Premium Taxes (if any), which if included would reduce the percentages reported by the Company. B-7 NON-STANDARDIZED TOTAL RETURN FOR PERIOD ENDING 12/31/97
MONTH- QUARTER 6 MONTHS TO-DATE TO-DATE TO-DATE ONE YEAR SINCE INCEPTION ------- ------- -------- -------- --------------- High-Grade Bond Subaccount... 1.03% 2.74% 6.05% 8.98% 7.51% High Yield Bond Subaccount... 1.29% 2.27% 6.05% 11.63% 13.06% Balanced Subaccount.......... 1.61% 2.77% 9.07% 22.60% 14.13% Equity Income Subaccount..... 2.62% 5.94% 14.23% 33.78% 19.43% Equity Index Subaccount...... 1.67% 2.73% 10.27% 32.59% 17.48% Growth Subaccount............ 1.53% 4.05% 7.29% 26.12% 21.17% International Subaccount..... 0.50% -9.60% -11.47% 2.92% 9.22% Small Company Growth Subaccount.................. -0.99% -8.22% 9.60% 12.80% 6.05%
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS FOR PERIOD ENDING 12/31/97
ONE YEAR THREE YEAR FIVE YEAR SINCE INCEPTION -------- ---------- --------- --------------- High-Grade Bond Subaccount........ 8.98% 9.69% 6.83% 7.51% High Yield Bond Subaccount........ 11.63% -- -- 13.06% Balanced Subaccount............... 22.60% 23.17% 15.77% 14.13% Equity Income Subaccount.......... 33.78% 29.74% -- 19.43% Equity Index Subaccount........... 32.59% 30.37% 19.47% 17.48% Growth Subaccount................. 26.12% 29.90% -- 21.17% International Subaccount.......... 2.92% 10.62% -- 9.22% Small Company Growth Subaccount... 12.80% -- -- 6.05%
NON-STANDARDIZED TOTAL RETURN YEAR-TO-DATE The Company may show Non-Standardized Total Return Year-to-Date as of a particular date, or simply Total Return YTD, for one or more Subaccounts with respect to one or more non-standardized base periods commencing at the beginning of a calendar year. Total Return YTD figures reflect the percentage change in actual Accumulation Unit Values during the relevant period. These percentages reflect a deduction for the Separate Account and Portfolio expenses, but do not include the Annual Contract Maintenance Fee or Premium Taxes (if any), which if included would reduce the percentages reported by the Company.
TOTAL RETURN YTD AS OF 12/31/97 ---------------- High-Grade Bond Subaccount..................................... 8.98% High Yield Bond Subaccount..................................... 11.63% Balanced Subaccount............................................ 22.60% Equity Income Subaccount....................................... 33.78% Equity Index Subaccount........................................ 33.59% Growth Subaccount.............................................. 26.12% International Subaccount....................................... 2.92% Small Company Growth Subaccount................................ 12.80%
NON-STANDARDIZED ONE YEAR RETURN The Company may show Non-Standardized One Year Return, for one or more Subaccounts with respect to one or more non-standardized base periods commencing at the beginning of a calendar year (or date of inception, if during the relevant year) and ending at the end of such calendar year. One Year Return figures reflect the percentage change in actual Accumulation Unit Values during the relevant period. These percentages reflect a deduction for the Separate Account and Portfolio expenses, but do not include the Annual Contract Maintenance Fee or Premium Taxes (if any), which if included would reduce the percentages reported by the Company. B-8
1997 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- ---- High-Grade Bond Subaccount............. 8.98% 3.08% 17.47% -3.19% 8.92% 5.70% High Yield Bond Subaccount............. 11.63% -- -- -- -- -- Balanced Subaccount.................... 22.60% 15.68% 31.76% -1.13% 12.56% 6.59% Equity Income Subaccount............... 33.78% 18.13% 38.19% -1.76% -- -- Equity Index Subaccount................ 32.59% 22.27% 36.67% 0.61% 9.18% 6.77% Growth Subaccount...................... 26.12% 26.29% 37.62% 3.74% -- -- International Subaccount............... 2.92% 14.05% 15.31% -- -- -- Small Company Growth Subaccount........ 12.80% -- -- -- -- --
SAFEKEEPING OF ACCOUNT ASSETS Title to assets of the Separate Account is held by the Company. The assets are kept physically segregated and held separate and apart from the Company's general account assets. Records are maintained of all purchases and redemptions of eligible Portfolio shares held by each of the Subaccounts. THE COMPANY Commonwealth General Corporation owns a 3.7% interest in the Company and 61%, 15.3% and 20% interests, respectively, are held by Commonwealth Life Insurance Company, Peoples Security Life Insurance Company and Capital Liberty, L.P. Commonwealth Life Insurance Company and Peoples Security Life Insurance Company are each wholly owned by Capital General Development Corporation, which in turn is wholly owned by Commonwealth General Corporation. A 1% interest in Capital Liberty, L.P. is owned by Commonwealth General Corporation, which is the general partner, and 79.2% and 19.8% interests, respectively, are held by two limited partners, Commonwealth Life Insurance Company and Peoples Security Life Insurance Company. Commonwealth General Corporation is wholly owned by AEGON USA, Inc., which in turn is wholly owned by AEGON U.S. Holding Corporation, a wholly owned subsidiary of AEGON International n.v. AEGON International n.v. is a wholly owned subsidiary of AEGON n.v. Vereniging AEGON (a Netherlands membership association) has a 53.63% interest in AEGON n.v. STATE REGULATION The Company is a stock life insurance company organized under the laws of Missouri, and is subject to regulation by the Missouri State Department of Insurance. An annual statement is filed with the Missouri Commissioner of Insurance on or before March 1 of each year covering the operations and reporting on the financial condition of the Company as of December 31 of the preceding calendar year. Periodically, the Missouri Commissioner of Insurance examines the financial condition of the Company, including the liabilities and reserves of the Separate Account. In addition, the Company is subject to the insurance laws and regulations of all the states where it is licensed to operate. The availability of certain contract rights and provisions depends on state approval and/or filing and review processes. Where required by state law or regulation, the Contracts will be modified accordingly. RECORDS AND REPORTS All records and accounts relating to the Separate Account will be maintained by the Company or by its administrator, The Vanguard Group, Inc. As presently required by the Investment Company Act of 1940 and regulations promulgated thereunder, the Company will mail to all Contract Owners at their last known address of record, at least semiannually, reports containing such information as may be required under that Act or by any other applicable law or regulation. B-9 LEGAL PROCEEDINGS There are no legal proceedings to which the Separate Account is a party or to which the assets of the Separate Account are subject. The Company is not involved in any litigation that is of material importance in relation to its total assets or that relates to the Separate Account. OTHER INFORMATION A Registration Statement has been filed with the Securities and Exchange Commission, under the Securities Act of 1933 as amended, with respect to the Contracts discussed in this Statement of Additional Information. Not all of the information set forth in the Registration Statement, amendments and exhibits thereto has been included in this Statement of Additional Information. Statements contained in this Statement of Additional Information concerning the content of the Contracts and other legal instruments are intended to be summaries. For a complete statement of the terms of these documents, reference should be made to the instruments filed with the Securities and Exchange Commission. FINANCIAL STATEMENTS The audited financial statements of the Separate Account for the years ended December 31, 1997 and December 31, 1996, including the Report of Independent Auditors thereon, are included in this Statement of Additional Information. The audited statutory-basis financial statements of the Company for the years ended December 31, 1997 and December 31, 1996, including the Report of Independent Auditors thereon, which are also included in this Statement of Additional Information, should be distinguished from the financial statements of the Separate Account and should be considered only as bearing on the ability of the Company to meet its obligations under the Contracts. They should not be considered as bearing on the investment performance of the assets held in the Separate Account. B-10 STATUTORY- BASIS FINANCIAL STATEMENTS PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY YEARS ENDED DECEMBER 31, 1997 AND 1996 WITH REPORT OF INDEPENDENT AUDITORS PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY STATUTORY-BASIS FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND 1996 CONTENTS Report of Independent Auditors.............................................. 1 Audited Financial Statements Balance Sheets (Statutory-Basis).......................................... 2 Statements of Operations (Statutory-Basis)................................ 3 Statements of Changes in Capital and Surplus (Statutory-Basis)............ 4 Statements of Cash Flows (Statutory-Basis)................................ 5 Notes to Financial Statements............................................. 6
REPORT OF INDEPENDENT AUDITORS Board of Directors Providian Life and Health Insurance Company We have audited the accompanying statutory-basis balance sheets of Providian Life and Health Insurance Company as of December 31, 1997 and 1996, and the related statutory-basis statements of operations, changes in capital and sur- plus, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to ex- press an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting 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 pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. As described in Note 1 to the financial statements, the Company presents its financial statements in conformity with accounting practices prescribed or permitted by the Missouri Department of Insurance, which practices differ from generally accepted accounting principles. The variances between such practices and generally accepted accounting principles are also described in Note 1. The effects on the financial statements of these variances are not reasonably de- terminable but are presumed to be material. In our opinion, because of the effects of the matter described in the pre- ceding paragraph, the financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the fi- nancial position of Providian Life and Health Insurance Company at December 31, 1997 and 1996, or the results of its operations or its cash flows for the years then ended. However, in our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Providian Life and Health Insurance Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with ac- counting practices prescribed or permitted by the Missouri Department of In- surance. /s/ Ernst & Young LLP Louisville, Kentucky April 24, 1998 1 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY BALANCE SHEETS (STATUTORY-BASIS)
DECEMBER 31 ----------------------- 1997 1996 ----------- ----------- (IN THOUSANDS) ADMITTED ASSETS Cash and invested assets: Bonds................................................. $ 4,363,420 $ 4,249,252 Preferred stocks...................................... 31,519 30,658 Common stocks......................................... 487,831 438,067 Mortgage loans........................................ 2,269,507 2,651,611 Real estate........................................... 8,759 6,653 Policy loans.......................................... 155,430 158,186 Cash and short-term investments....................... 45,122 139,705 Other invested assets................................. 216,266 168,430 ----------- ----------- Total cash and invested assets......................... 7,577,854 7,842,562 Deferred and uncollected premiums...................... 46,428 49,186 Accrued investment income.............................. 91,639 89,539 Other receivables...................................... 15,150 38,556 Amounts due from affiliates............................ 17,480 7,687 Federal income taxes recoverable from parent........... 230 5,840 Other admitted assets.................................. 32 1,385 Separate account assets................................ 3,573,052 2,427,504 ----------- ----------- TOTAL ADMITTED ASSETS.............................. $11,321,865 $10,462,259 =========== =========== LIABILITIES AND CAPITAL AND SURPLUS Liabilities: Aggregate policy reserves............................. $ 4,573,048 $ 4,736,127 Policy and contract claims............................ 49,145 43,006 Policyholder contract deposits........................ 1,770,902 1,961,549 Other policy or contract liabilities.................. 460,461 366,441 Amounts due to affiliates............................. 18,429 12,719 Asset valuation reserve............................... 109,465 97,169 Accrued expenses and other liabilities................ 165,840 212,433 Separate account liabilities.......................... 3,544,304 2,427,504 ----------- ----------- Total liabilities...................................... 10,691,594 9,856,948 Capital and surplus: Common stock, $11 par value; 1,145,000 shares authorized, issued and outstanding................... 12,595 12,595 Preferred stock, $11 par value; 2,290,000 shares authorized, issued and outstanding................... 25,190 25,190 Paid-in surplus....................................... 2,583 2,583 Unassigned surplus.................................... 589,903 564,943 ----------- ----------- Total capital and surplus.............................. 630,271 605,311 ----------- ----------- TOTAL LIABILITIES AND CAPITAL AND SURPLUS.......... $11,321,865 $10,462,259 =========== ===========
See accompanying notes. 2 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY STATEMENTS OF OPERATIONS (STATUTORY-BASIS)
YEAR ENDED DECEMBER 31 ---------------------- 1997 1996 ---------- ---------- (IN THOUSANDS) Revenues: Premiums earned: Life and annuity..................................... $ 406,561 $ 343,086 Accident and health.................................. 144,713 154,993 Annuity fund deposits................................. 995,014 1,073,366 Net investment income................................. 559,656 569,860 Commissions and expense allowances on reinsurance ceded................................................ 2,323 1,123 Amortization of interest maintenance reserve.......... 6,333 3,109 Other income.......................................... 7,770 10,196 ---------- ---------- 2,122,370 2,155,733 Benefits and expenses: Accident and health, life and other benefits.......... 1,474,430 1,417,390 Decrease in aggregate policy reserves................. (381,758) (111,769) Interest on policyholder contract deposits............ 122,478 102,631 Commissions and expense allowances on reinsurance assumed.............................................. 41,990 39,533 General insurance and other expenses.................. 129,266 122,906 Reinsurance recapture fee............................. 553 2,320 Net transfers to separate accounts.................... 599,633 425,800 ---------- ---------- 1,986,592 1,998,811 ---------- ---------- Net gain from operations before federal income taxes... 135,778 156,922 Federal income tax expense............................. 54,615 50,639 ---------- ---------- Net gain from operations............................... 81,163 106,283 Net realized capital gains, net of income taxes (1997-- $9,506; 1996--$1,402) and excluding gains transferred to the interest maintenance reserve (1997--$10,093; 1996--$2,921)......................................... 24,702 3,394 ---------- ---------- Net income............................................. $ 105,865 $ 109,677 ========== ==========
See accompanying notes. 3 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS (STATUTORY-BASIS)
COMMON PREFERRED PAID-IN UNASSIGNED STOCK STOCK SURPLUS SURPLUS ------- --------- ------- ---------- (IN THOUSANDS) Balances, January 1, 1996................. $12,595 $25,190 $2,583 $536,126 Net income................................ -- -- -- 109,677 Change in net unrealized gains on investments.............................. -- -- -- 40,540 Dividends to shareholders................. -- -- -- (125,000) Prior year federal income tax adjustment.. -- -- -- 6,546 Decrease in nonadmitted assets............ -- -- -- 4,737 Increase in asset valuation reserve....... -- -- -- (7,683) ------- ------- ------ -------- Balances, December 31, 1996............... $12,595 $25,190 $2,583 $564,943 Net income................................ -- -- -- 105,865 Change in net unrealized gains on investments.............................. -- -- -- 45,907 Dividends to shareholders................. -- -- -- (120,000) Prior year federal income tax adjustment.. -- -- -- 4,719 Decrease in nonadmitted assets............ -- -- -- 341 Increase in asset valuation reserve....... -- -- -- (12,296) Change in surplus in separate accounts.... -- -- -- 424 ------- ------- ------ -------- Balances, December 31, 1997............... $12,595 $25,190 $2,583 $589,903 ======= ======= ====== ========
See accompanying notes. 4 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY STATEMENTS OF CASH FLOWS (STATUTORY-BASIS)
YEAR ENDED DECEMBER 31 ---------------------- 1997 1996 ---------- ---------- (IN THOUSANDS) Cash and short-term investments provided Operations: Premiums and annuity fund deposits................... $1,549,498 $1,573,203 Net investment income received....................... 544,108 574,079 Allowances and reserve adjustments received on reinsurance ceded................................... 2,323 1,125 Other income received.................................. 5,906 10,182 ---------- ---------- 2,101,835 2,158,589 Benefits paid........................................ 1,468,102 1,412,797 General insurance and other expenses................. 170,488 169,580 Federal income taxes paid............................ 53,792 56,121 Net increase (decrease) in policy loans and premium notes............................................... (2,745) 3,520 Paid reinsurance reserves and other items............ 18 293 Net transfers to separate accounts................... 602,788 412,252 ---------- ---------- 2,292,443 2,054,563 ---------- ---------- Total cash provided (applied) by operations........... (190,608) 104,026 Investments sold, matured or repaid................... 5,059,887 3,688,955 Other cash provided: Increase in amounts due to affiliates................ 5,709 7,826 Net increase in broker receivables................... 891 31,112 Other items.......................................... 15,014 40,047 ---------- ---------- Total other cash provided............................. 21,614 78,985 ---------- ---------- Total cash and short-term investments provided......... 4,890,893 3,871,966 Cash and short-term investments applied: Investments acquired.................................. 4,783,450 3,717,511 Other cash applied: Dividends paid to shareholders....................... 120,000 125,000 Decrease in amounts due to affiliates................ 9,770 6,162 Net decrease in broker payables...................... 22,505 -- Net cash and short-term investments transferred on reinsurance recaptured.............................. 650 78,980 Capital contribution to separate account............. 26,362 -- Other items.......................................... 22,739 9,874 ---------- ---------- Total other cash applied.............................. 202,026 220,016 ---------- ---------- Total cash and short-term investments applied.......... 4,985,476 3,937,527 ---------- ---------- Decrease in cash and short-term investments............ (94,583) (65,561) Cash and short-term investments: Beginning of year..................................... 139,705 205,266 ---------- ---------- End of year........................................... $ 45,122 $ 139,705 ========== ==========
See accompanying notes. 5 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. ORGANIZATION, NATURE OF OPERATIONS AND ACCOUNTING POLICIES Organization Providian Life and Health Insurance Company (PLH) is a life and health in- surance company domiciled in Missouri. Prior to June 10, 1997, PLH was an in- direct, wholly owned subsidiary of Providian Corporation (Providian). On June 10, 1997, Providian's insurance operations, including the operations of PLH, were merged with an indirect, wholly owned subsidiary of AEGON N.V., an inter- national insurance organization headquartered in The Hague, The Netherlands. Providian was the surviving corporation in the merger. Effective October 15, 1997, Providian's name was changed to Commonwealth General Corporation (Com- monwealth). Effective December 31, 1997, ownership of Commonwealth was trans- ferred to AEGON USA, Inc., an indirect, wholly owned subsidiary of AEGON N.V. PLH is directly owned by Commonwealth Life Insurance Company (CLICO) 61%, Capital Liberty, L.P. (CLLP) 20%, Peoples Security Life Insurance Company (PSI) 15%, and Commonwealth 4%. Commonwealth is the ultimate parent of CLICO, CLLP, and PSI. PLH wholly owns an insurance subsidiary, Veterans Life Insur- ance Company (VLIC), which wholly owns an insurance subsidiary, First Providian Life and Health Insurance Company (FPLH), and a non-insurance sub- sidiary. Nature of Operations PLH sells and services life and accident and health insurance products, pri- marily utilizing direct response methods, such as television, telephone, mail and third-party programs to reach low to middle-income households nationwide. PLH also sells and services group and individual accumulation products, pri- marily utilizing brokers, fund managers, financial planners, stock brokerage firms and a mutual fund. Management's Estimates The preparation of financial statements of insurance companies requires man- agement to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assump- tions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. Basis of Presentation The accompanying financial statements of PLH have been prepared in accor- dance with the accounting practices prescribed or permitted by the Missouri Department of Insurance. Such practices vary from generally accepted account- ing principles (GAAP). The more significant variances from GAAP are as fol- lows: Investments Investments in bonds and mandatorily redeemable preferred stocks are re- ported at amortized cost or fair value based on their National Association of Insurance Commissioners (NAIC) rating; for GAAP, such fixed maturity in- vestments are designated at purchase as held-to-maturity, trading or avail- able-for-sale. Held-to-maturity fixed investments are reported at amortized cost, and the remaining fixed maturity investments are reported at fair value with unrealized holding gains and losses reported in operations for those designated as trading and as a separate component of shareholders' equity for those designated as available-for-sale. 6 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Fair values of investments in bonds and stocks are generally based on values specified by the Securities Valuation Office (SVO) of the NAIC, rather than on values provided by outside broker confirmations or inter- nally calculated estimates. However, for certain investments, the NAIC does not provide a value and PLH uses either admitted asset investment amounts (i.e., statement values) as allowed by the NAIC, quoted fair values pro- vided by outside broker confirmations or internally calculated estimates. Investments in real estate are reported net of related obligations rather than on a gross basis. Real estate owned and occupied by PLH is included in investments rather than reported as an operating asset, and investment in- come and operating expenses include amounts representing rent for PLH's oc- cupancy of such real estate. Changes between cost and admitted asset in- vestment amounts are credited or charged directly to unassigned surplus rather than to a separate surplus account. Valuation allowances are established for mortgage loans based on the dif- ference between the unpaid loan balance and the estimated fair value of the underlying real estate when such loans are determined to be in default as to scheduled payments. Under GAAP, valuation allowances would be estab- lished when PLH determines it is probable that it will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement. Such allowances are generally based on the es- timated fair value of the underlying real estate (collateral). The initial valuation allowance and subsequent changes in the allowance for mortgage loans are charged or credited directly to unassigned surplus, rather than being included as a component of earnings as would be required under GAAP. Under a formula prescribed by the NAIC, PLH defers the portion of real- ized capital gains and losses attributable to changes in the general level of interest rates on sales of certain liabilities and fixed income invest- ments, principally bonds and mortgage loans, and amortizes such deferrals into income on a straight-line basis over the remaining period to maturity based on groupings of individual liabilities or investments sold. The net accumulated unamortized balance of such deferrals is reported as an "inter- est maintenance reserve" (IMR). Realized capital gains and losses are re- ported in income net of federal income tax and transfers to the IMR. At De- cember 31, 1997 and 1996, the IMR balance was in an asset position of $7,002,000 and $10,762,000, respectively, and was non-admitted for statu- tory accounting purposes. The "asset valuation reserve" (AVR) is also de- termined by a NAIC prescribed formula and is reported as a liability rather than a valuation allowance. The AVR represents a provision for possible fluctuations in the value of bonds, equity securities, mortgage loans, real estate and other invested assets. Changes to the AVR are charged or cred- ited directly to unassigned surplus. Under GAAP, realized capital gains and losses are reported in the income statement on a pretax basis in the period that the asset giving rise to the gain or loss is sold and direct write- downs are recorded (or valuation allowances are provided, where appropriate under GAAP) when there has been a decline in value deemed to be other than temporary, in which case, write-downs (or provisions) for such declines are charged to income. Subsidiaries The accounts and operations of PLH's subsidiaries are not consolidated with the accounts and operations of PLH as would be required under GAAP. Policy Acquisition Costs Costs of acquiring and renewing business are expensed when incurred. Un- der GAAP, acquisition costs related to traditional life insurance, to the extent recoverable from future policy revenues, are deferred and amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For uni- versal life insurance and investmenttype contracts, to the extent recover- able from future gross profits, deferred policy acquisition costs are amor- tized generally in 7 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) proportion to the present value of expected gross profits from surrender charges and investment, mortality and expense margins. Nonadmitted Assets Certain assets designated as "nonadmitted," principally agents' debit balances and furniture and equipment, are excluded from the accompanying balance sheets and are charged directly to unassigned surplus. Premiums Revenues for universal life policies and investment-type contracts con- sist of the entire premium received and benefits incurred represent the to- tal of death benefits paid, surrenders and the change in policy reserves. Under GAAP, premiums received in excess of policy charges are not recog- nized as premium revenue and benefits represent the excess of benefits paid over the policy account value and interest credited to the account values. Benefit Reserves Certain policy reserves are calculated using prescribed interest and mor- tality assumptions rather than on expected experience and actual account balances as would be required under GAAP. Reinsurance Policy and contract liabilities ceded to reinsurers have been reported as reductions of the related reserves rather than as assets as would be re- quired under GAAP. Commissions allowed by reinsurers on business ceded are reported as in- come when received rather than being deferred and amortized with deferred policy acquisition costs. Federal Income Taxes Deferred federal income taxes are not provided for differences between the financial statement amounts and the tax bases of assets and liabili- ties. Statements of Cash Flows Cash and short term investments in the statements of cash flows represent cash balances and investments with initial maturities of one year or less. Under GAAP, the corresponding captions of cash and cash equivalents include cash balances and investments with initial maturities of three months or less. The effects of the foregoing variances from GAAP on the accompanying statu- tory-basis financial statements have not been determined, but are presumed to be material. Other significant accounting policies followed in preparing the accompanying statutory-basis financial statements are as follows: Investments Bonds, preferred stocks, common stocks, mortgage loans, real estate, pol- icy loans, short-term investments, other invested assets and derivative fi- nancial instruments are stated at values prescribed by the NAIC, as fol- lows: Bonds not backed by other loans are stated at amortized cost using the constant effective yield method. 8 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Loan-backed bonds and structured securities are valued at amortized cost using the constant effective yield method. Anticipated prepayments are considered when determining the amortization of related discounts or premiums. Prepayment assumptions are obtained from dealer survey values or internal estimates and are consistent with the current inter- est rate and economic environment. The retrospective adjustment method is used to value such securities. Preferred stocks are carried at cost. In addition, certain bonds and preferred stocks are carried at the lower of cost (or amortized cost) or the NAIC designated fair value. Common stocks are carried at the NAIC designated fair value, except that investments in unconsolidated subsidiaries and affiliates in which PLH has an interest of 20 percent or more are carried on the equity ba- sis. Mortgage loans in good standing are carried at unpaid principal bal- ances while statutorily delinquent mortgages are carried at their un- paid principal balance less the related valuation allowance. Real estate is carried at the lower of cost (less depreciation for occupied and investment real estate, generally calculated using the straight-line method) or net realizable value, and is net of related obligations, if any. Policy loans are carried at the aggregate unpaid principal balance. Short-term investments include investments with maturities of less than one year at the date of acquisition. Short-term investments are carried at amortized cost. Other invested assets are comprised of limited partnership invest- ments and are valued using the equity method of accounting. Derivative financial instruments, consisting primarily of interest rate swap agreements, including basis swaps, and futures, are valued consistently with the hedged item. Hedges of fixed income assets and/or liabilities are valued at amortized cost. Hedges of items carried at fair value are valued at fair value. Derivatives which cease to be ef- fective hedges are valued at fair value. Bond and other loan interest is credited to income as it accrues. Divi- dends on preferred and common stocks are credited to income on exdividend dates. For securities, PLH follows the guidelines of the NAIC for each se- curity on an individual basis in determining the admitted or nonadmitted status of accrued income amounts. There was no interest on securities ex- cluded from investment income at December 31, 1997 and 1996. For mortgage loans, PLH's policy is to exclude from investment income interest in excess of three months past due. At December 31, 1997 and 1996, the total amount excluded from accrued investment income for delinquent mortgage loans was approximately $308,000 and $504,000, respectively. The amounts to be paid or received as a result of derivative instruments are recognized in the statements of operations as an adjustment to investment income. Realized capital gains and losses on derivative instruments are recognized currently in earnings. If the item being hedged is subject to the IMR, the gain or loss on the hedging derivative instrument is subject to the IMR upon termi- nation. Net income includes realized capital gains and losses on investments sold, net of federal income tax and transfers to the IMR. The cost of in- vestments sold is determined on a first-in, first-out basis. Separate Accounts Separate account assets and liabilities reported in the accompanying statutory-basis financial statements represent funds that are separately administered, principally for annuity contracts, and for which the contract holder, rather than PLH, bears the investment risk. Separate account con- tract holders have no claim against the assets of the general account of PLH. Separate account assets are reported at estimated fair value. Separate account liabilities are also reported at estimated fair value and are ex- clusive of capital contributions 9 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) made by PLH. The operations of the separate accounts are not included in the accompanying statutory-basis financial statements. Fees charged on sep- arate account policyholder deposits are included in net transfers to sepa- rate accounts in the accompanying statements of operations. Policy Reserves Unearned premiums represent the portion of premiums written which are ap- plicable to the unexpired terms of accident and health policies in force, calculated principally by the application of monthly pro rata fractions. Liabilities for unearned premiums are included in aggregate policy re- serves. PLH waives deduction of deferred fractional premiums upon death of insureds. PLH's policy is to return any portion of the final premium beyond the date of death. Surrender values on direct business are not promised in excess of the legally computed reserves. Additional premiums are charged for policies issued on substandard lives according to underwriting classi- fication. Mean reserves are determined by computing the regular mean re- serve for the plan at the issued age and holding, in addition, onehalf of the extra premium charged for the year. The tabular interest has been determined from the basic data for the cal- culation of policy reserves. The tabular less actual reserve released and the tabular cost have been determined by formula as described in the NAIC instructions. Policy reserves also include single premium and flexible premium annuity contracts and structured settlement contracts. The single premium and flex- ible premium contracts contain surrender charges for the first six to seven years of the contract. These contract reserves are held at the contract value that accrues to the policyholder. Structured settlement contracts contain no surrender charge as the contracts are not surrenderable. Policy reserves on these contracts are determined based on the expected future cash flows discounted at the applicable statutorily defined mortality and interest rates. Annual effective rates credited to these annuity contracts ranged from 4.0 percent to 8.0 percent during 1997 and 1996. Liabilities for Policy and Contract Claims Liabilities for policy and contract claims, principally related to acci- dent and health policies, include amounts determined in accordance with standard actuarial practice and statutory regulation. These estimates are subject to the effects of trends in claim severity and frequency. Although considerable variability is inherent in such estimates, management believes that the liabilities for policy and contract claims are adequate. The meth- ods of making such estimates and establishing the resulting liabilities are continually reviewed and updated, and any adjustments resulting therefrom are reflected in current earnings. Policyholder Contract Deposits Policyholder contract deposits are comprised primarily of guaranteed in- vestment contracts (GICs). The GICs consist of three types. One type is guaranteed as to principal along with interest guarantees based upon prede- termined indices. The second type guarantees principal and interest, but also includes a penalty if the contract is surrendered early. The third type guarantees principal and interest and is non-surrenderable before the fixed maturity date. Policy reserves on the GICs are determined following the retrospective deposit method and consist of contract values that accrue to the benefit of the policyholder. Annual effective rates credited to these GICs ranged from 5.5 percent to 6.6 percent and from 5.2 percent to 6.6 percent during 1997 and 1996, respectively. Premiums, Benefits and Expenses For individual and most group life policies, premiums are reported as earned on the policy/certificate anniversary. For individual and group an- nuities, premiums and annuity fund deposits are recorded as earned when collected. For individual and group accident and health policies, premiums are recorded as earned on 10 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) a pro rata basis over the coverage period for which the premiums were col- lected or due. Benefit claims (including an estimated provision for claims incurred but not reported), policy reserve changes and expenses are charged to income as incurred. Reinsurance Reinsurance premiums, benefits and expenses are accounted for in a manner consistent with that used in accounting for original policies issued and the terms of the reinsurance contracts. Premiums, benefits, expenses and the reserves for policy and contract liabilities and unearned premiums are recorded net of reinsured amounts. Guaranty Fund Assessments Periodically, PLH is assessed by various state guaranty funds as part of those funds' activities to collect funds from solvent insurance companies to cover certain losses to policyholders that resulted from the insolvency or rehabilitation of other insurance companies. Each state guaranty fund operates independently of any other state guaranty fund; as such, the meth- ods by which assessments are levied against PLH vary from state to state. Also, some states permit guaranty fund assessments to be partially recov- ered through reductions in future premium taxes. At December 31, 1997 and 1996, PLH has established an estimated liability for guaranty fund assess- ments for those insolvencies or rehabilitations that have actually occurred prior to that date. The estimated liability is determined using preliminary information received from the various state guaranty funds and the National Organization of Life and Health Insurance Guaranty Associations. Because there are many uncertainties regarding the ultimate assessments that will be assessed against PLH, the ultimate assessments for those insolvencies or rehabilitations that occurred prior to December 31, 1997 may vary from the estimated liability included in the accompanying financial statements. The estimated liability for guaranty fund assessments recorded at December 31, 1997 and 1996 was $12,354,000 and $11,525,000, respectively. Permitted Statutory Accounting Practices PLH's statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the Missouri Depart- ment of Insurance. Currently, "prescribed" statutory accounting practices include state insurance laws, regulations, and general administrative rules, as well as a variety of publications of the NAIC, including the NAIC's Accounting Practices and Procedures Manual. "Permitted" statutory accounting practices encompass all accounting practices that are not pre- scribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC is in the process of codifying statutory accounting practices (Codification). Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that PLH uses to prepare its statutory-basis financial state- ments. Codification, which is expected to be approved by the NAIC in 1998, will require adoption by the various states before it becomes the pre- scribed statutory basis of accounting for insurance companies domesticated within those states. Accordingly, before Codification becomes effective for PLH, Missouri must adopt Codification as the prescribed basis of accounting on which domestic insurers must report their statutory-basis results to the Department of Insurance. At this time it is unclear whether Missouri will adopt Codification. However, based on current draft guidance, management believes that the impact of codification will not be material to PLH's statutory-basis financial statements. 11 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Reclassifications Certain reclassifications have been made to the prior year financial state- ments to conform with the current year presentation. 2. INVESTMENTS The tables below contain amortized cost (carrying value or statement value) and fair value information on bonds.
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) DECEMBER 31, 1997 U.S. government obligations......... $ 133,391 $ 931 $ 229 $ 134,093 States and political subdivisions... 19,464 1,217 -- 20,681 Foreign government obligations*..... 29,293 227 67 29,453 Corporate and other................. 2,595,091 95,032 4,976 2,685,147 Foreign corporate*.................. 384,898 14,292 10,739 388,451 Asset-backed........................ 541,542 434 -- 541,976 Mortgage-backed..................... 659,741 -- -- 659,741 ---------- -------- ------- ---------- $4,363,420 $112,133 $16,011 $4,459,542 ========== ======== ======= ==========
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) DECEMBER 31, 1996 U.S. government obligations......... $ 170,990 $ 576 $ 3,340 $ 168,226 States and political subdivisions... 33,765 526 994 33,297 Foreign government obligations*..... 39,483 301 432 39,352 Corporate and other................. 2,730,863 43,960 23,430 2,751,393 Foreign corporate*.................. 218,306 5,868 679 223,495 Asset-backed........................ 519,149 -- -- 519,149 Mortgage-backed..................... 536,696 -- -- 536,696 ---------- ------- ------- ---------- $4,249,252 $51,231 $28,875 $4,271,608 ========== ======= ======= ==========
- -------- * Substantially all are U.S. dollar denominated. 12 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The amortized cost and fair value of bonds at December 31, 1997, by contrac- tual maturity, are shown below. Actual maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay ob- ligations, sometimes without call or prepayment penalties.
AMORTIZED FAIR COST VALUE ---------- ---------- (IN THOUSANDS) Due in one year or less............................ $ 123,776 $ 123,553 Due after one year through five years.............. 524,363 525,913 Due after five years through ten years............. 886,610 895,178 Due after ten years................................ 1,627,388 1,713,181 ---------- ---------- 3,162,137 3,257,825 Asset-backed securities............................ 541,542 541,976 Mortgage-backed securities......................... 659,741 659,741 ---------- ---------- $4,363,420 $4,459,542 ========== ==========
Proceeds during 1997 and 1996 from sales, maturities and calls of bonds were $4,006,319,000 and $2,992,250,000, respectively. Gross gains of $43,227,000 and $36,104,000 and gross losses of $29,488,000 and $28,403,000 in 1997 and 1996, respectively, were realized on those sales. The cost of preferred stocks of unaffiliated companies was $31,519,000 and $30,886,000 at December 31, 1997 and 1996, respectively, and the related fair value was $31,640,000 and $30,681,000 at December 31, 1997 and 1996, respec- tively. There was no difference between cost and statement value of preferred stocks at December 31, 1997. The difference between cost and statement value of $228,000 at December 31, 1996 was credited directly to unassigned surplus as of that date and did not affect net income. The change in unrealized gains and losses on investments in common stocks and on investments in subsidiaries is credited or charged directly to unas- signed surplus and does not affect net income. The cost and fair value of those investments at December 31, 1997 and 1996 were as follows:
GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------- ---------- ---------- -------- (IN THOUSANDS) DECEMBER 31, 1997 Common stocks........................... $ 34,723 $ 1,527 $3,455 $ 32,795 Subsidiaries............................ 202,606 252,430 -- 455,036 -------- -------- ------ -------- $237,329 $253,957 $3,455 $487,831 ======== ======== ====== ======== DECEMBER 31, 1996 Common stocks........................... $ 28,991 $ 655 $1,083 $ 28,563 Subsidiaries............................ 202,606 206,898 -- 409,504 -------- -------- ------ -------- $231,597 $207,553 $1,083 $438,067 ======== ======== ====== ========
The fair value of investments in subsidiaries presented above represents PLH's equity interest in the net assets of the subsidiary. Included in investments are securities having statement values of $3,966,000 at December 31, 1997 which were on deposit with various state insurance de- partments to satisfy regulatory requirements. 13 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The carrying value of mortgage loans is net of an allowance for loan losses of $868,000 and $2,526,000 at December 31, 1997 and 1996, respectively. The maximum and minimum lending rates for commercial mortgage loans made during 1997 were 8.8 percent and 6.9 percent, respectively; the maximum and minimum lending rates for residential mortgage loans made during 1997 were 9.0 percent and 4.3 percent, respectively; and the maximum and minimum lending rates for farm mortgage loans made during 1997 were 8.5 percent and 7.8 percent, respec- tively. The maximum percentage of any one loan to the value of collateral at the time of the loan, exclusive of insured, guaranteed or purchase money mort- gages, was 80 percent. Hazard insurance is required on all properties covered by mortgage loans at least equal to the excess of the loan over the maximum loan which would be permitted by law on the land without buildings. As of De- cember 31, 1997, PLH held $1,059,000 of mortgages with interest more than one year overdue amounting to $137,000. As of December 31, 1997, there were no taxes, assessments, or other amounts advanced by PLH on account of mortgage loans which were not included in mortgage loan totals. During 1997, $440,000 of taxes and maintenance expenses were paid by PLH on property acquired through foreclosure. During 1997, PLH did not reduce interest rates on any outstanding mortgages. 3. FINANCIAL INSTRUMENTS PLH utilizes a variety of financial instruments in its asset/liability man- agement process and to meet its customers' financing needs. The asset/liability management process focuses on the management of a variety of risks, including interest rate, market and credit risks. Effective management of these risks is an important determinant of profitability. Instruments used in this process and to meet the customers' financing and investing needs in- clude derivative financial instruments, primarily interest rate swap agree- ments and futures contracts, and commitments to extend credit. Other deriva- tives, such as forwards, are used to a much lesser extent in the asset/liability management process. All of these instruments involve (to vary- ing degrees) elements of market and credit risks in excess of the amounts rec- ognized in the accompanying financial statements at a given point in time. The contract or notional values of all of these instruments reflect the extent of involvement in the various types of financial instruments. PLH's exposure to market risk (including interest rate risk) is the risk of market volatility and potential disruptions in the market which may result in certain instruments being less valuable. PLH monitors and controls its expo- sure to this risk primarily through the use of cash flow stress testing, total portfolio analysis of net duration levels, a monthly mark-to-market process and ongoing monitoring of interest rate movements. PLH's exposure to credit risk (including interest rate risk) is the risk of loss from a counterparty failing to perform according to the terms of the con- tract. This exposure includes settlement risk (risk that the counterparty de- faults after PLH has delivered funds or securities under the terms of the con- tract) which results in an accounting loss and replacement cost risk (cost to replace the contract at current market rates should the counterparty default prior to the settlement date). There is no off-balance sheet exposure to credit risk that would result in an immediate accounting loss (settlement risk) associated with counterparty non-performance on interest rate swap agreements and futures. Interest rate swap agreements are subject to replace- ment cost risk, which equals the cost to replace those contracts in a net gain position should a counterparty default. Default by a counterparty would not result in an immediate accounting loss. These instruments, as well as futures and forwards, are subject to market risk, which is the possibility that future changes in market prices may make the instruments less valuable. Credit loss exposure resulting from non-performance by a counterparty for commitments to extend credit is represented by the contractual amounts of the instruments. The credit risk on all financial instruments, whether on- or off-balance sheet, is controlled through an ongoing credit review, approval and monitoring process. PLH determines, on an individual counterparty basis, the need for collateral or other security to support financial instruments with credit risk, and establishes individual 14 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) and aggregate counterparty exposure limits. In order to limit exposure associ- ated with counterparty nonperformance on interest rate swap agreements, PLH enters into master netting agreements with its counterparties. These master netting agreements provide that, upon default of either party, contracts in gain positions will be offset with contracts in loss positions and the net gain or loss will be received or paid, respectively. Assuming every counterparty defaulted, the cost of replacing those interest rate contracts in a net gain position, after consideration of the aforementioned master netting agreements, was $20,344,000 and $22,188,000 at December 31, 1997 and 1996, re- spectively. PLH manages interest rate risk through the use of duration analysis. Dura- tion is a key portfolio management tool and is measured for both assets and liabilities. For the simplest forms of assets or liabilities, duration is pro- portional to their weighted average life, with weights equal to the discounted present value of estimated cash flows. This methodology causes near-term cash flows to have a greater proportional weight than cash flows further in the fu- ture. For more complex assets and liabilities with optional cash flows, for example, callable bonds, mortgage-backed securities, or traditional insurance liabilities, additional adjustments are made in estimating an effective dura- tion number. PLH uses derivatives as a less costly and less burdensome alter- native to restructuring the underlying cash instruments to manage interest rate risk based upon the aggregate net duration level of its aggregate portfo- lio. Information is provided below for each significant derivative product type. Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payments, without an exchange of the underlying princi- pal amount. PLH also enters into basis swap agreements where amounts received are based primarily upon three month LIBOR or less and pays amounts based on either a short-term Treasury or Prime Rate. The amounts to be paid or received as a result of these agreements are accrued and recognized in the accompanying statements of operations through net investment income. Gains or losses real- ized on closed or terminated agreements are deferred and amortized as a compo- nent of the IMR. Futures are contracts which call for the delayed delivery of securities in which the seller agrees to deliver on a specified future date, a specified in- strument at a specified price. The daily change in fair value for futures used as accounting hedges both for products that provide a return based on the mar- ket performance of a designated index and for investments in common stocks are recognized in the accompanying statement of operations through net realized investment gains and losses. Margin requirements on futures contracts, equal to the change in fair value, are usually settled on a daily basis. The following table summarizes the activity by notional or contract value in derivative products for 1997 and 1996:
RECEIVE PAY FIXED/ FIXED/PAY RECEIVE FLOATING FLOATING BASIS FUTURES FORWARDS ---------- ---------- -------- -------- -------- (IN THOUSANDS) Balances, December 31, 1995.... $1,320,962 $ -- $ 65,198 $ 50,106 $250,000 Additions.................... 107,473 10,000 100,000 314,271 -- Maturities................... 109,268 -- 4,558 -- -- Terminations................. 396,400 -- -- 293,594 -- ---------- ------- -------- -------- -------- Balances, December 31, 1996.... 922,767 10,000 160,640 70,783 250,000 Additions.................... 266,290 25,958 -- 319,168 -- Maturities................... 194,567 -- 22,002 314,449 -- Terminations................. 5,000 -- -- -- -- ---------- ------- -------- -------- -------- Balances, December 31, 1997.... $ 989,490 $35,958 $138,638 $ 75,502 $250,000 ========== ======= ======== ======== ========
15 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) During 1997 and 1996, PLH terminated or closed certain interest rate swap agreements which were accounted for as hedges. The net deferred gains on these agreements during 1997 and 1996 were $71,000 and $1,279,000, respectively, and are being amor- tized to investment income over a period of one to six years, the expected re- maining life of the related investments, as a component of the IMR. Commitments Commitments to extend credit consist of agreements to lend to a customer at some future time, subject to established contractual conditions. Since it is likely some commitments may expire or be withdrawn without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. PLH evaluates individually each customer's creditworthiness. Collateral may be obtained, if deemed necessary, based on a credit evaluation of the counterparty. The collateral may include commercial, residential and/or farm real estate. At December 31, 1997 and 1996, commitments to extend credit were $155,185,000 and $136,317,000, respectively. Additionally, at December 31, 1997, PLH has agreed to fund additional investments through the year 2002 in an amount not to exceed $75,313,000. Concentrations of Credit Risk PLH limits credit risk by diversifying its investment portfolio among common and preferred stocks, public bonds, private placement securities, and commer- cial and residential mortgage loans. It further diversifies these portfolios between and within industry sectors, by geography and by property type. Credit risk is also limited by maintaining stringent underwriting standards and pur- chasing insurance protection in certain cases. In addition, PLH establishes credit approval processes, credit limits and monitoring procedures on an indi- vidual counterparty basis. As a result, management believes that significant concentrations of credit risk do not exist. 4. FEDERAL INCOME TAXES PLH and its subsidiaries file a life-nonlife consolidated federal income tax return. Under a written agreement, PLH and its affiliates allocate the federal income tax liability among the members of the consolidated return group in the ratio that each member's separate return tax liability, or benefit from a net operating loss, for the year bears to the consolidated tax liability. The fi- nal settlement under this agreement is made after the annual filing of the consolidated U.S. Corporate Income Tax Return. Reported income tax expense differs from income tax expense that would re- sult from applying statutory rates to pretax income primarily due to differ- ences in the statutory and tax treatment of certain statutory investments, de- ferred policy acquisition costs, bad debts, and differences in policy and con- tract liabilities. Included in the statements of changes in capital and surplus are certain ad- justments increasing surplus by $4,719,000 and $6,546,000 at December 31, 1997 and 1996, respectively, relating to tax accrual adjustments applicable to prior tax years. At December 31, 1997, accumulated earnings of PLH for federal income tax purposes included a "Policyholders' Surplus" account balance of $17,425,000, a special memorandum tax account. This is a special memorandum account balance which has not been currently taxed, but income taxes computed at current rates will become payable if this surplus is distributed. Provisions of the Deficit Reduction Act of 1984 (the Act) do not permit further additions to the Policy- holders' Surplus account. The "Shareholders' Surplus" account is also a spe- cial memorandum tax account, and generally represents an accumulation of tax- able income (net of tax thereon) plus the dividends received deduction, tax- exempt interest, and certain other special deductions as provided by the Act. At December 31, 1997, the balance in the Shareholders' Surplus account amounted to approximately $611,347,000. There is no present intention to make distributions in excess of the Shareholders' Surplus account. 16 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. RELATED PARTY TRANSACTIONS Reinsurance Assumed from Affiliates PLH entered into two indemnity reinsurance agreements with CLICO in 1987 whereby PLH assumes 100 percent of the risks reinsured on all structured set- tlement policies issued during 1987 by CLICO. The agreements were amended in 1988 whereby PLH also assumes 100 percent of the risks reinsured on all struc- tured settlement, pension buyout, and single premium immediate annuities is- sued subsequent to 1987 by CLICO. The agreements were also amended in 1988 to change the agreements from indemnity reinsurance to coinsurance. The agree- ments were further amended in 1992 whereby CLICO recaptured structured settle- ments issued in 1991 and in the first five months of 1992. PLH entered into a reinsurance agreement with CLICO in 1990 on a coinsurance basis whereby PLH assumes 100 percent of the risk on certain guaranteed in- vestment contracts issued by CLICO. The agreement was amended in 1996 to pro- vide CLICO with profit sharing on the assumed business of up to 20 basis points per year of the account value. The amount of profit sharing paid to CLICO in 1997 and 1996 was $1,986,000 and $1,733,000, respectively. In addi- tion, the agreement was amended to provide CLICO with reimbursement of ex- traordinary expenses related to the assumed policies, including guaranty fund assessment payments. There were no expense reimbursements made to CLICO in 1997 or 1996. PLH entered into indemnity reinsurance agreements with PSI in 1987 whereby PLH assumes 100 percent of the risks reinsured on all structured settlement contracts issued during 1987. The agreements were amended in 1988 whereby PLH also assumed 100 percent of the risks reinsured on all structured settlement, pension buyout and single premium immediate annuities issued subsequent to 1987. The agreements were also amended in 1988 to change the agreements from indemnity reinsurance to coinsurance. PLH entered into a reinsurance agreement with PSI in 1996 on a coinsurance basis whereby PLH assumes 100 percent of the risk on certain guaranteed in- vestment contracts issued by PSI. The agreement provides PSI with profit shar- ing on the assumed business of up to 20 basis points of account value. The amount of profit sharing paid to PSI in 1997 and 1996 was $984,000 and $164,000, respectively. Effective June 30, 1995, PLH entered into a coinsurance agreement with PSI whereby PLH assumed 100 percent of the risk of business reinsured by PSI from Manufacturers Life Insurance Company of North America (MLIC), formerly North American Security Life. This agreement coinsured existing deposits of MLIC's fixed account portion of their variable annuity product business. In addition, this agreement included prospective coinsurance of future sales of MLIC's fixed account portion of their variable annuity product. This agreement also contained a provision which provided PSI with profit sharing on the assumed business of up to 10 basis points of account value. The profit sharing amount paid by PLH to PSI in 1996 was $574,000. Under the initial agreement, PLH re- ceived cash and invested assets in exchange for its coinsurance of $724,700,000 of fixed annuity deposits. As of November 1, 1996, the coinsur- ance agreement was amended whereby PSI recaptured the fixed annuity deposits from PLH. The recapture resulted in PLH transferring to PSI liabilities previ- ously reinsured related to the business of $575,450,000 and assets of $577,000,000 as of December 31, 1996. The $1,550,000 difference represented the net expense incurred by PLH as of December 31, 1996. 17 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes the amounts reflected in the statements of operations from reinsurance assumed by PLH from CLICO and PSI:
EXPENSE (REVENUE) FOR THE YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------------------ ASSUMED FROM ------------------------------------------------------------------ CLICO CLICO PSI PSI PSI TOTAL ITEM ASSUMED (ANNUITIES) (GIC'S) (ANNUITIES) (GIC'S) (MLIC) ASSUMED - ------------ ----------- --------- ----------- --------- --------- --------- (IN THOUSANDS) Premium income.......... $(173,892) $ (2,555) $(1,982) $(100,941) $ -- $(279,370) Life, annuity and other benefits............... 79,100 353,690 10,116 84,908 -- 527,814 Commissions and expenses............... 6,995 -- 19 -- -- 7,014 Change in reserves or policyholder contract deposits............... 178,450 (269,172) 56 45,651 -- (45,015) EXPENSE (REVENUE) FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------------------ ASSUMED FROM ------------------------------------------------------------------ CLICO CLICO PSI PSI PSI TOTAL ITEM ASSUMED (ANNUITIES) (GIC'S) (ANNUITIES) (GIC'S) (MLIC) ASSUMED - ------------ ----------- --------- ----------- --------- --------- --------- (IN THOUSANDS) Premium income.......... $(105,397) $(105,319) $ (307) $(244,197) $(126,736) $(581,956) Life, annuity and other benefits............... 62,884 152,409 9,871 5,120 306,302 536,586 Commissions and expenses............... 4,304 -- 3 -- (2,338) 1,969 Change in reserves or policyholder contract deposits............... 112,743 38,934 (789) 243,558 (149,236) 245,210
PLH entered into two separate reinsurance agreements with two affiliates, Academy Life Insurance Company (ALIC) and Pension Life Insurance Company of America (PLIC), in 1992, both on a coinsurance funds withheld basis. On April 1, 1993, the reinsurance agreements were amended from a coinsurance funds withheld basis to a coinsurance nonfunds withheld basis. The following table summarizes the amounts reflected in the statements of operations from these reinsurance agreements:
EXPENSE (REVENUE) FOR THE YEAR ENDED DECEMBER 31 ------------------ 1997 1996 -------- -------- (IN THOUSANDS) Premium income assumed............................... $(46,442) $(49,974) Life, accident and health and other benefit assumed.. 32,957 32,048 Commissions and expense allowances on reinsurance assumed............................................. 9,143 11,547 Change in policy reserves assumed.................... 2,788 3,983 Other income assumed................................. (167) (165)
18 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Other Agreements and Transactions with Related Parties PLH has entered into agreements with its affiliates whereby PLH performs ad- ministrative services, management support services, and marketing services for its affiliates. PLH, as compensation, receives an amount equal to the actual cost of providing such services. This cost is allocated on a pro rata basis to each affiliate receiving these services. Amounts received were $63,000,000 and $70,000,000 in 1997 and 1996, respectively. Such amounts are classified as re- ductions of general insurance and other expenses in the accompanying state- ments of operations. PLH entered into a revolving credit note with Commonwealth on April 8, 1996, whereby PLH can borrow from Commonwealth up to $35,000,000. Interest is com- puted monthly at a rate designated in the note. At December 31, 1997 and 1996, there was no outstanding balance. During 1997, PLH paid $24,000 in interest expense related to this note. No such interest expense was incurred or paid during 1996. PLH participates in various benefit plans sponsored by Commonwealth and the related costs allocated to PLH are not significant. PLH has 2,290,000 shares of redeemable preferred stock outstanding, all of which are owned by CLLP. The preferred stock has a par value of $11 per share and a liquidation value of $240 per share. CLLP is entitled to receive a cumu- lative dividend equal to 8 1/2 percent per annum of the liquidation value of the preferred stock. PLH may redeem all or any portion of the preferred stock at the liquidation value commencing December 18, 2008. During 1997, PLH paid ordinary cash dividends of $35,154,000 and paid an ex- traordinary cash dividend of $84,846,000 ($46,716,000 to CLLP and $73,284,000 to its common stock shareholders). During 1996, PLH paid ordinary cash divi- dends of $53,871,000 ($46,716,000 to CLLP and $7,155,000 to its common stock shareholders). Also during 1996, PLH paid an extraordinary cash dividend of $71,129,000 to its common stock shareholders. On December 23, 1996, PLH made a capital contribution of its home office data center with a book value of $4,657,000 to VLIC. Commonwealth provides general management, advisory, legal and other general services to PLH. Diversified Financial Products, Inc., (DFP), formerly Providian Capital Management, Inc., an affiliate, provides investment manage- ment services to PLH along with marketing and administrative services for PLH's accumulation business. 6. REINSURANCE Certain premiums and benefits are assumed from and ceded to nonaffiliated insurance companies under various reinsurance agreements. The ceded reinsur- ance agreements provide PLH with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. 19 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) PLH's assumed and ceded reinsurance agreements with affiliated and nonaffiliated insurance companies reduced (increased) certain items in the ac- companying financial statements by the following amounts:
1997 1996 ---------- ---------- (IN THOUSANDS) ASSUMED: Policy and contract liabilities*...................... $3,006,401 $3,040,667 Claim reserves*....................................... 14,169 13,796 Advance premiums*..................................... 908 928 Unearned premium reserves*............................ 6,697 7,273 CEDED: Benefits paid or provided............................. 743 1,512 Commissions and expense allowances on reinsurance ceded................................................ (2,323) (1,123) Other income-reserves on ceded business............... 17 39 Policy and contract liabilities*...................... 1,408 1,412 Claim reserves*....................................... 682 392 Advance premiums*..................................... 9 10 Unearned premium reserves*............................ 43 35
- -------- * At year end. For all long-duration contracts, the effect of reinsurance on life and annu- ity premiums earned in 1997 and 1996 was as follows:
1997 1996 PREMIUMS PREMIUMS EARNED EARNED -------- -------- (IN THOUSANDS) Direct................................................. $168,988 $162,087 Assumed................................................ 238,181 180,812 Ceded.................................................. (608) 187 -------- -------- Net.................................................... $406,561 $343,086 ======== ========
For all short-duration contracts, the effect of all reinsurance agreements on accident and health premiums written and earned in 1997 and 1996 was as follows:
1997 PREMIUMS 1996 PREMIUMS ------------------ ------------------ WRITTEN EARNED WRITTEN EARNED -------- -------- -------- -------- (IN THOUSANDS) Direct.................................. $ 84,959 $ 84,959 $ 92,721 $ 92,721 Assumed................................. 61,427 61,427 63,960 63,960 Ceded................................... (1,673) (1,673) (1,688) (1,688) -------- -------- -------- -------- Net..................................... $144,713 $144,713 $154,993 $154,993 ======== ======== ======== ========
Amounts payable or recoverable for reinsurance on paid or unpaid life and health claims are not subject to periodic or maximum limits. At December 31, 1997, PLH reinsurance recoverables are not material and no individual rein- surer owed PLH an amount equal to or greater than 3% of PLH's surplus. PLH remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. 20 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. LIFE AND ANNUITY RESERVES AND DEPOSIT FUND LIABILITIES The withdrawal provisions of PLH's annuity reserves and deposit fund liabil- ities at December 31, 1997 are summarized as follows:
AMOUNT PERCENT ---------- ------- (IN THOUSANDS) Subject to discretionary withdrawal (with adjustment): With market value adjustment............. $1,360,368 15.0% At book value less surrender charge....... 385,683 4.2% At market value......... 3,519,863 38.7% ---------- ----- 5,265,914 57.9% Subject to discretionary withdrawal (without adjustment) at book value with minimal or no charge or adjustment............... 1,691,979 18.6% Not subject to discretionary withdrawal. 2,134,391 23.5% ---------- ----- Total annuity reserves and deposit fund liabilities before reinsurance....... 9,092,284 100.0% ===== Less reinsurance.......... -- ---------- Net annuity reserves and deposit fund liabilities*............. $9,092,284 ==========
- -------- * Includes $3,521,516,000 of annuities reported in PLH's separate account li- abilities. The remaining balance, $5,570,768,000 is included in aggregate policy reserves and policyholder contract deposits in the accompanying bal- ance sheet. The above amount subject to discretionary withdrawal with market value ad- justment includes approximately $862,931,000 at December 31, 1997 of floating rate GIC liabilities with credited rates that vary in response to changes in stipulated indexes and which self-adjust in response to market changes making their market value and book value essentially equal. As of December 31, 1997, PLH had $114,171,000 of insurance in force, and re- lated policy reserves of $559,000, for which the gross premiums were less than the net premiums according to the standard of valuation set by the state of Missouri. 8. SEPARATE ACCOUNTS Separate accounts held by PLH represent funds held for individual policy- holders. The separate accounts do not have any minimum guarantees and the in- vestment risks associated with market value changes are borne entirely by the policyholder. The assets in the separate accounts, carried at estimated fair value, consist of common stocks, mortgage loans, long-term bonds and cash. During 1997, PLH made a capital contribution of $26,362,000 to the separate accounts. At December 31, 1997, the fair value of this capital contribution was $28,748,000 which is included in the separate account assets but is ex- cluded from the corresponding liabilities. No such capital contributions were made during 1996. 21 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Information regarding the separate accounts of PLH as of and for the year ended December 31, 1997 is as follows:
NONINDEXED GUARANTEED NON- MORE THAN 4% GUARANTEED TOTAL ------------ ---------- ---------- (IN THOUSANDS) Premiums, deposits and other considerations......................... $ 3,481 $ 781,075 $ 784,556 ======== ========== ========== Separate account liabilities*........... $166,241 $3,376,067 $3,542,308 ======== ========== ========== Reserves for separate accounts by withdrawal characteristics: Subject to discretionary withdrawal (with adjustment): With market value adjustment........ $166,241 $ -- $ 166,241 At market value..................... -- 3,376,067 3,376,067 -------- ---------- ---------- Total separate account liabilities...... $166,241 $3,376,067 $3,542,308 ======== ========== ==========
- -------- * Separate account liabilities are exclusive of $1,996,000 which represents amounts due to the general account net of other amounts payable as of De- cember 31, 1997. A reconciliation of the amounts transferred to and from PLH's separate ac- counts for the year ended December 31, 1997 is presented below (in thousands): Transfers as reported in the Summary of Operations of PLH's Separate Accounts Annual Statement: Transfers to separate accounts................................ $784,931 Transfers from separate accounts.............................. (189,627) -------- Net transfers to separate accounts.............................. 595,304 -------- Reconciling adjustments: Fees paid to external fund manager............................ 2,311 Transfers to modified separate account........................ 2,018 -------- 4,329 -------- Transfers as reported in the Summary of Operations of PLH's Life, Accident & Health Annual Statement.............. $599,633 ========
9. DEFERRED AND UNCOLLECTED PREMIUMS Deferred and uncollected accident and health and life insurance premiums and annuity considerations as of December 31, 1997 were as follows:
NET OF TYPE GROSS LOADING LOADING ---- ------- ------- ------- (IN THOUSANDS) Ordinary new...................................... $ 2,975 $ 2,161 $ 814 Ordinary renewal.................................. 18,330 5,589 12,741 ------- ------- ------- Total ordinary.................................... 21,305 7,750 13,555 ------- ------- ------- Group new business................................ 2,399 1,440 959 Group renewal..................................... 39,231 10,013 29,218 ------- ------- ------- Total group....................................... 41,630 11,453 30,177 ------- ------- ------- Total Life and annuity............................ 62,935 19,203 43,732 Accident and health............................... 2,696 -- 2,696 ------- ------- ------- Total............................................. $65,631 $19,203 $46,428 ======= ======= =======
22 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 10. CAPITAL AND SURPLUS AND STATUTORY RESTRICTIONS ON DIVIDENDS Life/Health insurance companies are subject to certain Risk-Based Capital (RBC) requirements as specified by the NAIC. Under those requirements, the amount of capital and surplus maintained by a life/health insurance company is to be determined based on the various risk factors related to it. At December 31, 1997, PLH meets the RBC requirements. PLH is subject to limitations, imposed by the state of Missouri, on the pay- ment of dividends to its parent company. Generally, dividends during any year may not be paid, without prior regulatory approval, in excess of the greater of (1) 10 percent of PLH's statutory capital and surplus as of the preceding December 31, or (2) PLH's statutory net income for the preceding year. Subject to availability of unassigned surplus at the time of such dividend, the maxi- mum payment which may be made in 1998, without prior regulatory approval, is $105,866,000. 11. CONTINGENCIES In the ordinary course of business, PLH is a defendant in litigation princi- pally involving insurance policy claims for damages, including compensatory and punitive damages. In the opinion of management, the outcome of such liti- gation will not result in a loss which would be material to PLH's financial position or results of operations. 12. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by PLH in estimating fair value disclosures for financial instruments in the accompanying financial statements and notes thereto: Bonds, Preferred Stocks and Common Stocks The fair values of bonds, preferred stocks and common stocks are gener- ally based on published quotations of the SVO of the NAIC. However, for certain investments, the SVO does not provide a value and PLH uses either admitted asset investment amounts (i.e., statement values) as allowed by the NAIC, values provided by outside broker confirmations or internally calculated estimates. The fair values of PLH's investments in bonds, pre- ferred stocks and common stocks are disclosed in Note 2. Mortgage Loans The fair values of commercial, residential and farm mortgage loans are estimated utilizing discounted cash flow calculations, using current market interest rates for loans with similar terms to borrowers of similar credit quality. Policy Loans The carrying values of policy loans reported in the accompanying balance sheets approximate their fair values. Cash, Short-Term Investments, Other Invested Assets and Deferred and Uncollected Premiums The carrying values of cash, short-term investments, other invested as- sets and deferred and uncollected premiums reported in the accompanying balance sheets approximate their fair values. Investment Contracts The fair values of floating rate guaranteed investment contracts approxi- mate their carrying values. The fair values of fixed rate guaranteed in- vestment contracts and investmenttype fixed annuity contracts are 23 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) estimated using discounted cash flow calculations, based on current inter- est rates for similar contracts. The fair values of variable annuity con- tracts are equal to their carrying values. Derivative Financial Instruments The fair values for derivative financial instruments are based on pricing models or formulas using current assumptions. The carrying values and fair values of PLH's investments in commercial, res- idential and farm mortgage loans are summarized as follows:
CARRYING FAIR VALUE VALUE ---------- ---------- (IN THOUSANDS) DECEMBER 31, 1997 Commercial mortgages................................ $1,376,289 $1,423,046 Residential mortgages............................... 797,525 806,891 Farm mortgages...................................... 95,693 99,515 ---------- ---------- $2,269,507 $2,329,452 ========== ========== DECEMBER 31, 1996 Commercial mortgages................................ $1,565,534 $1,584,662 Residential mortgages............................... 1,035,648 1,043,983 Farm mortgages...................................... 50,429 49,055 ---------- ---------- $2,651,611 $2,677,700 ========== ==========
The carrying values and fair values of PLH's interest rate swap and forward- rate agreements are summarized as follows:
CARRYING FAIR VALUE VALUE -------- ------- (IN THOUSANDS) DECEMBER 31, 1997 Interest rate swaps...................................... $ -- $18,417 Forwards................................................. 1,927 1,927 ------ ------- $1,927 $20,344 ====== ======= DECEMBER 31, 1996 Interest rate swaps...................................... $ -- $21,178 Forwards................................................. 210 210 ------ ------- $ 210 $21,388 ====== =======
24 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The carrying values and fair values of PLH's liabilities for investment-type contracts are summarized as follows:
CARRYING FAIR VALUE VALUE ---------- ---------- (IN THOUSANDS) DECEMBER 31, 1997 Fixed annuity contracts........................... $2,922,910 $2,968,539 Guaranteed investment contracts................... 1,770,902 1,781,897 Variable annuity contracts *...................... 3,542,308 3,542,308 ---------- ---------- $8,236,120 $8,292,744 ========== ========== DECEMBER 31, 1996 Fixed annuity contracts........................... $3,050,018 $3,097,631 Guaranteed investment contracts................... 1,961,549 2,034,047 Variable annuity contracts *...................... 2,430,508 2,430,508 ---------- ---------- $7,442,075 $7,562,186 ========== ==========
- -------- *Included in PLH's separate account liabilities. The fair values for PLH's insurance contracts other than investment con- tracts are not required to be disclosed. However, the fair values of liabili- ties under all insurance contracts are taken into consideration in PLH's over- all management of interest rate risk, such that PLH's exposure to changing in- terest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. 13. YEAR 2000 (UNAUDITED) Commonwealth's parent has adopted and has in place a Year 2000 Assessment and Planning Project (the Project) to review and analyze its information tech- nology and systems to determine if they are Year 2000 compatible. Commonwealth and PLH have begun to convert or modify, where necessary, critical data processing systems. It is contemplated that the Project will be substantially completed by early 1999. Commonwealth and PLH do not expect this Project to have a significant effect on operations. However, to mitigate the effect of outside influences upon the success of the Project, Commonwealth and PLH have undertaken communications with their significant customers, suppliers and other third parties to determine their Year 2000 compatibility and readiness. Management believes that the issues associated with the Year 2000 will be re- solved with no material financial impact on Commonwealth and PLH. Since the Year 2000 computer problem, and its resolution, is complex and multifaceted, the success of a response plan cannot be conclusively known un- til the Year 2000 is reached (or an earlier date to the extent that systems or equipment addresses Year 2000 date data prior to the Year 2000). Even with ap- propriate and diligent pursuit of a well-conceived project, including testing procedures, there is no certainty that any company will achieve complete suc- cess. Notwithstanding the efforts or results of Commonwealth and PLH, their ability to function unaffected to and through the Year 2000 may be adversely affected by actions (or failure to act) of third parties beyond their knowl- edge or control. 25 FINANCIAL STATEMENTS PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV Years ended December 31, 1997 and 1996 with Report of Independent Auditors PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND 1996 CONTENTS Report of Independent Auditors............................................. F-3 Audited Financial Statements Statements of Assets and Liabilities....................................... F-4 Statements of Operations................................................... F-5 Statements of Changes in Net Assets........................................ F-9 Notes to Financial Statements.............................................. F-13
F-2 REPORT OF INDEPENDENT AUDITORS Contract Owners Providian Life and Health Insurance Company Separate Account IV We have audited the accompanying statements of assets and liabilities of Providian Life and Health Insurance Company Separate Account IV (comprising the Money Market, High-Grade Bond, Balanced, Equity Index, Growth, Equity In- come, International, High Yield Bond, and Small Company Growth Subaccounts) as of December 31, 1997 and 1996, and the related statements of operations and changes in net assets for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to ex- press an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. Our proce- dures included confirmation of securities owned as of December 31, 1997 and 1996, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the respective subaccounts constituting the Providian Life and Health Insurance Company Sepa- rate Account IV at December 31, 1997 and 1996, and the results of their opera- tions and changes in their net assets for the years then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Louisville, Kentucky April 24, 1998 F-3 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31 ----------------------------- 1997 1996 -------------- -------------- ASSETS Investments: Money Market Portfolio (cost: $371,552,301 and $307,822,346 in 1997 and 1996, respec- tively).................................... $ 371,552,301 $ 307,822,346 High-Grade Bond Portfolio (cost: $195,869,365 and $138,952,194 in 1997 and 1996, respectively)........................ 201,054,285 139,742,432 Balanced Portfolio (cost: $370,193,553 and $273,862,778 in 1997 and 1996, respective- ly)........................................ 467,928,845 338,446,730 Equity Index Portfolio (cost: $505,818,804 and $315,174,642 in 1997 and 1996, respec- tively).................................... 729,598,787 428,230,285 Growth Portfolio (cost: $341,690,303 and $234,271,695 in 1997 and 1996, respective- ly)........................................ 456,227,268 300,148,377 Equity Income Portfolio (cost: $227,326,165 and $125,927,119 in 1997 and 1996, respec- tively).................................... 300,498,943 155,702,167 International Portfolio (cost: $189,515,133 and $148,121,109 in 1997 and 1996, respec- tively).................................... 200,158,929 165,699,331 High Yield Bond Portfolio (cost: $92,864,429 and $32,343,453 in 1997 and 1996, respec- tively).................................... 94,777,204 33,101,942 Small Company Growth Portfolio (cost: $118,708,456 and $52,498,244 in 1997 and 1996, respectively)........................ 124,555,024 52,169,364 -------------- -------------- TOTAL ASSETS................................. 2,946,351,586 1,921,062,974 LIABILITIES Amounts due to Providian Life and Health In- surance Company............................ 732,313 592,319 Amounts due to Vanguard Group, Inc.......... 33,362 399,137 -------------- -------------- NET ASSETS................................... $2,945,585,911 $1,920,071,518 ============== ============== NET ASSETS ATTRIBUTABLE TO VARIABLE ANNUITY CONTRACT OWNERS Money Market Subaccount..................... $ 371,527,944 $ 307,756,483 High-Grade Bond Subaccount.................. 201,167,039 139,806,986 Balanced Subaccount......................... 467,618,812 338,038,396 Equity Index Subaccount..................... 729,189,185 427,833,751 Growth Subaccount........................... 456,049,952 300,037,248 Equity Income Subaccount.................... 300,655,472 155,751,785 International Subaccount.................... 200,097,118 165,630,157 High Yield Bond Subaccount.................. 94,773,754 33,067,945 Small Company Growth Subaccount............. 124,506,635 52,148,767 -------------- -------------- NET ASSETS ATTRIBUTABLE TO VARIABLE ANNUITY CONTRACT OWNERS............................. $2,945,585,911 $1,920,071,518 ============== ============== ===
See accompanying notes. F-4 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
HIGH-GRADE MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH ------------ ----------- ----------- ------------ ------------ Investment income: Dividends.............. $ 19,306,003 $10,484,855 $35,601,558 $ 15,813,836 $ 15,526,501 Expenses: Mortality and expense risk and administrative charges............... 1,497,775 546,504 1,930,924 2,720,224 1,736,328 ------------ ----------- ----------- ------------ ------------ Net investment income... 17,808,228 9,938,351 33,670,634 13,093,612 13,790,173 Realized and unrealized gain on investments: Net realized gain from investment transac- tions: Proceeds from sales... 368,352,557 35,016,314 62,110,595 109,624,928 97,738,113 Cost of investments sold................. 368,352,557 34,729,485 48,169,540 76,384,289 72,814,174 ------------ ----------- ----------- ------------ ------------ -- 286,829 13,941,055 33,240,639 24,923,939 Net unrealized appreciation (depreciation) of investments: At end of year........ -- 5,184,920 97,735,292 223,779,983 114,536,965 At beginning of year.. -- 790,238 64,583,952 113,055,643 65,876,682 ------------ ----------- ----------- ------------ ------------ -- 4,394,682 33,151,340 110,724,340 48,660,283 ------------ ----------- ----------- ------------ ------------ Net gain (loss) on in- vestments.............. -- 4,681,511 47,092,395 143,964,979 73,584,222 ------------ ----------- ----------- ------------ ------------ Net increase in net as- sets resulting from op- erations............... $ 17,808,228 $14,619,862 $80,763,029 $157,058,591 $ 87,374,395 ============ =========== =========== ============ ============
See accompanying notes. F-5 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV STATEMENT OF OPERATIONS--(CONTINUED) YEAR ENDED DECEMBER 31, 1997
EQUITY HIGH YIELD SMALL COMPANY INCOME INTERNATIONAL BOND GROWTH TOTAL ----------- ------------- ----------- ------------- ------------ Investment income: Dividends.............. $10,992,886 $ 5,022,249 $ 5,623,214 $ 451,706 $118,822,808 Expenses: Mortality and expense risk and administrative charges............... 707,575 893,949 244,438 367,526 10,645,243 ----------- ----------- ----------- ----------- ------------ Net investment income... 10,285,311 4,128,300 5,378,776 84,180 108,177,565 Realized and unrealized gain on investments: Net realized gain from investment transac- tions: Proceeds from sales... 41,039,734 62,512,538 26,595,851 41,279,050 844,269,680 Cost of investments sold................. 31,551,150 56,758,783 26,145,087 39,290,754 754,195,819 ----------- ----------- ----------- ----------- ------------ 9,488,584 5,753,755 450,764 1,988,296 90,073,861 Net unrealized appreciation (depreciation) of investments: At end of year........ 73,172,778 10,643,796 1,912,775 5,846,568 532,813,077 At beginning of year.. 29,775,048 17,578,222 758,488 (328,880) 292,089,393 ----------- ----------- ----------- ----------- ------------ 43,397,730 (6,934,426) 1,154,287 6,175,448 240,723,684 ----------- ----------- ----------- ----------- ------------ Net gain (loss) on in- vestments.............. 52,886,314 (1,180,671) 1,605,051 8,163,744 330,797,545 ----------- ----------- ----------- ----------- ------------ Net increase in net as- sets resulting from op- erations............... $63,171,625 $ 2,947,629 $ 6,983,827 $ 8,247,924 $438,975,110 =========== =========== =========== =========== ============
See accompanying notes. F-6 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996
MONEY MARKET HIGH-GRADE BOND BALANCED EQUITY INDEX GROWTH ------------ --------------- ----------- ------------ ----------- Investment income: Dividends.............. $13,160,444 $8,463,430 $23,855,951 $ 8,868,690 $13,349,352 Expenses: Mortality and expense risk and administrative charges............... 1,260,312 622,547 1,641,529 1,830,793 1,153,277 ----------- ---------- ----------- ----------- ----------- Net investment income... 11,900,132 7,840,883 22,214,422 7,037,897 12,196,075 Realized and unrealized gain (loss) on investments: Net realized gain (loss) from investment transactions: Proceeds from sales... 211,205,591 47,435,492 61,055,889 73,303,777 58,237,988 Cost of investments sold................. 211,205,591 47,452,352 49,086,533 55,129,134 45,698,016 ----------- ---------- ----------- ----------- ----------- -- (16,860) 11,969,356 18,174,643 12,539,972 Net unrealized appreciation (depreciation) of investments: At end of year........ -- 790,238 64,583,952 113,055,643 65,876,682 At beginning of year.. -- 4,663,027 53,529,152 65,347,825 36,959,812 ----------- ---------- ----------- ----------- ----------- -- (3,872,789) 11,054,800 47,707,818 28,916,870 ----------- ---------- ----------- ----------- ----------- Net gain (loss) on investments............ -- (3,889,649) 23,024,156 65,882,461 41,456,842 ----------- ---------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations........ $11,900,132 $3,951,234 $45,238,578 $72,920,358 $53,652,917 =========== ========== =========== =========== ===========
See accompanying notes. F-7 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV STATEMENT OF OPERATIONS--(CONTINUED) YEAR ENDED DECEMBER 31, 1996
SMALL COMPANY EQUITY INCOME INTERNATIONAL HIGH YIELD BOND GROWTH TOTAL ------------- ------------- --------------- ------------- ------------ Investment income: Dividends.............. $ 6,157,784 $ 5,582,345 $1,034,662 $ 185,451 $ 80,658,109 Expenses: Mortality and expense risk and administrative charges............... 691,291 681,652 69,954 147,387 8,098,742 ----------- ----------- ---------- ---------- ------------ Net investment income... 5,466,493 4,900,693 964,708 38,064 72,559,367 Realized and unrealized gain (loss) on investments: Net realized gain (loss) from investment transactions: Proceeds from sales... 33,524,966 31,825,076 3,286,820 11,251,067 531,126,666 Cost of investments sold................. 27,736,656 28,197,949 3,247,554 11,600,231 479,354,016 ----------- ----------- ---------- ---------- ------------ 5,788,310 3,627,127 39,266 (349,164) 51,772,650 Net unrealized appreciation (depreciation) of investments: At end of year........ 29,775,048 17,578,222 758,488 (328,880) 292,089,393 At beginning of year.. 19,124,057 8,728,001 -- -- 188,351,874 ----------- ----------- ---------- ---------- ------------ 10,650,991 8,850,221 758,488 (328,880) 103,737,519 ----------- ----------- ---------- ---------- ------------ Net gain (loss) on investments............ 16,439,301 12,477,348 797,754 (678,044) 155,510,169 ----------- ----------- ---------- ---------- ------------ Net increase (decrease) in net assets resulting from operations........ $21,905,794 $17,378,041 $1,762,462 $ (639,980) $228,069,536 =========== =========== ========== ========== ============
See accompanying notes. F-8 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV STATEMENT OF CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1997
HIGH-GRADE MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH ------------ ------------ ------------ ------------ ------------ Balances at January 1, 1997................... $307,756,483 $139,806,986 $338,038,396 $427,833,751 $300,037,248 Increase in net assets resulting from operations: Net investment income.. 17,808,228 9,938,351 33,670,634 13,093,612 13,790,173 Net realized gain on investments........... -- 286,829 13,941,055 33,240,639 24,923,939 Net unrealized appreciation (depreciation) of investments........... -- 4,394,682 33,151,340 110,724,340 48,660,283 ------------ ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations............. 17,808,228 14,619,862 80,763,029 157,058,591 87,374,395 Changes from variable annuity contract transactions: Transfers of net premiums.............. 217,903,756 32,631,602 59,455,811 120,636,984 91,041,141 Transfers for terminations.......... (28,374,231) (4,491,074) (13,126,567) (12,795,430) (9,494,565) Transfers for annuity benefits.............. (779,602) (49,233) (523,938) (390,044) (198,384) Net transfers within Separate Account IV... (142,786,690) 18,648,896 3,012,081 36,845,333 (12,709,883) ------------ ------------ ------------ ------------ ------------ Net increase in net assets derived from variable annuity contract transactions.. 45,963,233 46,740,191 48,817,387 144,296,843 68,638,309 ------------ ------------ ------------ ------------ ------------ Net increase in net assets................. 63,771,461 61,360,053 129,580,416 301,355,434 156,012,704 ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1997................... $371,527,944 $201,167,039 $467,618,812 $729,189,185 $456,049,952 ============ ============ ============ ============ ============
See accompanying notes. F-9 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV STATEMENT OF CHANGES IN NET ASSETS--(CONTINUED) YEAR ENDED DECEMBER 31, 1997
HIGH YIELD SMALL COMPANY EQUITY INCOME INTERNATIONAL BOND GROWTH TOTAL ------------- ------------- ----------- ------------- -------------- Balances at January 1, 1997................... $155,751,785 $165,630,157 $33,067,945 $ 52,148,767 $1,920,071,518 Increase in net assets resulting from operations: Net investment income.. 10,285,311 4,128,300 5,378,776 84,180 108,177,565 Net realized gain on investments........... 9,488,584 5,753,755 450,764 1,988,296 90,073,861 Net unrealized appreciation (depreciation) of investments........... 43,397,730 (6,934,426) 1,154,287 6,175,448 240,723,684 ------------ ------------ ----------- ------------ -------------- Net increase in net assets resulting from operations............. 63,171,625 2,947,629 6,983,827 8,247,924 438,975,110 Changes from variable annuity contract transactions: Transfers of net premiums.............. 50,527,970 40,854,983 28,392,471 31,540,432 672,985,150 Transfers for terminations.......... (5,838,000) (6,329,735) (2,299,685) (2,012,223) (84,761,510) Transfers for annuity benefits.............. (140,462) 455,782 (41,137) (17,339) (1,684,357) Net transfers within Separate Account IV... 37,182,554 (3,461,698) 28,670,333 34,599,074 -- ------------ ------------ ----------- ------------ -------------- Net increase in net assets derived from variable annuity contract transactions.. 81,732,062 31,519,332 54,721,982 64,109,944 586,539,283 ------------ ------------ ----------- ------------ -------------- Net increase in net assets................. 144,903,687 34,466,961 61,705,809 72,357,868 1,025,514,393 ------------ ------------ ----------- ------------ -------------- Balances at December 31, 1997................... $300,655,472 $200,097,118 $94,773,754 $124,506,635 $2,945,585,911 ============ ============ =========== ============ ==============
See accompanying notes. F-10 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV STATEMENT OF CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 1996
MONEY MARKET HIGH-GRADE BOND BALANCED EQUITY INDEX GROWTH ------------ --------------- ------------ ------------ ------------ Balances at January 1, 1996................... $218,943,545 $125,374,146 $287,392,121 $294,449,996 $178,912,627 Increase (decrease) in net assets resulting from operations: Net investment income.. 11,900,132 7,840,883 22,214,422 7,037,897 12,196,075 Net realized gain (loss) on investments. -- (16,860) 11,969,356 18,174,643 12,539,972 Net unrealized appreciation (depreciation) of investments........... -- (3,872,789) 11,054,800 47,707,818 28,916,870 ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations........ 11,900,132 3,951,234 45,238,578 72,920,358 53,652,917 Changes from variable annuity contract transactions: Transfers of net premiums.............. 157,597,760 28,246,069 41,426,503 73,583,170 60,643,110 Transfers for terminations.......... (20,633,241) (3,734,039) (9,607,547) (10,057,111) (5,701,392) Transfers for annuity benefits.............. (248,748) (2,021) (138,974) 61,650 23,382 Net transfers within Separate Account IV... (59,802,965) (14,028,403) (26,272,285) (3,124,312) 12,506,604 ------------ ------------ ------------ ------------ ------------ Net increase in net assets derived from variable annuity contract transactions.. 76,912,806 10,481,606 5,407,697 60,463,397 67,471,704 ------------ ------------ ------------ ------------ ------------ Net increase in net assets................. 88,812,938 14,432,840 50,646,275 133,383,755 121,124,621 ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1996................... $307,756,483 $139,806,986 $338,038,396 $427,833,751 $300,037,248 ============ ============ ============ ============ ============
See accompanying notes. F-11 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV STATEMENT OF CHANGES IN NET ASSETS--(CONTINUED) YEAR ENDED DECEMBER 31, 1996
SMALL COMPANY EQUITY INCOME INTERNATIONAL HIGH YIELD BOND GROWTH TOTAL ------------- ------------- --------------- ------------- -------------- Balances at January 1, 1996................... $104,724,939 $ 95,133,312 $ -- $ -- $1,304,930,686 Increase (decrease) in net assets resulting from operations: Net investment income.. 5,466,493 4,900,693 964,708 38,064 72,559,367 Net realized gain (loss) on investments. 5,788,310 3,627,127 39,266 (349,164) 51,772,650 Net unrealized appreciation (depreciation) of investments........... 10,650,991 8,850,221 758,488 (328,880) 103,737,519 ------------ ------------ ----------- ----------- -------------- Net increase (decrease) in net assets resulting from operations........ 21,905,794 17,378,041 1,762,462 (639,980) 228,069,536 Changes from variable annuity contract transactions: Transfers of net premiums.............. 31,387,672 34,938,284 6,901,502 10,562,475 445,286,545 Transfers for terminations.......... (3,446,687) (4,009,584) (156,080) (386,129) (57,731,810) Transfers for annuity benefits.............. (286,506) 79,822 27,956 -- (483,439) Net transfers within Separate Account IV... 1,466,573 22,110,282 24,532,105 42,612,401 -- ------------ ------------ ----------- ----------- -------------- Net increase in net assets derived from variable annuity contract transactions.. 29,121,052 53,118,804 31,305,483 52,788,747 387,071,296 ------------ ------------ ----------- ----------- -------------- Net increase in net assets................. 51,026,846 70,496,845 33,067,945 52,148,767 615,140,832 ------------ ------------ ----------- ----------- -------------- Balances at December 31, 1996................... $155,751,785 $165,630,157 $33,067,945 $52,148,767 $1,920,071,518 ============ ============ =========== =========== ==============
See accompanying notes. F-12 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. ACCOUNTING POLICIES ORGANIZATION OF THE ACCOUNT Providian Life and Health Insurance Company Separate Account IV (the "Sepa- rate Account") is a separate account of Providian Life and Health Insurance Company ("PLH"), and is registered as a unit investment trust under the In- vestment Company Act of 1940, as amended. The Separate Account was established for the purpose of funding variable annuity contracts issued by PLH. Prior to June 10, 1997, PLH was an indirect, wholly owned subsidiary of Providian Corporation ("Providian"). On June 10, 1997, Providian's insurance operations, including the operations of PLH, were merged with an indirect, wholly owned subsidiary of AEGON N.V., an international insurance organization headquartered in The Hague, The Netherlands. Providian was the surviving cor- poration in the merger. Effective October 15, 1997, Providian's name was changed to Commonwealth General Corporation ("CGC"). Effective December 31, 1997, ownership of CGC was transferred to AEGON USA, Inc., an indirect, wholly owned subsidiary of AEGON N.V. As of December 31, 1997, the Separate Account has nine subaccounts which in- vest exclusively in shares of a corresponding portfolio of the Vanguard Vari- able Insurance Fund (the "Fund"), an open-end diversified investment company offered by The Vanguard Group, Inc. ("Vanguard"). The portfolios available in the Fund as of December 31, 1997 are as follows: VANGUARD VARIABLE INSURANCE FUND Money Market Portfolio High-Grade Bond Portfolio Balanced Portfolio Equity Index Portfolio Growth Portfolio Equity Income Portfolio International Portfolio High Yield Bond Portfolio Small Company Growth Portfolio Each portfolio has different investment objectives and policies as outlined in the prospectus of the Separate Account. There is no assurance that a port- folio will achieve its stated investment objective. The contract owner's initial premium is automatically allocated to the Money Market Subaccount until the end of the free look period (typically ten days or, in certain instances, 30 days or more). Subsequent to the free look period and a five day grace period, a contract owner may allocate all or a portion of the initial premium and additional premiums, if any, to one or more subaccounts of the Separate Account. INVESTMENTS The Separate Account purchases shares of the portfolios at net asset value in connection with premium payments allocated to the subaccounts in accordance with contract owners' directions and redeems shares of the portfolios to proc- ess transfers and to meet policy contract obligations. Gains and losses re- sulting from the redemption of shares are computed on the basis of average cost. Investment transactions are recorded on the trade dates. All dividends and capital gains earned on the portfolios are reinvested in the portfolios and are reflected in the unit values of the subaccounts of the Separate Account. F-13 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Investments in the portfolios are valued at market which is calculated daily on each day the New York Stock Exchange is open for trading. Income and both realized and unrealized gains or losses from assets of each subaccount will be credited to, or charged against, that subaccount without regard to income, gains or losses from any other subaccount of the Separate Account or arising out of any other business PLH may conduct. The contract's accumulated value varies with the investment performance of the corresponding portfolios. Investment results are not guaranteed by the Sep- arate Account or PLH. Although the assets in the Separate Account are the property of PLH, the as- sets in the Separate Account attributable to the contracts cannot be used to discharge the liabilities arising out of any other business which PLH may con- duct. The assets of the Separate Account are available to cover the general li- abilities of PLH only to the extent that the Separate Account's assets exceed its liabilities under the contracts. 2. INVESTMENTS The following is a summary of shares and amounts outstanding for each of the respective portfolios as of December 31, 1997 and 1996:
DECEMBER 31, 1997 ---------------------------------------------- PORTFOLIO SHARES NET ASSET VALUE FAIR VALUE - --------- --------------- --------------- -------------- Money Market..................... 371,552,301.070 $ 1.00 $ 371,552,301 High-Grade Bond.................. 18,790,120.093 10.70 201,054,285 Balanced......................... 27,525,226.176 17.00 467,928,845 Equity Index..................... 28,701,761.880 25.42 729,598,787 Growth........................... 21,121,632.778 21.60 456,227,268 Equity Income.................... 16,001,008.679 18.78 300,498,943 International.................... 15,576,570.350 12.85 200,158,929 High Yield Bond.................. 8,949,688.763 10.59 94,777,204 Small Company Growth............. 11,364,509.489 10.96 124,555,024 -------------- $2,946,351,586 ==============
DECEMBER 31, 1996 ---------------------------------------------- PORTFOLIO SHARES NET ASSET VALUE FAIR VALUE - --------- --------------- --------------- -------------- Money Market..................... 307,822,345.890 $ 1.00 $ 307,822,346 High-Grade Bond.................. 13,398,123.884 10.43 139,742,432 Balanced......................... 22,548,083.271 15.01 338,446,730 Equity Index..................... 21,904,362.398 19.55 428,230,285 Growth........................... 16,967,121.386 17.69 300,148,377 Equity Income.................... 10,664,532.007 14.60 155,702,167 International.................... 13,006,226.890 12.74 165,699,331 High Yield Bond.................. 3,204,447.399 10.33 33,101,942 Small Company Growth............. 5,372,746.072 9.71 52,169,364 -------------- $1,921,062,974 ==============
F-14 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The aggregate cost of shares purchased during the years ended December 31, 1997 and 1996 for each of the respective portfolios is as follows:
1997 1996 -------------- ------------ Money Market........................................ $ 432,082,512 $301,289,330 High-Grade Bond..................................... 91,646,656 65,756,574 Balanced............................................ 144,500,315 88,846,647 Equity Index........................................ 267,028,451 140,971,704 Growth.............................................. 180,232,782 137,965,542 Equity Income....................................... 132,950,196 68,234,485 International....................................... 98,152,807 89,893,236 High Yield Bond..................................... 86,666,063 35,591,007 Small Company Growth................................ 105,500,966 64,098,475 -------------- ------------ $1,538,760,748 $992,647,000 ============== ============
3. FEDERAL INCOME TAXES Operations of the Separate Account are included in the federal income tax re- turn of PLH, which is taxed as a life insurance company under the Internal Rev- enue Code. The Separate Account will not be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code. Under current federal income tax law, no federal income taxes are payable with respect to the Sepa- rate Account. 4. ADVISORY AND SERVICE FEES Vanguard furnishes corporate management, administrative, marketing and dis- tribution services. Additionally, Vanguard furnishes investment advisory serv- ices to certain Funds' portfolios. The net asset value of the portfolios is net of the advisory and service fees. 5. EXPENSES An annual charge is deducted from the unit values of the subaccounts of the Separate Account for PLH's assumption of certain mortality and expense risks incurred in connection with the contract and for the cost of administering the contract. It is assessed daily based on the Fund's combined net assets attrib- utable to the Separate Account and Separate Account B of First Providian Life and Health Insurance Company ("FPLH"), an affiliate of PLH. For the year ended December 31, 1995 and through April 29, 1996, the annual rate on the first $500 million of combined net assets in the Fund was .45% and was .40% on the next $250 million of combined net assets in the Fund. This charge was reduced in various increments to .30% on combined net assets in the Fund in excess of $1.5 billion. Effective April 30, 1996 and through November 30, 1997, the annual rate changed to .375% on the first $1.5 billion of combined net assets in the Fund and is reduced to .30% of combined net assets in the Fund in excess of $1.5 billion. Effective December 1, 1997, the annual rate changed to .30% on the first $2.5 billion of combined net assets in the Fund, is reduced to .28% of combined net assets in the Fund over $2.5 billion and up to $5 billion, and is further reduced to .27% of combined net assets in the Fund in excess of $5 billion. For the years ended December 31, 1997 and 1996, the effective annual rate for this mortality and expense charge was .33% and .37%, respectively, and the to- tal charge was $8,334,397 and $5,928,086, respectively. In addition, an annual administrative charge of .10% is deducted from the unit values of the subaccounts of the Separate Account. This charge is assessed daily by Vanguard, based on the net assets attributable to the Separate Account and Separate Account B of FPLH. Additionally, an annual maintenance fee of $25 per contract F-15 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV NOTES TO FINANCIAL STATEMENTS--(CONTINUED) is charged for contracts valued at less than $25,000 at the time of initial purchase and on the last business day of each year. The maintenance fee is de- ducted proportionately from the contract's accumulated value. These deductions represent reimbursement to Vanguard for the costs expected to be incurred for issuing and maintaining each contract and the Separate Account. The total of these costs for the years ended December 31, 1997 and 1996 was $2,310,846 and $2,170,656, respectively. 6. CONTRACT OWNER TRANSACTIONS Transactions with contract owners during 1997 and 1996 and end of period val- ues for each of the respective subaccounts were as follows:
1997 1996 ----------------- ----------------- MONEY MARKET Outstanding units at be- ginning of period....... 246,219,368.636 183,867,044.733 Issuance of units........ 322,738,113.296 234,989,691.634 Redemption of units...... (286,144,342.815) (172,637,367.731) ----------------- ----------------- Outstanding units at end of period............... 282,813,139.117 246,219,368.636 ================= ================= End of period: Unit value.............. $ 1.313687 $ 1.249928 ================= ================= Subaccount value........ $ 371,527,944 $ 307,756,483 ================= ================= HIGH-GRADE BOND Outstanding units at be- ginning of period....... 9,394,532.242 8,684,285.622 Issuance of units........ 5,251,505.755 3,980,774.263 Redemption of units...... (2,242,639.315) (3,270,527.643) ----------------- ----------------- Outstanding units at end of period............... 12,403,398.682 9,394,532.242 ================= ================= End of period: Unit value.............. $ 16.218703 $ 14.881740 ================= ================= Subaccount value........ $ 201,167,039 $ 139,806,986 ================= ================= BALANCED Outstanding units at be- ginning of period....... 17,306,951.811 17,020,904.719 Issuance of units........ 4,994,533.368 3,631,390.249 Redemption of units...... (2,773,302.669) (3,345,343.157) ----------------- ----------------- Outstanding units at end of period............... 19,528,182.510 17,306,951.811 ================= ================= End of period: Unit value.............. $ 23.945844 $ 19.531943 ================= ================= Subaccount value........ $ 467,618,812 $ 338,038,396 ================= ================= EQUITY INDEX Outstanding units at be- ginning of period....... 19,360,323.938 16,292,023.678 Issuance of units........ 9,635,037.119 6,659,468.353 Redemption of units...... (4,109,141.256) (3,591,168.093) ----------------- ----------------- Outstanding units at end of period............... 24,886,219.801 19,360,323.938 ================= ================= End of period: Unit value.............. $ 29.300922 $ 22.098481 ================= ================= Subaccount value........ $ 729,189,185 $ 427,833,751 ================= =================
F-16 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1997 1996 --------------- --------------- GROWTH Outstanding units at beginning of period...... 15,744,328.753 11,856,793.774 Issuance of units............................. 7,615,399.753 7,257,192.909 Redemption of units........................... (4,384,827.134) (3,369,657.930) --------------- --------------- Outstanding units at end of period............ 18,974,901.372 15,744,328.753 =============== =============== End of period: Unit value................................... $ 24.034378 $ 19.056846 =============== =============== Subaccount value............................. $ 456,049,952 $ 300,037,248 =============== =============== EQUITY INCOME Outstanding units at beginning of period...... 9,259,727.052 7,354,576.945 Issuance of units............................. 6,180,595.097 4,071,632.986 Redemption of units........................... (2,079,556.812) (2,166,482.879) --------------- --------------- Outstanding units at end of period............ 13,360,765.337 9,259,727.052 =============== =============== End of period: Unit value................................... $ 22.502863 $ 16.820343 =============== =============== Subaccount value............................. $ 300,655,472 $ 155,751,785 =============== =============== INTERNATIONAL Outstanding units at beginning of period...... 12,435,392.012 8,146,285.194 Issuance of units............................. 6,519,817.190 6,779,070.277 Redemption of units........................... (4,358,523.547) (2,489,963.459) --------------- --------------- Outstanding units at end of period............ 14,596,685.655 12,435,392.012 =============== =============== End of period: Unit value................................... $ 13.708394 $ 13.319255 =============== =============== Subaccount value............................. $ 200,097,118 $ 165,630,157 =============== =============== HIGH YIELD BOND Outstanding units at beginning of period...... 3,041,910.125 -- Issuance of units............................. 7,081,022.117 3,355,401.631 Redemption of units........................... (2,312,982.643) (313,491.506) --------------- --------------- Outstanding units at end of period............ 7,809,949.599 3,041,910.125 =============== =============== End of period: Unit value................................... $ 12.135002 $ 10.870783 =============== =============== Subaccount value............................. $ 94,773,754 $ 33,067,945 =============== =============== SMALL COMPANY GROWTH Outstanding units at beginning of period...... 5,362,364.247 -- Issuance of units............................. 9,916,890.076 6,547,047.130 Redemption of units........................... (3,929,423.425) (1,184,682.883) --------------- --------------- Outstanding units at end of period............ 11,349,830.898 5,362,364.247 =============== =============== End of period: Unit value................................... $ 10.969911 $ 9.724958 =============== =============== Subaccount value............................. $ 124,506,635 $ 52,148,767 =============== ===============
F-17 PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. NET ASSETS Net assets at December 31, 1997 for each of the respective subaccounts are summarized in the following tables:
HIGH-GRADE MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH ------------ ------------ ------------ ------------ ------------ Contract owner transac- tions.................. $321,352,750 $159,543,079 $252,642,396 $404,486,174 $269,992,819 Accumulated net investment income...... 50,175,194 36,400,799 85,156,223 36,267,154 29,813,011 Accumulated net realized gain on investments.... -- 38,241 32,084,902 64,655,874 41,707,157 Net unrealized apprecia- tion on investments.... -- 5,184,920 97,735,291 223,779,983 114,536,965 ------------ ------------ ------------ ------------ ------------ $371,527,944 $201,167,039 $467,618,812 $729,189,185 $456,049,952 ============ ============ ============ ============ ============
HIGH YIELD SMALL COMPANY EQUITY INCOME INTERNATIONAL BOND GROWTH TOTAL ------------- ------------- ----------- ------------- -------------- Contract owner transac- tions.................. $189,615,522 $169,067,081 $86,027,465 $116,898,691 $1,969,625,977 Accumulated net invest- ment income............ 22,588,172 10,037,572 6,343,484 122,244 276,903,853 Accumulated net realized gain on investments.... 15,279,000 10,348,669 490,030 1,639,132 166,243,005 Net unrealized apprecia- tion on investments.... 73,172,778 10,643,796 1,912,775 5,846,568 532,813,076 ------------ ------------ ----------- ------------ -------------- $300,655,472 $200,097,118 $94,773,754 $124,506,635 $2,945,585,911 ============ ============ =========== ============ ==============
8. YEAR 2000 (UNAUDITED) CGC's parent has adopted and has in place a Year 2000 Assessment and Planning Project (the "Project") to review and analyze its information technology and systems to determine if they are Year 2000 compatible. CGC and PLH have begun to convert or modify, where necessary, critical data processing systems. It is contemplated that the Project will be substantially completed by early 1999. CGC and PLH do not expect this Project to have a significant effect on opera- tions. However, to mitigate the effect of outside influences upon the success of the Project, CGC and PLH have undertaken communications with their signifi- cant customers, suppliers and other third parties to determine their Year 2000 compatibility and readiness. Management believes that the issues associated with the Year 2000 will be resolved with no material financial impact on CGC and PLH. Since the Year 2000 computer problem, and its resolution, is complex and multifaceted, the success of a response plan cannot be conclusively known until the Year 2000 is reached (or an earlier date to the extent that systems or equipment addresses Year 2000 date data prior to the Year 2000). Even with ap- propriate and diligent pursuit of a well-conceived project, including testing procedures, there is no certainty that any company will achieve complete suc- cess. Notwithstanding the efforts or results of CGC and PLH, their ability to function unaffected to and through the Year 2000 may be adversely affected by actions (or failure to act) of third parties beyond their knowledge or control. F-18 OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (A) FINANCIAL STATEMENTS Part A None Part B Audited Financial Statement Providian Life & Health Insurance Company Separate Account IV Years ended December 31, 1997 and 1996 with Report of Independent Au- ditors/8/ Audited Financial Statements--Statutory-Basis Providian Life & Health Insurance Company Years ended December 31, 1997 and 1996 with Report of Independent Au- ditors/8/ Part C None (B) EXHIBITS (1) Resolution of the Board of Directors of National Home Life Assurance Company ("National Home") authorizing establishment of the Separate Ac- count./4/ (2) Not Applicable. (3) Not Applicable. (4) Form of variable annuity contract/5/ (5) Form of application/5/ (6) (a) Articles of Incorporation of National Home/1/ (b) Amendment to Articles of Incorporation of National Home/2/ (c) Amended and Restated Articles of Incorporation of National Home/3/ (7) Not applicable. (8) (a) Participation Agreement for the Vanguard Variable Insurance Fund/6/ (b) First Amendment to Participation, Market Consulting and Administra- tion Agreement/7/ (c) Administration Service Agent/8/ (9) (a) Opinion and Consent of Counsel/8/ (b) Consent of Counsel/8/ (10) Consent of Independent Auditors/8/ (11) No financial statements are omitted from item 23. (12) Not applicable. (13) Performance computation/7/ (14) Not applicable. - -------- /1/ Incorporated by reference from the initial Registration Statement of the Providian Life & Health Insurance Company Separate Account II, File No. 33- 7033. /2/ Incorporated by reference from Post-Effective Amendment No. 3 to the Regis- tration Statement of Providian Life & Health Insurance Company Separate Ac- count II, File No. 33-7033. /3/ Incorporated by reference from Post-Effective Amendment No. 5 to the Regis- tration Statement of the Providian Life & Health Insurance Company Separate Account II, File No. 33-7033. /4/ Incorporated by reference from the initial Registration Statement of the Providian Life & Health Insurance Company Separate Account IV, File No. 33- 36073. /5/ Incorporated by reference from Pre-Effective Amendment No. 1 to the Regis- tration Statement of the Providian Life & Health Insurance Company Separate Account IV, File No. 33-36073. /6/ Incorporated by reference from Post-Effective Amendment No. 1 to the Regis- tration Statement of Providian Life & Health Insurance Company Separate Ac- count IV, File No. 33-36073. /7/ Incorporated by reference from Post-Effective Amendment No. 6 to Registra- tion Statement of Providian Life & Health Insurance Company Separate Account IV, File No. 33-36073. /8/ Filed herewith. C-1 ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
NAME AND PRINCIPAL POSITIONS AND OFFICES BUSINESS ADDRESS* WITH DEPOSITOR ------------------ --------------------- Bart Herbert, Jr. ............. President Edward A. Biemer............... Senior Vice President Thomas P. Bowie................ Senior Vice President G. Douglas Mangum, Jr. ........ Senior Vice President William L. Busler.............. Executive Vice President Martha A. McConnell............ Treasurer Brian Alford................... Vice President Nathan C. Anguiano............. Vice President & Assistant Treasurer Frank A. Camp.................. Vice President & Division General Counsel Brenda K. Clancy............... Vice President Michele M. Coan................ Vice President Jane A. Coyne.................. Vice President Karen H. Fleming............... Vice President Carolyn M. Johnson............. Vice President Michael F. Lane................ Vice President Vice President, Secretary and Associate General Susan E. Martin................ Counsel John A. Mazzuca................ Vice President Daniel C. Mohwinkel............ Vice President Thomas B. Nesspor.............. Vice President Maureen E. Nielsen............. Vice President Larry N. Norman................ Vice President G. Eric O'Brien................ Vice President Daniel H. Odum................. Vice President John C. Prestwood, Jr. ........ Vice President and Actuary Frank J. Rosa.................. Vice President Douglas A. Sarcia.............. Vice President Gary H. Scott.................. Vice President Brian A. Smith................. Vice President Colleen M. Tobiason............ Vice President William A. Waldie, Jr. ........ Vice President Michael A. Wapp................ Vice President Ronald L. Ziegler.............. Vice President & Actuary Janice Boehmler................ Assistant Vice President Michael A. Cioffi.............. Assistant Vice President & Qualified Actuary Kimberly A. Cushing............ Assistant Vice President Mary Ellen Fahringer........... Assistant Vice President JoAnn Herndon.................. Assistant Vice President Patricia A. Lukacs............. Assistant Vice President William R. Maurer.............. Assistant Vice President Robert E. Payne................ Assistant Vice President Teresa L. Stolba............... Assistant Vice President Harvey Waite................... Assistant Vice President Cliford W. Flenniken........... Assistant Treasurer William C. White, IV........... Assistant Treasurer Paul J. Lukacs................. Assistant Controller Joseph C. Noone................ Assistant Controller Amy E. Anders.................. Second Vice President George E. Claiborne, Jr. ...... Second Vice President Cindy L. Chanley............... Second Vice President Marvin A. Johnson.............. Second Vice President Anne M. Spaes.................. Second Vice President David L. Blankenship........... Second Vice President/Investments C. Ray Brewer.................. Second Vice President/Investments Kirk W. Buese.................. Second Vice President/Investments William S. Cook................ Second Vice President/Investments Deborah A. Dias................ Second Vice President/Investments Lee W. Eastland................ Second Vice President/Investments Donald E. Flynn................ Second Vice President/Investments
C-2
NAME AND PRINCIPAL POSITIONS AND OFFICES BUSINESS ADDRESS* WITH DEPOSITOR ------------------ --------------------- Donald E. Flynn.................... Second Vice President/Investments Eric B. Goodman.................... Second Vice President/Investments M. Josette Goulet.................. Second Vice President/Investments James Grant........................ Second Vice President/Investments David R. Halfpap................... Second Vice President/Investments Robert L. Hansen................... Second Vice President/Investments Donna L. Heitzman.................. Second Vice President/Investments David W. Hopewell.................. Second Vice President/Investments Frederick B. Howard................ Second Vice President/Investments Claudia Jackson.................... Second Vice President/Investments Jon D. Kettering................... Second Vice President/Investments Tim Kuussalo....................... Second Vice President/Investments James D. MacKinnon................. Second Vice President/Investments Jeffrey T. McGlaun................. Second Vice President/Investments Paul D. Mier....................... Second Vice President/Investments Thomas L. Nordstrom................ Second Vice President/Investments Ralph M. O'Brien................... Second Vice President/Investments Douglas H. Owen, Jr. .............. Second Vice President/Investments Dennis Roland...................... Second Vice President/Investments James D. Ross...................... Second Vice President/Investments J. Alan Schork..................... Second Vice President/Investments Lindsay Schumacher................. Second Vice President/Investments Michael B. Shaffer................. Second Vice President/Investments Clifford Sheets.................... Second Vice President/Investments Michael B. Simpson................. Second Vice President/Investments Jon L. Skaggs...................... Second Vice President/Investments Elizabeth A. Smedley............... Second Vice President/Investments Michael S. Smith................... Second Vice President/Investments Donna J. Spalding.................. Second Vice President/Investments Robert T. Stanley.................. Second Vice President/Investments Bradley L. Stofferahn.............. Second Vice President/Investments Randall K. Waddell................. Second Vice President/Investments Marcia Weiland..................... Second Vice President/Investments Tammy C. Wetterer.................. Second Vice President/Investments Kim A. Bivins...................... Second Vice President/Special Markets Gregory Lee Chapman................ Second Vice President/Special Markets Lisa L. Patterson.................. Second Vice President/Special Markets Rhonda L. Pritchett................ Second Vice President/Special Markets Thomas E. Walsh.................... Second Vice President/Special Markets Harvey Willis...................... Second Vice President/Special Markets Edward P. Reiter................... Second Vice President & Assistant Secretary L. Jude Clark...................... Assistant Secretary Colleen S. Lyons................... Assistant Secretary Mary Ann Malinyak.................. Assistant Secretary John F. Reesor..................... Assistant Secretary Mary L. Schaefer................... Assistant Secretary Kimberly A. Scouller............... Assistant Secretary R. Michael Slaven.................. Assistant Secretary Craig D. Vermie.................... Assistant Secretary Carolyn Wetterer................... Assistant Secretary Nancy E. Partington................ Advertising Compliance Officer James T. Bradley................... Product Compliance Officer
C-3 DIRECTORS: Susan E. Martin Douglas A. Sarcia John C. Prestwood, Jr. Brian A. Smith Bart Herbert, Jr. Thomas B. Nesspor Jay H. Berman Craig D. Vermie G. Douglas Mangum, Jr.
- ------- * The business address of each director and officer of Providian Life & Health Insurance Company is 20 Moores Road, Frazer, Pennsylvania 19355, 400 West Market Street, Louisville, Kentucky 40202 or 4333 Edgewood Road NE, Cedar Rapids, Iowa 52499. ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR REGISTRANT. The Depositor, Providian Life & Health Insurance Company, is indirectly wholly owned by AEGON USA, Inc. The Registrant is a segregated asset account of Providian Life & Health Insurance Company. The following chart indicates the persons controlled by or under common con- trol with Providian Life & Health Insurance Company.
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- AEGON N.V. Netherlands 53.63% of Vereniging Holding company Corporation AEGON Netherlands Membership Association Groninger Financieringen Netherlands 100% of AEGON N.V. Holding company B.V. Corporation Netherlands Corporation AEGON Netherland N.V. Netherlands 100% of AEGON N.V. Holding company Corporation Netherlands Corporation AEGON Nevak Holding B.V. Netherlands 100% of AEGON N.V. Holding company Corporation Netherlands Corporation AEGON International N.V. Netherlands 100% of AEGON N.V. Holding company Corporation Netherlands Corporation Voting Trust Trustees: Delaware Voting Trust K.J. Storm Donald J. Shepard H.B. Van Wijk Dennis Hersch AEGON U.S. Holding Delaware 100% of Voting Trust Holding company Corporation Short Hills Management New Jersey 100% of AEGON U.S. Holding company Company Holding Corporation CORPA Reinsurance New York 100% of AEGON U.S. Holding company Company Holding Corporation AEGON Management Company Indiana 100% of AEGON U.S. Holding company Holding Corporation RCC North America Inc. Delaware 100% of AEGON U.S. Holding company Holding Corporation AEGON USA, Inc. Iowa 100% of AEGON U.S. Holding company Holding Corporation AUSA Holding Company Maryland 100% AEGON USA, Inc. Holding company Monumental General Maryland 100% AUSA Holding Co. Holding company Insurance Group, Inc. Trip Mate Insurance Kansas 100% Monumental Sale/admin. of travel Agency, Inc. General Insurance insurance Group, Inc. Monumental General Maryland 100% Monumental Provides management Administrators, Inc. General Insurance srvcs. to unaffiliated Group, Inc. third party administrator Executive Management and Maryland 100% Monumental Provides actuarial Consultant General consulting services Services, Inc. Administrators, Inc.
C-4
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- Monumental General Mass Maryland 100% Monumental Marketing arm for sale of Marketing, Inc. General Insurance mass marketed insurance Group, Inc. coverages Diversified Investment Delaware 100% AUSA Holding Co. Registered investment Advisors, Inc. advisor Diversified Investors Delaware 100% Diversified Broker-Dealer Securities Corp. Investment Advisors, Inc. AEGON USA Securities, Iowa 100% AUSA Holding Co. Broker-Dealer Inc. Supplemental Ins. Tennessee 100% AUSA Holding Co. Insurance Division, Inc. Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance CRC Creditor Resources Canada 100% Creditor Insurance agency Canadian Dealer Network Resources, Inc. Inc. AEGON USA Investment Iowa 100% AUSA Holding Co. Investment advisor Management, Inc. AEGON USA Realty Iowa 100% AUSA Holding Co. Provides real estate Advisors, Inc. administrative and real estate investment services Quantra Corporation Delaware 100% AEGON USA Realty Real estate and financial Advisors, Inc. software production and sales Quantra Software Delaware 100% Quantra Manufacture and sell Corporation Corporation mortgage loan and security management software Landauer Realty Iowa 100% AEGON USA Realty Real estate counseling Advisors, Inc. Advisors, Inc. Landauer Associates, Delaware 100% AEGON USA Realty Real estate counseling Inc. Advisors, Inc. Realty Information Iowa 100% AEGON USA Realty Information Systems for Systems, Inc. Advisors, Inc. real estate investment management AEGON USA Realty Iowa 100% AEGON USA Realty Real estate management Management, Inc Advisors, Inc. USP Real Estate Iowa 21.89% First AUSA Real estate investment Investment Trust Life Ins. Co. trust 13.11% PFL Life Ins. Co. 4.86% Bankers United Life Assurance Co. Cedar Income Fund, Ltd. Iowa 16.73% PFL Life Ins. Real estate investment Co. trust 3.77% Bankers United Life Assurance Company 3.38% Life Investors Co. of America 1.97% AEGON USA Realty Advisors, Inc. .18% First AUSA Life Ins. Co. RCC Properties Limited Iowa AEGON USA Realty Limited Partnership Partnership Advisors, Inc. is General Partner and 5% owner. AUSA Financial Markets, Iowa 100% AUSA Holding Co. Marketing Inc. Endeavor Investment California 49.9% AUSA Financial General Partnership Advisors Markets, Inc. Universal Benefits Iowa 100% AUSA Holding Co. Third party administrator Corporation Investors Warranty of Iowa 100% AUSA Holding Co. Provider of automobile America, Inc. extended maintenance contracts Massachusetts Fidelity Iowa 100% AUSA Holding Co. Trust company Trust Co. Money Services, Inc. Delaware 100% AUSA Holding Co. Provides financial counseling for employees and agents of affiliated companies Zahorik Company, Inc. California 100% AUSA Holding Co. Broker-Dealer
C-5
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- ZCI, Inc. Alabama 100% Zahorik Company, Insurance agency Inc. AEGON Asset Management Delaware 100% AUSA Holding Co. Registered investment Services, Inc. advisor Intersecurities, Inc. Delaware 100% AUSA Holding Co. Broker-Dealer ISI Insurance Agency, California 100% Intersecurities, Insurance agency Inc. Inc. ISI Insurance Agency of Ohio 100% ISI Insurance Insurance agency Ohio, Inc. Agency, Inc. ISI Insurance Agency of Texas 100% ISI Insurance Insurance agency Texas, Inc. Agency, Inc. ISI Insurance Agency of Massachusetts 100% ISI Insurance Insurance Agency Massachusetts, Inc. Agency Inc. Associated Mariner Michigan 100% Intersecurities, Holding co./management Financial Group, Inc. Inc. services Mariner Financial Michigan 100% Associated Broker/Dealer Services, Inc. Mariner Financial Group, Inc. Mariner Planning Michigan 100% Mariner Financial Financial planning Corporation Services, Inc. Associated Mariner Michigan 100% Associated Insurance agency Agency, Inc. Mariner Financial Group, Inc. Associated Mariner Hawaii 100% Associated Insurance agency Agency of Hawaii, Inc. Mariner Agency, Inc. Associated Mariner Ins. Massachusetts 100% Associated Insurance agency Agency of Mariner Agency, Inc. Massachusetts, Inc. Associated Mariner Ohio 100% Associated Insurance agency Agency Ohio, Inc. Mariner Agency, Inc. Associated Mariner Texas 100% Associated Insurance agency Agency Texas, Inc. Mariner Agency, Inc. Associated Mariner New Mexico 100% Associated Insurance agency Agency New Mexico, Inc. Mariner Agency, Inc. Mariner Mortgage Corp. Michigan 100% Associated Mortgage origination Mariner Financial Group, Inc. Idex Investor Services, Florida 100% AUSA Holding Co. Shareholder services Inc. Idex Management, Inc. Delaware 50% AUSA Holding Co. Investment advisor 50% Janus Capital Corp. IDEX II Series Fund Massachusetts Various Mutual fund IDEX Fund Massachusetts Various Mutual fund IDEX Fund 3 Massachusetts Various Mutual fund First AUSA Life Maryland 100% AEGON USA, Inc. Insurance holding company Insurance Company AUSA Life Insurance New York 100% First AUSA Life Insurance Company, Inc. Insurance Company Life Investors Insurance Iowa 100% First AUSA Life Insurance Company of America Ins. Co. Bankers United Life Iowa 100% Life Investors Insurance Assurance Company Ins. Company of America Life Investors Agency Iowa 100% Life Investors Marketing Group, Inc. Ins. Company of America PFL Life Insurance Iowa 100% First AUSA Life Insurance Company Ins. Co. AEGON Financial Services Minnesota 100% PFL Life Marketing Group, Inc. Insurance Co. AEGON Assignment Kentucky 100% AEGON Financial Administrator of Corporation Services Group, Inc. structured settlements Southwest Equity Life Arizona 100% of Common Voting Insurance Ins. Co. Stock First AUSA Life Ins. Co.
C-6
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- Iowa Fidelity Life Arizona 100% of Common Voting Insurance Insurance Co. Stock First AUSA Life Ins. Co. Western Reserve Life Ohio 100% First AUSA Life Insurance Assurance Co. of Ohio Ins. Co. WRL Series Fund, Inc. Maryland Various Mutual fund WRL Investment Services, Florida 100% Western Reserve Provides administration Inc. Life Assurance Co. of for affiliated mutual Ohio fund WRL Investment Florida 100% Western Reserve Registered investment Management, Inc. Life Assurance Co. of advisor Ohio Monumental Life Maryland 100% First AUSA Life Insurance Insurance Co. Ins. Co. AEGON Special Markets Maryland 100% Monumental Life Marketing Group, Inc. Ins. Co. Monumental General Maryland 100% First AUSA Life Insurance Casualty Co. Ins. Co. United Financial Maryland 100% First AUSA Life General agency Services, Inc. Ins. Co. Bankers Financial Life Arizona 100% First AUSA Life Insurance Ins. Co. Ins. Co. The Whitestone Maryland 100% First AUSA Life Insurance agency Corporation Ins. Co. Cadet Holding Corp. Iowa 100% First AUSA Life Holding company Insurance Company Commonwealth General Delaware 100% AEGON USA, Inc. Holding company Corporation ("CGC") PB Series Trust Massachusetts N/A Mutual fund Monumental Agency Group, Kentucky 100% CGC Provider of srvcs. to Inc. ins. cos. Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security Life Insurance Company Durco Agency, Inc. Virginia 100% Benefit Plans, General agent Inc. Commonwealth General. Kentucky 100% CGC Administrator of Assignment Corporation structured settlements Providian Financial Pennsylvania 100% CGC Financial services Services, Inc. AFSG Securities Pennsylvania 100% CGC Broker-Dealer Corporation PB Investment Advisors, Delaware 100% CGC Registered investment Inc. advisor Diversified Financial Delaware 100% CGC Provider of investment, Products Inc. marketing and admin. services to ins. cos. AEGON USA Real Estate Delaware 100% Diversified Real estate and mortgage Services, Inc. Financial Products holding company Inc. Capital Real Estate Delaware 100% CGC Furniture and equiment Development Corporation lessor Capital General Delaware 100% CGC Holding company Development Corporation Commonwealth Life Kentucky 100% Capital General Insurance company Insurance Company Development Corporation Agency Holding I, Inc. Delaware 100% Commonwealth Life Investment subsidiary Insurance Company Agency Investments I, Delaware 100% Agency Holding I, Investment subsidiary Inc. Inc. Peoples Security Life North 100% Capital General Insurance company Insurance Company Carolina Development Corporation Ammest Realty Texas 100% Peoples Security Special purpose Corporation Life Insurance subsidiary Company Agency Holding II, Inc. Delaware 100% Peoples Security Investment subsidiary Life Insurance Company
C-7
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- Agency Investments II, Delaware 100% Agency Holding Investment subsidiary Inc. II, Inc. Agency Holding III, Inc. Delaware 100% Peoples Security Investment subsidiary Life Insurance Company Agency Investments III, Delaware 100% Agency Holding Investment subsidiary Inc. III, Inc. JMH Operating Company, Mississippi 100% Peoples Security Real estate holdings Inc. Life Insurance Company Capital Security Life North 100% Capital General Insurance company Ins. Co. Carolina Development Corporation Independence Automobile Florida 100% Capital Security Automobile Club Association, Inc. Life Insurance Company Independence Automobile Georgia 100% Capital Security Automobile Club Club, Inc. Life Insurance Company Capital 200 Block Delaware 100% CGC Real estate holdings Corporation Capital Broadway Kentucky 100% CGC Real estate holdings Corporation Southlife, Inc. Tennessee 100% CGC Investment subsidiary Ampac Insurance Agency, Pennsylvania 100% CGC Provider of management Inc. support services (EIN 23-1720755) National Home Life Pennsylvania 100% Ampac Insurance Special-purpose Corporation Agency, Inc. subsidiary Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose Corporation Agency, Inc. subsidiary Association Consultants, Illinois 100% Ampac Insurance TPA license-holder Inc. Agency, Inc. Valley Forge Associates, Pennsylvania 100% Ampac Insurance Furniture & equipment Inc. Agency, Inc. lessor Veterans Benefits Plans, Pennsylvania 100% Ampac Insurance Administator of group Inc. Agency, Inc. insurance programs Veterans Insurance Delaware 100% Ampac Insurance Special-purpose Services, Inc. Agency, Inc. subsidiary Financial Planning Dist. 100% Ampac Insurance Special-purpose Services, Inc. Columbia Agency, Inc. subsidiary Providian Auto and Home Missouri 100% CGC Insurance company Insurance Company Academy Insurance Group, Delaware 100% CGC Holding company Inc. Academy Life Insurance Missouri 100% Academy Insurance Insurance company Co. Group, Inc. Pension Life Insurance New Jersey 100% Academy Insurance Insurance company Company of America Group, Inc. Academy Services, Inc. Delaware 100% Academy Insurance Special-purpose Group, Inc. subsidiary Ammest Development Corp. Kansas 100% Academy Insurance Special-purpose Inc. Group, Inc. subsidiary Ammest Insurance Agency, California 100% Academy Insurance General agent Inc. Group, Inc. Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose Insurance Agency, Inc. Group, Inc. subsidiary Ammest Realty, Inc. Pennsylvania 100% Academy Insurance Special-purpose Group, Inc. subsidiary Ampac, Inc. Texas 100% Academy Insurance Managing general agent Group, Inc. Ampac Insurance Agency, Pennsylvania 100% Academy Insurance Special-purpose Inc. Group, Inc. subsidiary (EIN 23-2364438) Data/Mark Services, Inc. Delaware 100% Academy Insurance Provider of mgmt. Group, Inc. services
C-8
JURISDICTION OF PERCENT OF VOTING NAME INCORPORATION SECURITIES OWNED BUSINESS ---- --------------- ----------------- -------- Force Financial Group, Delaware 100% Academy Insurance Special-purpose Inc. Group, Inc. subsidiary Force Financial Massachusetts 100% Force Fin. Group, Special-purpose Services, Inc. Inc. subsidiary Military Associates, Pennsylvania 100% Academy Insurance Special-purpose Inc. Group, Inc. subsidiary NCOA Motor Club, Inc. Georgia 100% Academy Insurance Automobile club Group, Inc. NCOAA Management Company Texas 100% Academy Insurance Special-purpose Group, Inc. subsidiary Unicom Administrative Pennsylvania 100% Academy Insurance Provider of admin. Services, Inc. Group, Inc. services Unicom Administrative Germany 100% Unicom Provider of admin. Services, GmbH Administrative servcies Services, Inc. Providian Property and Kentucky 100% Providian Auto Insurance company Casualty Insurance and Home Insurance Company Company Providian Fire Insurance Kentucky 100% Providian Insurance company Co. Property and Casualty Insurance Co. Capital Liberty, L.P. Delaware 79.2% Commonwealth Holding Company Life Insurance Company 19.8% Peoples Security Life Insurance Company 1% CGC Commonwealth General LLC Turks & 100% CGC Special-purpose Caicos subsidiary Islands Providian Life and Missouri 3.7% CGC Insurance company Health Insurance Company 15.3% Peoples Security Life Insurance Company 20% Capital Liberty, L.P. 61% Commonwealth Life Insurance Company Veterans Life Insurance Illinois 100% Providian Life Insurance company Co. and Health Insurance Company Peoples Benefit Pennsylvania 100% Veterans Life Special-purpose Services, Inc. Ins. Co. subsidiary First Providian Life and New York 100% Veterans Life Insurance Company Health Insurance Ins. Co. Company
C-9 ITEM 27. NUMBER OF CONTRACT OWNERS As of February 28, 1998 there were 40,875 owners of Contracts. ITEM 28. INDEMNIFICATION Item 28 is incorporated by reference from the Post-Effective Amendment No. 6 to the Registration Statement of the National Home Life Assurance Company Sep- arate Account II, File No. 33-7037. ITEM 29. PRINCIPAL UNDERWRITERS (a) None. (b) Not Applicable. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS The books, accounts and other documents required by Section 31(a) under the Investment Company Act and the rules promulgated thereunder will be maintained in the physical possession of The Continuum Company, Inc., Kansas City, Mis- souri and The Vanguard Group, Inc., Valley Forge, Pennsylvania. ITEM 31. MANAGEMENT SERVICES All management contracts are discussed in Part A or Part B. ITEM 32. UNDERTAKINGS (a) Providian Life & Health Insurance Company represents that the fees and charges deducted under the contracts in this registration statement, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by Providian Life & Health In- surance Company. C-10 SIGNATURES AS REQUIRED BY THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT, PROVIDIAN LIFE & HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV, CERTIFIES THAT IT MEETS THE REQUIREMENTS OF SECURITIES ACT RULE 485 FOR EFFECTIVENESS HEREOF AND HAS DULY CAUSED THIS AMENDED REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF IN THE COUNTY OF JEFFERSON AND COMMONWEALTH OF KENTUCKY ON THE 30TH DAY OF APRIL, 1998. Providian Life & Health Insurance Company Separate Account IV (Registrant) By: Providian Life & Health Insurance Company By: /s/ Bart Herbert, Jr.* --------------------------------- BART HERBERT, JR., PRESIDENT Providian Life & Health Insurance Company (Depositor) By: /s/ Bart Herbert, Jr.* --------------------------------- BART HERBERT, JR., PRESIDENT *By: /s/ R. Michael Slaven -------------------------------- R. MICHAEL SLAVEN ATTORNEY-IN-FACT C-11 AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS AMENDED REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Martha A. McConnell* Treasurer (Chief April 30, 1998 - ------------------------------------ Accounting Officer) MARTHA A. MCCONNELL /s/ Jay H. Berman* Director April 30, 1998 - ------------------------------------ JAY H. BERMAN /s/ Susan E. Martin* Director, Vice April 30, 1998 - ------------------------------------ President, SUSAN E. MARTIN Secretary and Associate General Counsel /s/ G. Douglas Mangum, Jr.* Director, and Senior April 30, 1998 - ------------------------------------ Vice President G. DOUGLAS MANGUM, JR. /s/ John C. Prestwood, Jr.* Director, Vice April 30, 1998 - ------------------------------------ President and JOHN C. PRESTWOOD, JR. Actuary /s/ Douglas A. Sarcia* Director and Vice April 30, 1998 - ------------------------------------ President DOUGLAS A. SARCIA /s/ Brian A. Smith* Director and Senior April 30, 1998 - ------------------------------------ Vice President BRIAN A. SMITH /s/ Thomas B. Nesspor* Director and Vice April 30, 1998 - ------------------------------------ President THOMAS B. NESSPOR /s/ Bart Herbert, Jr.* Director and April 30, 1998 - ------------------------------------ President BART HERBERT, JR. /s/ Craig D. Vermie* Director April 30, 1998 - ------------------------------------ CRAIG D. VERMIE /s/ R. Michael Slaven *By: _______________________________ R. MICHAEL SLAVEN ATTORNEY-IN-FACT
C-12 SEPARATE ACCOUNT IV VANGUARD VARIABLE ANNUITY PLAN CONTRACT INDEX TO EXHIBITS EXHIBIT 8(c) ADMINISTRATIVE SERVICES AGREEMENT DATED SEPTEMBER, 1997 BETWEEN THE VANGUARD GROUP, INC., PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY AND FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY EXHIBIT 9(a) OPINION AND CONSENT OF COUNSEL EXHIBIT 9(b) CONSENT OF COUNSEL EXHIBIT 10 CONSENT OF INDEPENDENT AUDITORS EX-8.(C) 2 ADMINISTRATIVE SERVICES AGREEMENT ADMINISTRATIVE SERVICES AGREEMENT THIS ADMINISTRATIVE SERVICES AGREEMENT (this "Agreement"), dated as of September 30, 1997, is between The Vanguard Group, Inc. ("Vanguard"), and Providian Life and Health Insurance Company and First Providian Life and Health Insurance Company (referred to herein as the "Company"). WHEREAS, the Company or its authorized representatives desire to ensure that the administration of the Vanguard Variable Annuity Plan Contract, offered by the Company which uses the Vanguard Variable Insurance Fund as its underlying investment vehicle (the "Contracts"), is implemented in accordance with all applicable laws and regulations; and WHEREAS, Vanguard, a licensed third party administrator desires to perform certain administrative functions with respect to the Contracts. NOW, THEREFORE, in consideration of the promises herein contained and other good and valuable consideration, the parties hereto agree as follows with respect to the administration of the Contracts. AGREEMENT 1.1 Administration of Contracts. The Company retains Vanguard to --------------------------- perform the administrative services set forth in Exhibit A hereto with respect to the Contracts. 1.2 Termination. Either party may terminate this Agreement upon ----------- written notice to the other party in the manner described below (a) for Cause (defined below); (b) upon the termination, for whatever reason, of that certain Participation, Market Consulting and Administration Agreement dated April 23, 1991 among Vanguard, the Company and Vanguard Variable Insurance Fund, Inc., as amended (the "Participation Agreement"): and/or (c) upon mutual agreement of the parties hereto. The Company must fulfill all lawful obligations with respect to the Contracts, regardless of any dispute between the Company and Vanguard. In order to fulfill this obligation, Vanguard shall maintain and make available to the Company complete Books and Records (defined below) which shall be (i) readily accessible to the Company at Vanguard's offices during the transition from Vanguard to the Company or another third party administrator selected by the Company and (ii) promptly delivered to the Company at its offices or such other location designated by the Company. Upon termination, Vanguard, subject to any fiduciary obligations it may have, shall release its authority with respect to the bank accounts, and funds deposited therein, described in Section 1.4 below. "Cause" shall mean the material breach of this Agreement by either party or the material default by either party in any of its duties and obligations hereunder, which breach or default remains uncured for thirty (30) days after the receipt of written notice thereof by the breaching or defaulting party. The Company shall provide thirty (30) days written notice to Vanguard of termination or cancellation of this Agreement if the termination is required by applicable law. 1.3 Receipt of Payments. The payment to Vanguard of any premiums or ------------------- charges for the Contracts by or on behalf of a Contract owner shall be deemed to have been received by the Company, and the payment of return premiums or claims by the Company to Vanguard shall not be deemed payment to a Contract owner or claimant until such payments are received by such Contract owner or claimant. Vanguard shall comply with all federal securities laws, regulations and rules and NASD rules regarding the deadlines for investing premiums, redeeming Contracts and paying claims. Nothing in this Section 1.3 limits any right of the Company against Vanguard resulting from the failure of Vanguard to make payments to the Company, Contract owners or claimants. 1.4 Fiduciary Account. Vanguard will hold in a fiduciary capacity all ----------------- charges or premiums collected by it on behalf of or for the Company with respect to Contract owners, and return premiums received from the Company. Vanguard shall comply with all applicable fiduciary account statutes and regulations. In accordance with applicable laws, regulations and rules, Vanguard will immediately remit such funds to the person or persons entitled thereto, or shall promptly deposit them in a fiduciary account established and maintained by Vanguard in a federally or state-insured financial institution reasonably acceptable to the Company, in the name of the Company, which fiduciary account, with respect to funds relating to Nevada policyholders, shall be deposited in an account located at a financial institution located in Nevada, unless the Nevada Insurance Department grants an exemption. Vanguard shall require the bank in which such fiduciary account is maintained to keep records clearly recording the deposits in and withdrawals from such account on behalf of or for the Company. Vanguard shall promptly obtain and keep copies of all such records and, upon request of the Company, furnish the Company with copies of such records pertaining to deposits and withdrawals on behalf of or for the Company. Vanguard may make withdrawals from such account for: a. remittance to the Company when entitled thereto; b. transfer to and deposit in accounts for the underlying portfolios described in the Contracts in accordance with Contract owner instructions; c. transfer to and deposit in a claims paying account, with claims to be paid as provided in this Agreement; d. payment to Vanguard of the amounts described in Section 1.10 below; or e. remittance of return premiums to the person or persons entitled thereto. 1.5 Form of Payments of Claims. All claims paid by Vanguard from funds -------------------------- collected on behalf of the Company, including withdrawals, cancellations and death claims, shall be paid only on checks or drafts of and as authorized by the Company. 1.6 Notices to Policyholders. To the extent required by applicable law, ------------------------ Vanguard shall provide a written notice to the Contract owners advising them of the identity of and relationship among Vanguard, the Contract owners and the Company. If Vanguard collects funds from the Contract owners, Vanguard will provide the Contract owner with a written statement specifying the amount of the premium charged by the Company for such Contract. Any policies, 2 certificates, booklets, termination notices or other written communications delivered by the Company to Vanguard for delivery to its Contract owners shall be delivered by Vanguard promptly after receipt of instructions from the Company to do so. 1.7 Books and Records. Vanguard shall establish and maintain facilities and ----------------- procedures for the safekeeping of policy forms, check forms and facsimile signature imprinting devices, if any, and all other documents, reports, records, books, files, and other materials (whether on paper, microfiche, computer or other forms) relative to this Agreement and all transactions between Vanguard, the Company, and Contract owners, which shall include the identity and addresses of contract owners and certificate holders (collectively, "Books and Records"), which facilities and procedures shall be reasonably acceptable to the Company. The Company may request additional facilities and procedures if necessary to comply with applicable laws or industry standards. Vanguard shall maintain the Books and Records at its principal administrative office, for the duration of this Agreement and seven years thereafter; provided, however, that in the event this agreement is terminated, Vanguard may, pursuant to applicable law, deliver the Books and Records to the Company and/or a successor administrator rather than maintain such Books and Records for seven years. The Books and Records shall also be maintained in accordance with prudent standards of insurance recordkeeping and as required by applicable law. The Company and Vanguard shall both own the Books and Records and shall each retain the right of access to the Books and Records to fulfill its contractual obligations to Contract owners, claimants and the Company. 1.8 Access to Books and Records. The Company and any applicable regulatory --------------------------- agency (including state insurance departments, the SEC and the NASD) shall have full and free access, during ordinary business hours, to the Books and Records, which shall be in a form usable by them. Each party shall cooperate with the other party and all appropriate governmental authorities in connection with any investigation or inquiry relating to this Agreement. The Company or its duly authorized independent auditors have the right under this Agreement to perform on-site reviews of Vanguard's operations and audits of the Books and Records directly pertaining to the Contracts serviced by Vanguard's facilities hereunder at Vanguard's facilities in accordance with reasonable procedures and at reasonable frequencies, including a reasonable period of time in advance of an announced SEC examination. Each party shall pay for its own costs and expenses (including personnel time and materials) incurred in connection with such audits. 1.9 Description of Books and Records. -------------------------------- a. Vanguard shall maintain detailed books and records that reflect all administered transactions specifically in regard to premiums, withdrawals, cancellations, transfers, death claims, state and federal tax withholding, premium taxes, administrator's fees, contributions received and deposited and claims and authorized expenses paid. b. The detailed preparation, journalizing, and posting of such books and records shall be made in accordance with the terms and conditions of this Agreement and state insurance, SEC and NASD requirements, and, if applicable, in accordance with ERISA, as amended and to enable the insurer to complete the National Association of Insurance Commissioners' annual financial statement. 3 c. Vanguard shall maintain a cash receipt register of all premiums or contributions received. The minimum detail required in the register shall be: date received and deposited, the mode of payment, the policy number, name of individual or group Contract owner. d. The description of a disbursement shall be in sufficient detail to identify the source document substantiating the purpose of the disbursement, and shall include all of the following: (i) the check number; (ii) the date of disbursement; (iii) the person to whom the disbursement was made; (iv) the amount disbursed; and (v) ledger account number. If the amount disbursed does not agree with the amount billed or authorized, Vanguard shall prepare a written record as to the application for the disbursement. All disbursements shall be supported by evidential matter. The evidential matters must be referenced in the journal entry so that they may be traced for verification. e. Vanguard shall prepare and maintain monthly financial institution account reconciliations and provide these reconciliations to the Company by the date noted in Exhibit A. f. Vanguard shall render accounts to the Company detailing all transactions and remit all money due to the Company under this Agreement, the Contracts and the Participation Agreement (including the mortality and expense risk charge) to the Company by the dates set forth in Exhibit A. Vanguard will render an accounting to the Company detailing all transactions performed by Vanguard pertaining to the business underwritten by the Company by the dates set forth in Exhibit A. g. Vanguard shall maintain a customer complaint log in accordance with state insurance, SEC and NASD requirements and shall file the customer complaint log with the applicable regulatory agency if and when required. Vanguard shall provide the Company with a copy of the customer complaint log on a quarterly basis or more frequently if reasonably requested by the Company. Vanguard shall promptly notify the Company of all customer complaints involving a regulatory agency. 1.10 Contingent Fees. Vanguard shall not receive commissions, fees, or charges --------------- contingent upon savings obtained in the adjustment, settlement and payment of losses covered by the Company obligations, but Vanguard may receive compensation based on premiums or charges collected or the number of claims paid or processed as may be provided for in any later amendments to this Agreement. For services to be rendered by Vanguard, as provided in Section 1.1 of this Agreement, Vanguard shall receive no compensation. But in any event Vanguard shall receive the administration charge set forth in the Participation Agreement. Vanguard shall not receive from the Company or any covered individual any compensation or other payments except as expressly set forth in this Agreement. 4 1.11 Advertising. Vanguard may use only such advertising pertaining to the ----------- business underwritten by the Company as has been approved in writing by the Company in advance of its use. The Company shall have the prior approval of the Director of the Department of Insurance, State of Idaho, before approving advertising for use by Vanguard. Vanguard shall maintain at its principal administrative office a complete file of all advertisements, regardless of by whom written, created or designed, which are used with respect to Contract owners or potential Contract owners of the Contracts located in Georgia, with a notation indicating the manner and extent of distribution and the form number of any policy advertised. Such file shall be subject to inspection by the Office of Commissioner of Insurance of the State of Georgia. All such advertisements shall be maintained in said file for a period of not less than five years. Vanguard shall file with the Commissioner of Insurance of the State of Georgia on or before March 1 of each year, a certification executed by an authorized officer of the administrator wherein it is stated that to the best of his knowledge, information and belief, the advertisements disseminated by Vanguard with regard to the Contracts during the preceding calendar year complied, or were made to comply in all respects, with the advertising regulations of Georgia. The Company shall be solely responsible for ensuring that all such advertisements provided to and approved in writing by the Company comply in all respects with the advertising regulations of Georgia. 1.12 Underwriting. The underwriting of the insurance policies is the ------------ responsibility of the Company and Vanguard shall not provide any underwriting services. The Company shall be responsible for determining the benefits, premium rates, adjudication of claims, underwriting criteria and claims payment procedures applicable to such coverage and for securing reinsurance, if any; the rules pertaining to these matters must be provided, in writing, by the Company to Vanguard. 1.13 Copy of Written Agreement. This Agreement shall be retained as part of ------------------------- the official records of both the Company and Vanguard for the duration of this Agreement plus seven years. 1.14 Compliance. Vanguard is licensed as a third party administrator in the ---------- Commonwealth of Pennsylvania and will seek and maintain a third party administrator license in those states where it is required and will be in material compliance with all laws, rules and regulations applicable to third party administration of the Contracts. 1.15 Confidentiality of Personal Information. Information that identifies an --------------------------------------- individual covered by a Contract is confidential and shall be kept confidential in accordance with applicable law. In addition, all information provided by the Company to Vanguard shall be kept confidential. During the time such information is in Vanguard's custody or control, Vanguard shall take all reasonable precautions to prevent disclosure or use of the information for a purpose unrelated to administration of the Contract. Vanguard shall disclose such information only: in response to a court order; for an examination conducted by the applicable regulatory agency; to or at the request of the Company; or with the written consent of the identified individual or his or her legal representative. This Section 1.15 shall survive the termination of this Agreement. 1.16 Liability. Each party shall only be responsible or liable to the other --------- party for losses caused by the negligence, bad faith, malfeasance or misconduct of such party or its employees or agents. 5 1.17 Bond. Vanguard shall comply with the bond and insurance requirements of ---- each state in which it administers Contracts, and to the bonding requirements of the SEC and NASD. 1.18 Agent, Broker, or Adjuster Licensing. With respect to Wyoming residents, ------------------------------------ Vanguard will not: a. solicit applications for insurance or annuities for the Company, negotiate insurance or annuities on behalf of the Company, or carry out and countersign insurance policies unless licensed in Wyoming as an agent; b. on behalf of the Company, for compensation or fee, solicit, negotiate or procure insurance or the renewal or continuance thereof for Wyoming insured or prospective insureds unless licensed in Wyoming as a broker; c. adjust claims in Wyoming for the Company by investigating and negotiating settlements unless licensed in Wyoming as an adjuster, or an agent or broker who adjusts or assists in the adjustment of losses arising under policies issued by the Company represented by that agent or through that broker. Nothing herein shall be interpreted as to prohibit Vanguard from engaging in ministerial or clerical activities relating to the payment of claims. SECTION 2 - MISCELLANEOUS ------------- 2.1 Ratifications. Except for the Participation Agreement, this Agreement, ------------- including Exhibit A, constitutes the entire Agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof, whether written or oral. 2.2 Amendments and Modifications. No provision of this Agreement may be ---------------------------- amended, modified or waived except in a writing signed by the parties hereto. 2.3 Successors and Assigns. This Agreement is binding upon and shall inure to ---------------------- the benefit of the Company and Vanguard and their respective successors and permitted assigns. This Agreement may not be assigned by either part without the prior written consent of the other party. 2.4 Corporate Authority. Each party hereto represents and warrants to each ------------------- other party that it is empowered under the applicable laws and regulations and by its charter and by-laws to enter into and perform this Agreement and that all requisite corporate proceedings have been taken to authorize it to enter into and perform this Amendment. 2.5 Governing Law. This Agreement shall be governed by the laws of the ------------- Commonwealth of Pennsylvania. 2.6 Severability. If any portion of this Agreement shall be held or made ------------ invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. 6 2.7 Remedies Cumulative; No Waiver. No right, power or remedy granted or ------------------------------ reserved herein is intended to be exclusive of any other right, power or remedy, but each and every such right, power and remedy shall be cumulative and concurrent and in addition to any other right, remedy or power hereunder or under law. No delay or omission by either party to exercise any right, power or remedy in connection with a default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of such default or acquiescence therein. 2.8 Arbitration. Any dispute arising out of or related to this Agreement, ----------- which cannot be resolved by negotiation, shall be settled by binding arbitration in accordance with and subject to the Commercial Arbitration Rules of the American Arbitration Association then applicable (the "Rules"). Unless otherwise mutually agreed upon by the parties, the arbitration hearings will be held in the City of Philadelphia, PA. A panel of three arbitrators will be selected in accordance with the Rules and the arbitrators will allow such discovery as is appropriate and consistent with the purposes of arbitration in accomplishing fair, speedy and cost effective resolution of disputes. The arbitrators will reference the rules of evidence and the Federal Rules of Civil Procedure then in effect in setting the scope of discovery. Judgment upon the award rendered in any such arbitration may be entered in any court having jurisdiction thereof, or application may be made to such court for a judicial acceptance of the award and an enforcement, as the law of such jurisdiction may require or allow. 2.9 Errors and Omissions. Any inadvertent error or omission made by either -------------------- party in connection with this Agreement which has been corrected within 30 days, shall not constitute a material breach of the Agreement or render the Agreement null and void. 2.10 Notice Addresses. Any notice to be given by one party to the other shall ---------------- be (i) personally delivered or (ii) mailed certified mail postage prepaid, if to Vanguard, at Vanguard Financial Center, 100 Vanguard Boulevard, Malvern PA 19355, Attn: Pauline C. Scalvino, and if to the Company, at 400 West Market Street, Louisville, Kentucky 40202, Attn: Sarah Strange. 7 EXECUTED as of the date first written above. VANGUARD: -------- THE VANGUARD GROUP, INC. By /s/ Raymond J. Klapinsky ------------------------------ Name Raymond J. Klapinsky ---------------------------- Title Managing Director --------------------------- PROVIDIAN: --------- PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY By /s/ William L. Busler ------------------------------ Name William L. Busler ---------------------------- Title Executive Vice President --------------------------- FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY By /s/ William L. Busler ------------------------------ Name William L. Busler ---------------------------- Title Exec. V.P. --------------------------- 8 EXHIBIT A - --------- ADMINISTRATIVE SERVICES (Responsibility for each item is indicated by V for Vanguard, C for Company and V/C for a joint responsibility of both Vanguard and Company.) A. CONTRACT ISSUANCE/SUBSEQUENT PAYMENTS 1. Review new applications, apply issuance criteria to application for Contract. (V) 2. Notify Contract owner or annuitant of any error or missing data needed to establish Contract within SEC guidelines of accepting the funds within two days or return funds within five days. (V) 3. If issuance criteria met, prepare contract schedule page, prepare issued Contract, and mail Contract to Contract Owners. (V) 4. Establish and maintain participant, annuitant, and Contract Owner records, as applicable, on authorized storage/retrieval systems. (V) 5. Print and maintain supply of confirmation statements. Prepare and mail confirmation statements of purchases to Contract Owners. (V) 6. Deposit monies received with application into the designated account (see "Accounting/Auditing", below). (V) 7. Print and maintain inventory of issue-related forms, Contracts and endorsements. (V) 8. During the free-look period, premiums will be invested in accordance with the terms of the contract and prospectus. 9. Update the Contract Owner master records and other records to reflect payments received, and the allocation of each payment received. (V) B. ACCOUNTING/AUDITING 1. Deposit cash received under the Contracts into a designated bank account. (V) 2. Photocopy and microfilm all checks. Balance, edit, endorse and prepare daily deposits. (V) 9 3. Transfer funds from the depository account to the custodian bank. (V) 4. On returned items, reverse transactions, prepare reports, and communicate with Contract Owner. (V) 5. Receive funds from custodian accounts for transfer into disbursement account. (V) 6. Prepare disbursement checks (see "Disbursement" below). (V) 7. Generate accounting information necessary to post entries to transfer agency bank account reconciliation. (V) 8. Cooperate on annual audit of Separate Accounts and other audits, as required, which are conducted for purposes of financial statement certification and publication. The Company will give at least 30 days notice. (V) Additionally, accommodate other client and/or regulatory audits, as required. The Company will notify Vanguard of client and /or regulatory time frames as soon as possible. 9. Retain systems generated reports in accordance with a retention schedule mutually established within the Participation, Market Consulting and Administration Agreement in Schedule 1.6(b)(iv). Provide access to such reports for internal and external auditing. (V) 10. Perform daily balancing of Vantage-One and RPS cycle reports (system check from nightly cycle), Vantage-One and RPS accounting extract and Vantage-One and RPS disbursement extract. (C) During the daily balancing described above, forced balances and/or invalid Journal entries may occur. When these errors occur, the Company and Vanguard will work together to determine the cause of the error, perform the proper corrections, and develop and implement procedures if deemed necessary to ensure the error does not reoccur. (C/V) 11. Company will perform daily balancing for the Separate Account including the following reconciliations: Separate Account shares to Fund Shares, Separate Account units to customer units on Vantage-One, RPS and the spreadsheets for annuitized customers tracked manually, and Separate Account assets to liabilities. 10 Separate Account Shares to Fund Shares -------------------------------------- Company will communicate the difference to Vanguard, work with Vanguard to determine the cause of the difference and agree upon the appropriate resolution. Separate Account Units to Customer Units on Vantage-One or RPS -------------------------------------------------------------- Company will communicate the difference to Vanguard, work with Vanguard to determine the cause of the difference and agree upon the appropriate resolution. Separate Account Units to RPS Manual Spreadsheets ------------------------------------------------- Company will communicate the difference to Vanguard, work with Vanguard to determine the cause of the difference and agree upon the appropriate resolution. Separate Account Assets to Liabilities -------------------------------------- Company will communicate the difference (i.e. breakage) to Vanguard, work with Vanguard to determine the cause of the difference (that is in excess of the normal level of breakage) and agree upon the appropriate resolution. Vanguard and Company will mutually agree upon what is considered a normal level of breakage. (C) C. PRICING/VALUATION 1. Company will perform daily the calculation for the accumulation and annuity (payout) unit values for the Separate Account in accordance with the prospectus and the Statement of Additional Information. Company will also perform daily the calculation of the M&E factor included in the unit value calculation. Vanguard will use its best efforts to provide, in a mutually agreed upon format, the NAV and dividend and capital gain rate and share balance by 6:00 p.m. EST on each day the NYSE is open. (C/V) 2. Vanguard will communicate to Company any corrections to the NAV, dividend rate, or capital gain rate as soon as the error is detected. Company will maintain a record of corrections of the accumulation and annuity (payout) unit values for the Separate Account in accordance with applicable federal securities laws, rules and regulations. For errors not caused by corrections to the NAV, dividend rate, or capital gain rate, 11 Company will communicate the unit value corrections to Vanguard as soon as the error is detected. Company will also communicate to Vanguard when the unit value has been corrected on the administrative system so that Vanguard can reverse and reapply the affected transactions. Company will work with the recordkeeper to correct unit values in the administrative system. All corrections will be verified by Company. (C/V) 3. Vanguard will determine daily the purchases and redemptions (trade sheets) activity by fund and notify the fund manager. Vanguard will provide daily to Company the purchases and redemptions transacted on the Vantage-One and RPS systems by fund, as well as purchases and redemptions of the annuitized customers tracked manually. Company will determine daily the purchases and redemptions activity by fund. Company will use the activity by fund in processing the share balances by fund and will confirm these share balances as indicated per item B11 above. (C/V) D. CONTRACT OWNER SERVICE/RECORD MAINTENANCE 1. Process Contract owner service requests, including informational requests, endorsement/acknowledgment, beneficiary changes, transfer of assets between investment vehicles, and changes of any other information maintained on the system. (V) 2. Respond directly to questions or inquiries relating to transaction records or current account value. (V) 3. Review daily system reports confirming changes made to participant, annuitant or Contract owner accounts. (V) 4. Process Contract owner service requests within the following standards (V): - New Policy Issue 2 business days - Subsequent Premium same business day - Surrenders/Partial Withdrawals 1 business day - Correspondence - - Financial 2 business days - Non-Financial 5 business days 5. Provide client service within agreed upon guidelines. Provide results monthly to the Company. (V) - 90% of all calls answered within 20 seconds. - Average "Speed of Answer" 20 seconds or less 12 - Abandonment Rate of 3% or less 6. Provide quarterly customer statements. (V) E. DISBURSEMENTS (SURRENDERS; CLAIMS) 1. Receive requests for partial or full surrenders, and death claims from Contract owners and beneficiaries. (V) 2. Process surrender requests and death claims against the Contract owner master files. (V) 3. Prepare checks for surrenders, partial withdrawals, death claims and forward to Contract owner, beneficiary or designated payee, after withholding appropriate Federal and State taxes. (V) 4. Prepare and mail confirmation statements of disbursement transactions to Contract owners. (V) 5. Print and maintain check supply. (V) 6. Follow up on outstanding checks on a periodic basis and escheat unclaimed funds to states based on individual state requirements. (V) F. ANNUITY BENEFIT PROCESSING -- FOR FIXED PAYOUTS AND VARIABLE PAYOUTS Fixed ----- 1. Receive information with respect to annuitants going into the annuity (payout) phase. Fixed annuity election reports are forwarded to the Company. Funds are wired from Vanguard, 10 business days before first payment is due. (V/C) Vanguard is to provide the following information in order for the Company to process a fixed annuitization. The information is needed for a fixed annuitization on the 10th business day prior to the due date of the first payment on the annuitized contract. a) Contract amount b) Annuitization form (including W4P and W9 tax information) c) Tax Cost Basis of Original Premium d) Birth Date Verification (copy of birth certificate or driver's license) 13 e) Copy of Quote or date annuitization paperwork received at Vanguard f) If joint annuitant, need their date of birth g) Address of where to mail the check h) Account number for direct deposits i) Beneficiary information Variable 2. Variable annuity election requests are handled by Vanguard with the exclusion ratio calculated by the Company and verified by Vanguard. The Company calculates the amount of the initial annuity payment for variable payout based on tables attached to the Contract and the current annuity unit value calculated 10 business days prior to the annuitization date. (C/V) Both parties will coordinate the transfer of the appropriate information necessary to complete calculations and communicate results. G. TAXES 1. Vanguard is to collect and account for premium taxes as appropriate, instruct Company to remit the taxes and wire premium dollars to the Company. The Company shall inform Vanguard of any changes in state regulations regarding the imposition of premium taxes. The Company will remit all premium taxes due. (V/C) 2. Vanguard is to collect and account for all federal and state withholding as appropriate, and wire the dollar amount of such taxes collected to the Company. The Company shall inform Vanguard of any changes in federal and state regulations regarding the imposition of federal and state taxes. The Company will remit all federal and state taxes due. (V) 3. Vanguard is to prepare and maintain premium tax and other federal and state tax records by Contract owner and by state. (V) H. FINANCIAL AND MANAGEMENT REPORTS 1. REPORTS TO BE PREPARED MONTHLY BY THE DATES OUTLINED BELOW FOR SEPARATE ACCOUNT IV & B DATE RECEIVED BY OTHER PARTY -------------- a) M&E and admin report (C) Last business day of month 14 b) Separate Account General Ledger (C) 1st business day c) Federal & State Withholding and Premium 1st business day Tax Information (V) d) Bank Statements/Reconciliation-- 5th business day the Insurance Company (V) e) Reconciliation of Premiums in 5th business day Suspense to balance in Receipt Bank Account (V) 2. MONTHLY REPORTS FROM THE VANTAGE ONE AND RPS SYSTEMS TO BE PROVIDED BY VANGUARD TO THE COMPANY DATE RECEIVED BY THE COMPANY -------------- a) Suspense File List (V) 4th business day b) Investment Vehicle Report (V) 4th business day c) Reserve Listing Calculation Results (V) 4th business day d) Mortality Gain/Loss Detail (V) 4th business day e) Detail Account Reporting (V) daily with a day lag f) Variable Fund Value (V) 1st business day g) RPS feed to PCATS system (V) 4th business day h) Minimum Death Benefit Report (V) 4th business day i) Annuity Statutory Reserve (V) 1st business day following year end j) CO5 (Vantage One Report) (V) Daily (by 8:00 a.m.) k) Others as requested by the Company's internal or external auditors l) Others as requested by the Company's accounting areas as needed to prepare financial statements or perform analysis. m) Payment Account Control Report(AD-134)(V) 8:00 a.m. after cycle runs n) VVAP Extract File (V) Daily I. AGENT LICENSE RECORDKEEPING 1. Report the following agent license status information to the Company (V): a) Address changes b) Name changes should be reported to each State with a copy to the Company. c) New Agents to be licensed/appointed as it relates to the Vanguard Variable Annuity Plan 2. The Company will track and monitor individual agent license status and compliance with individual continuing education requirements. (C) 15 J. ADDITIONAL SERVICES 1. The Company will calculate daily the Mortality and Expense Risk Charge (M&E) and Administrative charges. The Company will provide a statement and supporting documentation to Vanguard the evening of the last business day of the month detailing the M&E and Administrative charges owed by fund for Separate Account IV and B. Vanguard will wire the Company an amount equal to the M&E charge on the statement on the second business day except when the difference between the Company's statement and Vanguard's records is greater than 20%. Should this occur, Vanguard will provide to the Company a list of the discrepancies by fund and both Vanguard and Company will cooperate to reconcile the difference within five business days. Vanguard is not responsible for wiring the M&E to the Company until it has received the statement from the Company. Vanguard will perform a review of the M&E and Administrative charges per the Company's statements to its records. If the discrepancies between the Company's and Vanguard's calculation is less than 20%, Vanguard will provide to the Company a list of the discrepancies by fund. Both Vanguard and the Company will cooperate to resolve the discrepancies prior to the 10th business day following the end of the month in question. Any funds owed between Vanguard and the Company will be wired on the 10th business day. The above procedures will begin on a date mutually agreed to by Vanguard and the Company. (V/C) 2. Vanguard will ensure that the administrative system controls are in place to ensure the accuracy of the annual maintenance fee due Vanguard. Separate Accounts IV and B will remit to Vanguard no later than the fourth business day of the month the total for the previous month. (V) 3. Maintain an appropriate Disaster Recovery Contingency Plan for the annuity business. (V/C) K. PROXY PROCESSING 1. The Company is to receive record date information and proxy solicitation from Vanguard's Legal Department. (V) 2. Vanguard will perform proxy solicitation using Vanguard proxy tape information. (V) 16 L. PERIODIC REPORTS TO CONTRACT OWNERS 1. Based on necessary information provided by Vanguard in a timely manner, tax reporting will be performed by the Company in accordance with procedures mutually agreed upon by the Company and Vanguard. (C) 2. Respond to requests from plan administrators or trustees for information affecting the plan or participants for qualified plans. (V) 3. Prepare semi-annual and annual reports for the funds in compliance with the Investment Company Act of 1940 for the benefit of the Separate Account shareholders. (V) M. TRANSACTION AND BREAKAGE GAIN/LOSS 1. Transaction gain/loss should be funded by Vanguard to the Separate Account on a daily basis. (V) 2. The Company will provide a report of breakage amounts to Vanguard as of the end of the previous month with supporting documentation no later than the 1st business day following the end of the previous month. Vanguard will fund breakage to the Separate Account within three (3) business days of notification. (V/C) These time frames may be modified through mutual agreement by Vanguard and the Company. N. MORTALITY GAIN/LOSS 1. Mortality gain/loss should be funded by the Company to the Separate Account when deemed necessary by Company. Company will provide a statement annually to Vanguard for the necessary withdrawals and fundings for mortality gain/loss at that time. (C) O. BANK ACCOUNTS 1. Company shall be deemed the co-owner with Vanguard of the bank accounts established for deposits into and withdrawals from the Separate Account. 17 EX-9.(A) 3 OPINION AND CONSENT OF COUNSEL EXHIBIT 9(A) April 30, 1998 PROVIDIAN LIFE & HEALTH INSURANCE COMPANY ADMINISTRATIVE OFFICES 20 MOORES ROAD FRAZER, PENNSYLVANIA 19355 RE: PROVIDIAN LIFE & HEALTH INSURANCE COMPANY SEPARATE ACCOUNT IV--OPINION AND CONSENT To Whom It May Concern: This opinion and consent is furnished in connection with the filing of Post- Effective Amendment No. 11 (the "Amendment") to the Registration Statement on Form N-4, File No. 33-36073 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), of Providian Life & Health Insurance Company Separate Account IV ("Separate Account IV"). Separate Account IV receives and invests premiums allocated to it under a flexible premium multi-funded annuity contract (the "Annuity Contract"). The Annuity Contract is offered in the manner described in the prospectus contained in the Registration Statement (the "Prospectus"). In my capacity as legal adviser to Providian Life & Health Insurance Company, I hereby confirm the establishment of Separate Account IV pursuant to a resolu- tion adopted by the Board of Directors of Providian Life & Health Insurance Company for a separate account for assets applicable to the Annuity Contract, pursuant to the provisions of Section 376.309 of the Missouri Insurance Stat- utes. In addition, I have made such examination of the law in addition to con- sultation with outside counsel and have examined such corporate records and such other documents as I consider appropriate as a basis for the opinion here- inafter expressed. On the basis of such examination, it is my professional opinion that: 1. Providian Life & Health Insurance Company is a corporation duly orga- nized and validly existing under the laws of the State of Missouri. 2. Separate Account IV is an account established and maintained by Providian Life & Health Insurance Company pursuant to the laws of the State of Missouri, under which income, capital gains and capital losses incurred on the assets of Separate Account IV are credited to or charged against the assets of Separate Account IV, without regard to the income, capital gains or capital losses arising out of any other business which Providian Life & Health Insurance Company may conduct. 3. Assets allocated to Separate Account IV will be owned by Providian Life & Health Insurance Company. The assets in Separate Account IV attributable to the Annuity Contract generally are not chargeable with liabilities aris- ing out of any other business which Providian Life & Health Insurance Com- pany may conduct. The assets of Separate Account IV are available to cover the general liabilities of Providian Life & Health Insurance Company only to the extent that the assets of Separate Account IV exceed the liabilities arising under the Annuity Contracts. 4. The Annuity Contracts have been duly authorized by Providian Life & Health Insurance Company and, when sold in jurisdictions authorizing such sales, in accordance with the Registration Statement, will constitute val- idly issued and binding obligations of Providian Life & Health Insurance Company in accordance with their terms. Providian Life and Health Insurance Company Separate Account IV April 30, 1998 5. Owners of the Annuity Contracts as such, will not be subject to any de- ductions, charges or assessments imposed by Providian Life and Health Insur- ance Company other than those provided in the Annuity Contract. I hereby consent to the use of this opinion as an exhibit to the Amendment and to the reference to my name under the heading "Legal Matters" in the Prospec- tus. Very truly yours, /s/ Kimberly A. Scouller Kimberly A. Scouller Assistant General Counsel EX-9.(B) 4 CONSENT OF COUNSEL EXHIBIT 9(b) JORDEN BURT BOROS CICCKETTI BERENSON & JOHNSON LLP 1025 THOMAS JEFFERSON STREET, N.W. SUITE 400-EAST WASHINGTON, D.C. 20007-0805 (202) 965-8100 TELECOPIER (202) 965-8104 April 30, 1998 PROVIDIAN LIFE & HEALTH INSURANCE COMPANY 20 MOORES ROAD FRAZER, PENNSYLVANIA 19355 Ladies and Gentlemen: We hereby consent to the reference to our name under the caption "Legal Matters" in the Prospectus contained in Post-Effective Amendment No. 11 to the Registration Statement on Form N-4 (file No. 33-36073) filed by Providian Life & Health Insurance Company and Providian Life & Health Insurance Company Separate Account IV with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. Very truly yours, /s/ Jorden Burt Boros Ciccketti Berenson & Johnson LLP Jorden Burt Boros Ciccketti Berenson & Johnson LLP EX-10 5 CONSENT OF INDEPENDENT AUDITORS Exhibit No. (10) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Auditors" and to the use of our reports dated April 24, 1998, with respect to the financial statements of Providian Life and Health Insurance Company Separate Account IV and the statutory-basis financial statements of Providian Life and Health Insurance Company in Post-Effective Amendment No. 11 to the Registration Statement (Form N-4 No. 33-36073) and related Prospectus of Providian Life and Health Insurance Company Separate Account IV. /s/ Ernst & Young LLP Louisville, Kentucky April 24, 1998 -----END PRIVACY-ENHANCED MESSAGE-----