<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997
REGISTRATION NO. 333-22389
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Illinois 36-3050975
-------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Kemper Drive
Long Grove, Illinois 60049
(847) 550-5500
----------------------------------------------------- 6312
(Address, including zip code, and telephone number, -------------------------
including area code, of registrant's principal executive (Primary Standard Industrial
offices) Classification Code Number)
</TABLE>
Debra P. Rezabek, Esq.
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
(847) 550-7390
---------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
Frank Julian, Esq. Joan E. Boros, Esq.
Kemper Investors Life Insurance Company Katten Muchin & Zavis
1 Kemper Drive 1025 Thomas Jefferson Street, N.W.
Long Grove, Illinois 60049 Washington, D.C. 20007
</TABLE>
------------------
Approximate date of commencement of proposed sale to the public: as soon as
practicable after this Registration Statement becomes effective.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
------------------
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<PAGE> 2
KEMPER INVESTORS LIFE INSURANCE COMPANY
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B)
<TABLE>
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FORM S-1
ITEM NO. FORM S-1 CAPTION CAPTION IN PROSPECTUS
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<S> <C> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus.................... Facing Page and Outside Front Cover Page of
Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Table of Contents.
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Summary; Not Applicable as to Ratio of
Earnings to Fixed Charges.
4. Use of Proceeds................................... KILICO, The MVA Option, The Separate Account
and The Funds--The MVA Option; Business--
Investments.
5. Determination of Offering Price................... Not Applicable.
6. Dilution.......................................... Not Applicable.
7. Selling of Security Holders....................... Not Applicable.
8. Plan of Distribution.............................. Distribution of Contracts.
9. Description of Securities to be Registered........ Summary; The Contracts; The Accumulation
Period; Contract Charges and Expenses.
10. Interests of Named Experts and Counsel............ Experts; Legal Matters.
11. Information with Respect to the Registrant........ Federal Income Taxes; Business; Management's
Discussion and Analysis of Financial
Condition and Results of Operations; Legal
Proceedings; Financial Statements.
12. Disclosure of Commission Position on
Indemnification For Securities Act Liabilities.... Part II, Item 17.
</TABLE>
<PAGE> 3
PROSPECTUS--
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET
VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
The types of Variable, Fixed and Market Value Adjusted Deferred Annuity
Contracts ("Contracts") offered by this Prospectus are issued by Kemper
Investors Life Insurance Company ("KILICO") and are designed to provide annuity
benefits under retirement plans which may or may not qualify for the Federal tax
advantages available under Section 408 of the Internal Revenue Code of 1986, as
amended. Depending upon particular state requirements, participation in a group
contract will be accounted for by the issuance of a certificate and
participation in an individual contract will be accounted for by the issuance of
an individual annuity contract. The certificate and individual annuity contract
and values thereunder are hereafter both referred to in terms of the "Contract".
Purchase payments for the Contracts may be allocated to one or more of the
options under which Contract values accumulate on a variable basis, a fixed
basis, or a fixed basis subject to a market value adjustment. These options
consist of the fourteen Subaccounts of the Separate Account, the Fixed Account
Option and the Market Value Adjustment Option ("MVA Option"). Each Subaccount
invests in one of the Portfolios of the following funds: the Investors Fund
Series ("IFS"), the Janus Aspen Series ("Janus"), the Lexington Natural
Resources Trust ("Lexington") and the Warburg Pincus Trust ("Warburg").
The following Portfolios of the Investors Fund Series are available under the
Contracts: Money Market, Total Return, High Yield, Growth, International and
Value+Growth. The following Portfolios of the Janus Aspen Series are available
under the Contracts: Growth, Worldwide Growth and Balanced. The Lexington
Natural Resources Trust currently consists of only one Portfolio. The following
Portfolios of the Warburg Pincus Trust are available under the Contracts:
International Equity, Small Company Growth and Post-Venture Capital.
Subaccounts and Portfolios may be added in the future. Contract values allocated
to any of the Subaccounts will vary to reflect the investment objectives and the
attendant risks of the Funds. Contract values allocated to the Fixed Account or
one or more Guarantee Periods of the MVA Option will accumulate on a fixed
basis.
This Prospectus is designed to provide you with certain essential information
that you should know before investing. A Statement of Additional Information
dated has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. A Statement of Additional Information
is available without charge upon request from KILICO by writing or calling the
address or telephone number listed above. A table of contents for the Statement
of Additional Information is on page 51 of this Prospectus.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS
FOR THE INVESTORS FUND SERIES, JANUS ASPEN SERIES, LEXINGTON NATURAL RESOURCES
TRUST AND WARBURG PINCUS TRUST. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR
FUTURE REFERENCE.
THE CONTRACTS ARE NOT INSURED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND ARE NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR
SAVINGS INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 2
SUMMARY OF EXPENSES......................................... 4
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 6
FIXED ACCOUNT OPTION........................................ 11
THE CONTRACTS............................................... 11
CONTRACT CHARGES AND EXPENSES............................... 18
THE ANNUITY PERIOD.......................................... 20
FEDERAL INCOME TAXES........................................ 23
DISTRIBUTION OF CONTRACTS................................... 27
VOTING RIGHTS............................................... 28
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 28
DOLLAR COST AVERAGING....................................... 28
SYSTEMATIC WITHDRAWAL PLAN.................................. 29
BUSINESS.................................................... 30
PROPERTIES.................................................. 34
LEGAL PROCEEDINGS........................................... 34
SELECTED FINANCIAL DATA..................................... 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 36
DIRECTORS AND OFFICERS OF KILICO............................ 46
EXECUTIVE COMPENSATION...................................... 49
EXPERTS..................................................... 51
LEGAL MATTERS............................................... 51
SPECIAL CONSIDERATIONS...................................... 51
AVAILABLE INFORMATION....................................... 51
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 51
FINANCIAL STATEMENTS........................................ 51
</TABLE>
<PAGE> 5
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATED GUARANTEE PERIOD VALUE--The sum of an Owner's Guarantee Period
Values.
ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments and upon the continuation of whose life annuity payments
involving life contingencies depend.
ANNUITY DATE--The date on which annuity payments are to commence.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person designated to receive any benefits under a Contract
upon the death of the Annuitant or the Owner prior to the Annuity Period.
CONTRACT--A Variable, Fixed and Market Value Adjusted Annuity Contract
offered by this Prospectus.
CONTRACT OWNER OR OWNER--The person designated in the Contract as having
the privileges of ownership defined in the Contract.
CONTRACT VALUE--The sum of the values of the Owner's Separate Account
Contract Value, Accumulated Guarantee Period Value and Fixed Account
Contract Value.
CONTRACT YEAR--Period between anniversaries of the Date of Issue of a
Contract.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Date of
Issue of the Contract.
CONTRIBUTION YEAR--Each one year period following the date a Purchase
Payment is made.
DATE OF ISSUE--The date on which the first Contract Year commences.
FIXED ACCOUNT--The General Account of KILICO to which a Contract Owner may
allocate all or a portion of Purchase Payments or Contract Value. KILICO
guarantees a minimum rate of interest on Purchase Payments allocated to the
Fixed Account.
FIXED ACCOUNT CONTRACT VALUE--The value of the Owner's Contract interest in
the Fixed Account.
FIXED ANNUITY--An annuity under which the amount of each annuity payment
does not vary with the investment experience of a Subaccount and is
guaranteed by KILICO.
FUND OR FUNDS--Investors Fund Series, Janus Aspen Series, Lexington Natural
Resources Trust and Warburg Pincus Trust including any Portfolios
thereunder.
GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
separate account.
GUARANTEED INTEREST RATE--The rate of interest established by KILICO for a
given Guarantee Period.
GUARANTEE PERIOD--A period of time during which an amount is to be credited
with a Guaranteed Interest Rate. Guarantee Period options may have
durations of from one to ten years, as offered by KILICO and as elected by
the Owner.
GUARANTEE PERIOD VALUE--The Guarantee Period Value is the sum of the
Owner's: (1) Purchase Payment allocated or amount transferred to a
Guarantee Period; plus (2) interest credited; minus (3) withdrawals,
previously assessed Withdrawal Charges and transfers; and (4) as adjusted
for any applicable Market Value Adjustment previously made.
KILICO--Kemper Investors Life Insurance Company, whose Home Office is at 1
Kemper Drive, Long Grove, Illinois 60049.
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula on any date prior to the end of a Guarantee
Period.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula prior to the end of
that Guarantee Period. The adjustment reflects the change in the value of
the Guarantee Period Value due to changes in interest rates since the date
the Guarantee Period commenced. The adjustment is computed using the market
value adjustment formula stated in the Contract.
1
<PAGE> 6
NON-QUALIFIED PLAN CONTRACT--A Contract issued in connection with a
retirement plan which does not receive favorable tax treatment under
Section 408 of the Internal Revenue Code.
PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to herein as a
Fund.
PURCHASE PAYMENTS--Amounts paid to KILICO by or on behalf of a Contract
Owner.
QUALIFIED PLAN CONTRACT--A Contract issued in connection with a retirement
plan which receives favorable tax treatment under Section 408 of the
Internal Revenue Code.
SEPARATE ACCOUNT--A unit investment trust registered with the Securities
and Exchange Commission under the Investment Company Act of 1940 known as
the KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT CONTRACT VALUE--The sum of the Owner's Contract interest
in the Subaccount(s).
SUBACCOUNTS--The fourteen subdivisions of the Separate Account available
under this contract, the assets of which consist solely of shares of the
corresponding Portfolios.
SUBACCOUNT VALUE--The value of the Owner's Contract interest in each
Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which the Owner's
Contract has an interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Contract Value in the first seven Contribution Years
after a Purchase Payment is made or against certain annuitization of
Contract Value in the first seven Contribution Years after a Purchase
Payment is made.
WITHDRAWAL VALUE--Contract Value less any premium tax payable if the
Contract is being annuitized, minus any Withdrawal Charge applicable to
that Contract.
SUMMARY
The Contracts described in the Prospectus provide a way to invest on a
tax-deferred basis and to receive annuity benefits in accordance with the
annuity option selected and the retirement plan under which the Contract has
been purchased. The Prospectus offers both Non-Qualified Plan and Qualified Plan
Contracts. KILICO makes underlying allocation options, including fourteen
variable Subaccounts, a Fixed Account Option and ten durations of Guarantee
Periods, available for the Contract Owner to pursue his or her investment
objectives.
The minimum initial Purchase Payment is $1,000 and the minimum subsequent
payment is $500. An allocation to a Subaccount, Fixed Account or Guarantee
Period must be at least $500. The maximum Purchase Payments without KILICO's
prior approval is $1,000,000. (See "The Contracts," page 11.)
KILICO provides for variable accumulations and benefits under the Contracts by
crediting purchase payments to one or more Subaccounts of the Separate Account
as selected by the Contract Owner. Each Subaccount invests in one of the
following corresponding Portfolios: Kemper Money Market, Kemper Total Return,
Kemper High Yield, Kemper Growth, Kemper International and Kemper Value+Growth;
Janus Growth, Janus Worldwide Growth and Janus Balanced; Lexington Natural
Resources Trust; Warburg International Equity, Warburg Small Company Growth and
Warburg Post-Venture Capital. (See "The Funds" page 7.) The Contract Values
allocated to the Separate Account will vary with the investment performance of
the Portfolios and Funds selected by the Contract Owner.
KILICO provides for fixed accumulations and benefits under the Contracts in the
Fixed Account. Any portion of the purchase payment allocated to the Fixed
Account is credited with interest daily at a rate periodically declared by
KILICO in its sole discretion, but not less than 3%. (See "Fixed Account
Option," page 11.)
KILICO also provides for fixed accumulations under the Contracts in the MVA
Option. The MVA Option is only available during the Accumulation Period. An
Owner may allocate amounts to one or more Guarantee Periods
2
<PAGE> 7
available under the MVA Option with durations of from one to ten years. KILICO
may, in its discretion, offer additional Guarantee Periods or, limit for new
Contracts the number of Guarantee Period options available to no less than three
(3). KILICO will credit interest daily at a rate declared by KILICO in its sole
discretion to amounts allocated to the MVA Option and guarantees these amounts
at various interest rates ("Guaranteed Interest Rates") for the duration of the
Guarantee Period selected by the Owner, subject to any applicable withdrawal
charge, Market Value Adjustment or Records Maintenance Charge. KILICO may not
change a Guaranteed Interest Rate for the duration of the Guarantee Period;
however, Guaranteed Interest Rates for subsequent Guarantee Periods will be
determined at the sole discretion of KILICO. At the end of any Owner's Guarantee
Period, a subsequent Guarantee Period automatically renews for the same duration
as the terminating Guarantee Period unless the Owner elects another Guarantee
Period during the designated period after the end of the Guarantee Period. The
interests under the Contract relating to the MVA Option are registered under the
Securities Act of 1933 but are not registered under the Investment Company Act
of 1940. (See "The MVA Option," page 6.)
The investment risk under the Contracts is borne by the Contract Owner, except
to the extent that Contract Values are allocated to the MVA Option and are
guaranteed to receive the Guaranteed Interest Rate or to the Fixed Option and
are guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization,
subject to certain limitations. A transfer from a Guarantee Period is subject to
a Market Value Adjustment unless effected within 30 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 14 and 22, respectively.)
A Contract Owner may withdraw all or a portion of the Contract Value subject to
Withdrawal Charges, any applicable Market Value Adjustment and other specified
conditions. (See "Withdrawal During Accumulation Period," page 15.)
No sales charge is deducted from any Purchase Payment. Each Contract Year, a
Contract Owner may withdraw the greater of (i) the excess of Contract Value over
total Purchase Payments subject to Withdrawal Charges less prior withdrawals
that were previously assessed a Withdrawal Charge, and (ii) 10% of the Contract
Value, without assessment of any charge. If the Contract Owner withdraws an
amount in excess of the above amount in any Contract Year, the Purchase Payments
withdrawn in excess of the above amount are subject to a contingent deferred
sales charge ("Withdrawal Charge"). The Withdrawal Charge is 7% in the first
Contribution Year, 6% in the second Contribution Year, 5% in the third and
fourth Contribution Years, 4% in the fifth Contribution Year, 3% in the sixth
Contribution Year, 2% in the seventh Contribution Year and 0% thereafter. (See
"Withdrawal Charge," page 19.) The Withdrawal Charge also applies at the
annuitization of Accumulation Units in their seventh Contribution Year or
earlier, except as set forth under "Withdrawal Charge." Please note that adverse
tax consequences may occur with respect to certain withdrawals. (See "Taxation
of Partial and Full Withdrawals," page 25.)
KILICO makes charges under the Contract for assuming the mortality and expense
risk and administrative expenses under the Contract, for records maintenance,
for any applicable premium taxes and for the Guaranteed Retirement Income
Benefit. (See "Charges Against the Separate Account," page 18.) In addition, the
investment advisers to the Funds deduct varying charges against the assets of
the Funds for which they provide investment advisory services. (See the Funds'
prospectuses for such information.)
The Contracts may be purchased in connection with retirement plans which qualify
as individual retirement account plans established under Section 408 of the
Code, and are also offered under other retirement plans which may not qualify
for similar tax advantages. (See "Taxation of Annuities in General," page 23 and
"Qualified Plans," page 26.)
A Contract Owner has the right within the "free look" period (generally ten
days, subject to state variation) after receiving the Contract to cancel the
Contract by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Contract will be cancelled and a refund will be made. The amount of the refund
will depend on the state in which the Contract is issued; however, it generally
will be an amount at least equal to the Separate Account Contract Value plus
amounts allocated to the Fixed Account or to the Guarantee Periods which will
not be subject to a Market Value Adjustment. (See "The Contracts," page 11.)
3
<PAGE> 8
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SUMMARY OF EXPENSES
- --------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES
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Sales Load Imposed on Purchases (as a percentage of purchase payments).............................. None
Contingent Deferred Sales Load (as a percentage of amount surrendered)*
Year of Withdrawal After Purchase
First year........................... 7%
Second year.......................... 6%
Third year........................... 5%
Fourth year.......................... 5%
Fifth year........................... 4%
Sixth year........................... 3%
Seventh year......................... 2%
Eighth year and following............ 0%
Surrender Fees...................................................................................... None
Exchange Fee++...................................................................................... $25
ANNUAL CONTRACT FEE (Records Maintenance Charge)**.................................................. $30
</TABLE>
FUND ANNUAL EXPENSES(After Fee Waivers and Expense
Reductions)
(as percentage of each Portfolio's average net assets
for the period ended December 31, 1996)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER
MONEY TOTAL KEMPER KEMPER KEMPER VALUE+
MARKET RETURN HIGH YIELD GROWTH INTERNATIONAL GROWTH+
------ ------ ---------- ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees......................... .50% .55% .60% .60% .75% .75%
Other Expenses.......................... .10 .04 .05 .04 .21 .20
- - - - - -
Total Portfolio Annual Expenses......... .60% .59% .65% .64% .96% .95%
=== === === === === ===
</TABLE>
<TABLE>
<CAPTION>
Separate Account Annual Expenses
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense
Risk.................................. 1.25%
Administration.......................... .15%
Account Fees and Expenses............... 0%
Total Separate Account
Annual Expenses....................... 1.40%
GUARANTEED RETIREMENT INCOME BENEFIT
CHARGE
Annual Expense (as a percentage of
Contract Value)....................... .30%
</TABLE>
FUND ANNUAL EXPENSES(After Fee Waivers and Expense
Reductions)
(as percentage of each Portfolio's average net assets
for the period ended December 31, 1996)
<TABLE>
<CAPTION>
JANUS LEXINGTON WARBURG WARBURG WARBURG
JANUS WORLDWIDE JANUS NATURAL INTERNATIONAL SMALL COMPANY POST-VENTURE
GROWTH*** GROWTH*** BALANCED*** RESOURCES EQUITY**** GROWTH**** CAPITAL****
--------- --------- ----------- --------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees..... .65% .66% .79% 1.00% .96% .90% .62%
Other Expenses...... .04 .14 .15 .42% .40% .26% .78%
- - - -- -- -- --
Total Portfolio
Annual Expenses.... .69% .80% .94% 1.42% 1.36% 1.16% 1.40%
=== === === ==== ==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
* A Contract Owner may withdraw up to the greater of (i) the excess of
Contract Value over total Purchase Payments subject to Withdrawal Charges
less prior withdrawals that were previously assessed a Withdrawal Charge,
and (ii) 10% of the Contract Value in any Contract Year without assessment
of any charge. Under certain circumstances the contingent deferred sales
charge may be reduced or waived, including when certain annuity options are
selected.
** Applies to Contracts with a Contract Value less than $50,000 on the date of
assessment. Under certain circumstances the annual Records Maintenance
Charge may be reduced or waived by KILICO.
*** The expense figures shown are net of certain fee waivers or reductions from
Janus Capital Corporation. Without such waivers, Management Fees, Other
Expenses and Total Portfolio Annual Expenses for the Portfolios for the
fiscal year ended December 31, 1996 would have been: .79%, .04% and .83%,
respectively, for the Growth Portfolio; .77%, .14% and .91%, respectively,
for the Worldwide Growth Portfolio; .92%, .15% and 1.07%, respectively, for
the Balanced Portfolio. See the prospectus and Statement of Additional
Information of Janus Aspen Series for a description of these waivers.
**** The expense figures shown are net of certain fee waivers or reductions from
Warburg Pincus Asset Management, Inc. Without such waivers, Management
Fees, Other Expenses and Total Portfolio Annual Expenses for the Portfolios
for the fiscal year ended December 31, 1996 would have been 1.00%, .40% and
1.40%, respectively for the International Equity Portfolio; .90%, .27% and
1.17% for the Small Company Growth Portfolio; and 1.25%, .82% and 2.07% for
the Post-Venture Capital Portfolio.
+ Other expenses have been estimated for the Kemper Value+Growth Portfolio
for the current fiscal year.
++ KILICO reserves the right to charge a fee of $25 for each transfer of
Contract Value in excess of 12 transfers per calendar year.
4
<PAGE> 9
- --------------------------------------------------------------------------------
EXAMPLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your contract at the end of the applicable Kemper Money Market $83 $121 $161 $247
time period: Kemper Total Return 83 121 161 246
You would pay the following expenses on a $1,000 Kemper High Yield 84 123 164 253
investment,
assuming 5% annual return on assets: Kemper Growth 84 123 163 252
Kemper International 87 132 179 285
Kemper Value+Growth 87 132 -- --
Janus Growth 84 124 -- --
Janus Worldwide Growth 85 127 -- --
Janus Balanced 87 131 -- --
Lexington Natural Resources 91 145 -- --
Trust
Warburg International 91 144 -- --
Equity......................
Warburg Small Company Growth 89 138 -- --
Warburg Post-Venture 91 145 -- --
Capital.....................
If you do not surrender your Contract: Kemper Money Market 22 67 115 247
You would pay the following expenses Kemper Total Return 22 67 115 246
on a $1,000 investment, assuming Kemper High Yield 22 69 118 253
5% annual return on assets: Kemper Growth 22 68 117 252
Kemper International 25 78 134 285
Kemper Value+Growth 25 78 -- --
Janus Growth 23 70 -- --
Janus Worldwide Growth 24 73 -- --
Janus Balanced 25 78 -- --
Lexington Natural Resources 30 92 -- --
Trust
Warburg International 30 91 -- --
Equity......................
Warburg Small Company Growth 28 84 -- --
Warburg Post-Venture 30 92 -- --
Capital.....................
</TABLE>
- --------------------------------------------------------------------------------
The purpose of the preceding table which includes the "SUMMARY OF EXPENSES" on
the prior page, is to assist Contract Owners in understanding the various costs
and expenses that a Contract Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH
MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. "Management Fees" and "Other Expenses" in the "SUMMARY OF
EXPENSES" for the Portfolios have been provided by Zurich Kemper Investments
Inc., Janus Capital Corporation, Lexington Management Corporation and Warburg
Pincus Asset Management, Inc., as applicable, and have not been independently
verified. The Example assumes a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This hypothetical rate
of return is not intended to be representative of past or future performance of
any Subaccount. The Records Maintenance Charge is a single charge, it is not a
separate charge for each Subaccount. In addition, the effect of the Records
Maintenance Charge has been reflected in the Example by applying the percentage
derived by dividing the total amounts of annual Records Maintenance Charge
collected by the total net assets of all the Subaccounts in the Separate
Account. See "Contract Charges and Expenses" for more information regarding the
various costs and expenses.
5
<PAGE> 10
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
Kemper Investors Life Insurance Company ("KILICO"), 1 Kemper Drive, Long Grove,
Illinois 60049, was organized in 1947 and is a stock life insurance company
organized under the laws of the State of Illinois. KILICO offers annuity and
life insurance products and is admitted to do business in the District of
Columbia and all states except New York. KILICO is a wholly-owned subsidiary of
Kemper Corporation, a nonoperating holding company. Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("I.P."), and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") indirectly and directly
own 80 percent and 20 percent, respectively, of Kemper Corporation.
THE MVA OPTION
An Owner may allocate amounts in the MVA Option to one or more Guarantee Periods
with durations of one to ten years during the Accumulation Period. KILICO may,
at its discretion, offer additional Guarantee Periods or limit, for new
Contracts, the number of durations of Guarantee Periods available to no less
than three (3).
The amounts allocated to the MVA Option under the Contracts are invested in
accordance with the standards applicable to KILICO's General Account. Assets
supporting the amounts allocated to Guarantee Periods under the Contracts are
held in a "non-unitized" separate account of KILICO. However, all of KILICO's
General Account assets are available to fund benefits under the Contracts. A
non-unitized separate account is a separate account in which the Owner does not
participate in the performance of the assets through unit values. There are no
discrete units for this separate account. The assets of the non-unitized
separate account are held as reserves for the guaranteed obligations of KILICO.
The assets of the separate account are not chargeable with liabilities arising
out of the business conducted by any other separate account or out of any other
business KILICO may conduct.
State insurance laws concerning the nature and quality of investments regulate
KILICO's investments for its General Account and any non-unitized separate
account. Within specified limits and subject to certain standards, these laws
generally permit investment in federal, state and municipal obligations,
preferred and common stocks, corporate bonds, real estate mortgages, real estate
and certain other investments. (See "Management's Discussion and
Analysis--INVESTMENTS" and "FINANCIAL STATEMENTS" for information on KILICO's
investments.) Assets of KILICO's general account are managed by Zurich Kemper
Investments, Inc. ("ZKI") an affiliate of KILICO and a wholly owned subsidiary
of ZKI Holding Corporation. ZKI Holding Corporation is a more than 90% owned
subsidiary of Zurich Holding Company of America, which is a wholly-owned
subsidiary of Zurich.
KILICO intends to consider the return available on the instruments in which it
intends to invest the proceeds from the Contracts when it establishes Guaranteed
Interest Rates. Such return is only one of many factors considered in
establishing the Guaranteed Interest Rates. (See "The Accumulation Period--D.
Establishment of Guaranteed Interest Rates.")
KILICO's investment strategy for this non-unitized separate account is generally
to invest in debt instruments that it uses to match its liabilities with regard
to a Guarantee Period. This is done, in KILICO's sole discretion, by investing
in any type of instrument that is authorized under applicable state law. KILICO
expects to invest a substantial portion of the Purchase Payments received in
debt instruments as follows: (1) securities issued by the United States
Government or its agencies or instrumentalities, which issues may or may not be
guaranteed by the United States Government; (2) debt securities which have an
investment grade, at the time of purchase, within the four (4) highest grades
assigned by Moody's Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa),
Standard & Poor's Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any
other nationally recognized rating service; and (3) other debt instruments
including, but not limited to, issues of or guaranteed by banks or bank holding
companies and corporations, which obligations, although not rated by Moody's or
Standard & Poor's, are deemed by KILICO's management to have an investment
quality comparable to securities which may be purchased as stated above. In
addition, KILICO may engage in options and futures transactions on fixed income
securities.
KILICO's invested assets portfolio at December 31, 1996 included approximately
86.8 percent in U.S. Treasuries, investment grade corporate, foreign and
municipal bonds, and commercial paper, .3 percent in below investment grade
(high risk) bonds, 5.9 percent in mortgage loans and other real estate-related
investments and 7.0 percent in all other investments. (See "Management's
Discussion and Analysis--INVESTMENTS.")
6
<PAGE> 11
KILICO is not obligated to invest the amounts allocated to the MVA Option
according to any particular strategy, except as may be required by applicable
state insurance laws. (See "Management's Discussion and Analysis--INVESTMENTS.")
THE SEPARATE ACCOUNT
KILICO originally established the KILICO Variable Annuity Separate Account (the
"Separate Account") on May 29, 1981 pursuant to Illinois law as the KILICO Money
Market Separate Account, initially registered with the Securities and Exchange
Commission ("Commission") as an open-end, diversified management investment
company under the Investment Company Act of 1940 ("1940 Act"). On November 2,
1989, Contract Owners approved a Reorganization under which the Separate Account
was restructured as a unit investment trust registered with the Commission under
the 1940 Act. Such registration does not involve supervision by the Commission
of the management, investment practices or policies of the Separate Account or
KILICO.
The Separate Account is administered and accounted for as part of the general
business of KILICO, but the income and capital gains or capital losses, whether
or not realized, for assets allocated to the Separate Account are credited to or
charged against the assets held in the Separate Account, without regard to any
other income, capital gains or capital losses of any other separate account or
arising out of any other business which KILICO may conduct. The benefits
provided under the Contracts are obligations of KILICO. The assets of the
Separate Account are not chargeable with liabilities arising out of the business
conducted by any other separate account or out of any other business KILICO may
conduct.
The Separate Account holds assets that are segregated from all of KILICO's other
assets. The Separate Account is used to support the variable annuity contracts
described herein and certain other variable annuity contracts. The obligations
to Contract Owners and beneficiaries arising under the Contracts are general
corporate obligations of KILICO.
Fourteen Subaccounts of the Separate Account are currently available under this
Contract. Each Subaccount invests exclusively in shares of one of the
corresponding Portfolios of the Funds. Additional Subaccounts may be added in
the future.
The Separate Account will purchase and redeem shares from the Funds at net asset
value. KILICO will redeem shares of the Funds as necessary to provide benefits,
to deduct charges under the Contracts and to transfer assets from one Subaccount
to another as requested by Contract Owners. All dividends and capital gains
distributions received by the Separate Account from a Portfolio of a Fund will
be reinvested in such Portfolio at net asset value and retained as assets of the
corresponding Subaccount.
The Separate Account's financial statements appear in the Statement of
Additional Information.
THE FUNDS
The Separate Account invests in shares of the Investors Fund Series, the Janus
Aspen Series, the Lexington Natural Resources Trust and the Warburg Pincus
Trust, open-end, management investment companies. Registration of the Funds by
the Securities and Exchange Commission does not involve supervision of their
management, investment practices or policies by the Commission. The Funds are
designed to provide investment vehicles for variable life insurance and variable
annuity contracts and, in the case of the Janus Aspen Series, certain qualified
retirement plans. Shares of the Funds are sold only to insurance company
separate accounts and qualified retirement plans. In addition to selling shares
to separate accounts of KILICO and its affiliates, shares of the Funds may be
sold to separate accounts of insurance companies not affiliated with KILICO. It
is conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts of companies
unaffiliated with KILICO, or for variable life insurance separate accounts,
variable annuity separate accounts and qualified retirement plans to invest
simultaneously in the Funds. Currently, neither KILICO nor the Funds foresee any
such disadvantages to variable life insurance owners, variable annuity owners or
qualified retirement plans. Management of the Funds has an obligation to monitor
events to identify material conflicts between such owners and determine what
action, if any, should be taken. In addition, if KILICO believes that a Fund's
response to any of those events or conflicts insufficiently protects Contract
Owners, it will take appropriate action on its own.
A Fund may consist of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio.
7
<PAGE> 12
The thirteen Portfolios are summarized below:
INVESTORS FUND SERIES
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments that mature in twelve months or less.
KEMPER TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, by investing in a combination of debt securities and
common stocks.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER VALUE+GROWTH PORTFOLIO seeks growth of capital through professional
management of a portfolio of growth and value stocks.
JANUS ASPEN SERIES
GROWTH PORTFOLIO seeks long-term growth of capital in a manner consistent with
the preservation of capital. It is a diversified Portfolio that pursues its
objective by investing in common stocks of companies of any size. This Portfolio
generally invests in larger, more established issuers.
WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital. It is a diversified Portfolio that
pursues its objective primarily through investments in common stocks of foreign
and domestic issuers.
BALANCED PORTFOLIO seeks long-term capital growth, consistent with preservation
of capital and balanced by current income. It is a diversified Portfolio that,
under normal circumstances, pursues its objective by investing 40-60% of its
assets in securities selected primarily for their growth potential and 40-60% of
its assets in securities selected primarily for their income potential.
LEXINGTON NATURAL RESOURCES TRUST
This Fund seeks long-term growth of capital through investment primarily in
common stocks of companies that own or develop natural resources and other basic
commodities, or supply goods and services to such companies. Current income will
not be a factor. Total return will consist primarily of capital appreciation.
WARBURG PINCUS TRUST
INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing
in equity securities of non-U.S. issuers.
SMALL COMPANY GROWTH PORTFOLIO seeks capital growth by investing in equity
securities of small-sized U.S. companies.
POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by investing
primarily in equity securities of issuers in their post-venture-capital stage of
development and pursues an aggressive investment strategy.
------------------
There is no assurance that any of the Portfolios of the Funds will achieve their
objective as stated in their prospectuses. More detailed information, including
a description of risks involved in investing in each of the Subaccounts that
invest in the Funds, may be found in the corresponding prospectuses for the
Funds, attached hereto, and the Funds' Statements of Additional Information
available upon request from KILICO. Read the prospectuses carefully before
investing.
Zurich Kemper Investments, Inc. ("ZKI"), an affiliate of KILICO, is the
investment manager for the six available Portfolios of the Investors Fund
Series. Zurich Kemper Value Advisors, Inc. ("ZKVA"), a wholly owned subsidiary
of ZKI, is the sub-adviser for the Kemper Value+Growth Portfolio. Under the
terms of the
8
<PAGE> 13
Sub-Advisory Agreement with ZKI, ZKVA will manage the value portion of this
Portfolio and will provide such other investment advice, research and assistance
as ZKI may from time to time, reasonably request. Janus Capital Corporation is
the investment adviser for the three available Portfolios of the Janus Aspen
Series. Lexington Management Corporation is the investment adviser for the
Lexington Natural Resources Trust. Warburg Pincus Asset Management, Inc. is the
investment adviser for the three available Portfolios of the Warburg Pincus
Trust. The investment advisers are paid fees for their services by the Funds
they manage. KILICO may receive compensation from the Funds or the investment
advisers of the Funds for services related to the Funds. Such compensation will
be consistent with the services rendered or the cost savings resulting from the
arrangement.
For their services to the Portfolios, the managers receive compensation at the
following rates:
INVESTORS FUND SERIES
For its services, ZKI is paid a management fee based upon the average daily net
assets of each Portfolio, as follows: Kemper Money Market (.50 of 1%), Kemper
Total Return (.55 of 1%), Kemper High Yield (.60 of 1%), Kemper Growth (.60 of
1%), Kemper International (.75 of 1%) and Kemper Value+Growth (.75 of 1%). ZKVA
serves as sub-adviser for the Kemper Value+Growth Portfolio. ZKI pays ZKVA for
its services as sub-adviser for the Kemper Value+Growth Portfolio a sub-advisory
fee, payable monthly, at an annual rate of .25 of 1% of the average daily net
assets of that Portfolio.
JANUS ASPEN SERIES
Janus Capital Corporation receives a monthly advisory fee for the Janus Growth
Portfolio, Janus Worldwide Growth Portfolio and Janus Balanced Portfolio based
on the following schedule (expressed as an annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
------------------- -----------
<S> <C>
First $30,000,000.................... 1.00%
Next $270,000,000.................... .75%
Next $200,000,000.................... .70%
Over $500,000,000.................... .65%
</TABLE>
However, Janus Capital Corporation has agreed to reduce each of the above
Portfolios' advisory fees to the extent that such fee exceeds the effective rate
of a fund managed by Janus Capital Corporation with similar investment objective
and policies.
LEXINGTON NATURAL RESOURCES TRUST
Lexington Management Corporation receives a monthly investment advisory fee at
the annual rate of 1.00% of the Fund's average net assets.
WARBURG PINCUS TRUST
Warburg Pincus Asset Management, Inc. receives a monthly advisory fee based upon
the average daily net assets of each Warburg Portfolio, as follows:
International Equity 1.00%, Small Company Growth 0.90% and Post-Venture Capital
1.25%.
CHANGE OF INVESTMENTS
KILICO reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares held by the Separate Account or
that the Separate Account may purchase. KILICO reserves the right to eliminate
the shares of any of the Portfolios of the Funds and to substitute shares of
another Portfolio of the Funds or of another investment company, if the shares
of a Portfolio are no longer available for investment, or if in its judgment
further investment in any Portfolio becomes inappropriate in view of the
purposes of the Separate Account. KILICO will not substitute any shares
attributable to a Contract Owner's interest in a Subaccount of the Separate
Account without notice to the Contract Owner and prior approval of the
Commission, to the extent required by the 1940 Act or other applicable law.
Nothing contained in this Prospectus shall prevent the Separate Account from
purchasing other securities for other series or classes of policies, or from
permitting a conversion between series or classes of policies on the basis of
requests made by Contract Owners.
9
<PAGE> 14
KILICO also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new portfolio of the Funds, or
in shares of another investment company, with a specified investment objective.
New subaccounts may be established when, in the sole discretion of KILICO,
marketing needs or investment conditions warrant, and any new subaccounts may be
made available to existing Contract Owners as determined by KILICO. KILICO may
also eliminate or combine one or more subaccounts, transfer assets, or it may
substitute one subaccount for another subaccount, if, in its sole discretion,
marketing, tax, or investment conditions warrant. KILICO will notify all
Contract Owners of any such changes.
If deemed by KILICO to be in the best interests of persons having voting rights
under the Contract, the Separate Account may be: (a) operated as a management
company under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with other KILICO separate
accounts. To the extent permitted by law, KILICO may also transfer the assets of
the Separate Account associated with the Contract to another separate account,
or to the General Account.
PERFORMANCE INFORMATION
From time to time, the Separate Account may advertise several types of
performance information for the Subaccounts. All Subaccounts may advertise
"average annual total return" and "total return." The Kemper High Yield
Subaccount may also advertise 'yield'. The Kemper Money Market Subaccount may
advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of the future
performance of a Subaccount. Average annual total return and total return
calculations measure the net income of a Subaccount plus the effect of any
realized or unrealized appreciation or depreciation of the underlying
investments in the Subaccount for the period in question. Average annual total
return will be quoted for periods of at least one year, five years if
applicable, and the life of Subaccount, ending with the most recent calendar
quarter. Average annual total return figures are annualized and, therefore,
represent the average annual percentage change in the value of an investment in
a Subaccount over the applicable period. Total return figures are not annualized
and represent the actual percentage change over the applicable period. Yield is
a measure of the net dividend and interest income earned over a specific one
month or 30-day period (seven-day period for the Kemper Money Market Subaccount)
expressed as a percentage of the value of the Subaccount's Accumulation Units.
Yield is an annualized figure, which means that it is assumed that the
Subaccount generates the same level of net income over a one year period which
is compounded on a semi-annual basis. The effective yield for the Kemper Money
Market Subaccount is calculated similarly but includes the effect of assumed
compounding calculated under rules prescribed by the Securities and Exchange
Commission. The Kemper Money Market Subaccount's effective yield will be
slightly higher than its yield due to this compounding effect. The Subaccounts'
units are sold at Accumulation Unit value. The Subaccounts' performance figures
and Accumulation Unit values will fluctuate. Units of the Subaccounts are
redeemable by an investor at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first seven years after purchase may be subject
to a Withdrawal Charge that ranges from 7% the first year to 0% after seven
years. Yield, effective yield and total return figures do not include the effect
of any Withdrawal Charge that may be imposed upon the redemption of units, and
thus may be higher than if such charges were deducted. Average annual total
return figures include the effect of the applicable Withdrawal Charge that may
be imposed at the end of the period in question. Additional information
concerning a Subaccount's performance appears in the Statement of Additional
Information. The Subaccounts may provide comparative information with regard to
the Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, the
Consumer Price Index, the CDA Certificate of Deposit Index, the Lehman Brothers
Government and Corporate Bond Index, the Salomon Brothers High Grade Corporate
Bond Index and the Merrill Lynch Government/Corporate Master Index, the CDA
Mutual Fund--International Index, and the Morgan Stanley Capital International
Europe, Australia, Far East Index, and may provide Lipper Analytical Services,
Inc., the VARDS Report and Morningstar, Inc. performance analysis rankings. In
addition, the Subaccounts may provide comparative information with regard to the
Standard & Poor's Midcap Index, Lehman Brothers Government/Corporate 1-3 Year
Bond Index, Lehman Brothers Long Government/Corporate Bond Index, Russell 2000
Index and the NASDAQ Composite Index and the Morgan Stanley International World
Index and may provide Ibbotson Associates or Micropal performance analysis
rankings. From time to time, the Separate Account may quote information from
publications such as MORNINGSTAR, INC., THE WALL STREET JOURNAL, MONEY MAGAZINE,
FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA TODAY, INSTITUTIONAL
INVESTOR, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR AND VARDS.
10
<PAGE> 15
FIXED ACCOUNT OPTION
CONTRIBUTIONS UNDER THE FIXED ACCOUNT OF THE CONTRACT AND TRANSFERS TO THE FIXED
ACCOUNT BECOME PART OF THE GENERAL ACCOUNT OF THE INSURANCE COMPANY, WHICH
SUPPORTS INSURANCE AND ANNUITY OBLIGATIONS. BECAUSE OF EXEMPTIVE AND
EXCLUSIONARY PROVISIONS, INTERESTS IN THE GENERAL ACCOUNT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT") NOR IS THE GENERAL
ACCOUNT REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF
1940 ("1940 ACT"). ACCORDINGLY, NEITHER THE GENERAL ACCOUNT NOR ANY INTERESTS
THEREIN GENERALLY ARE SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS AND
KILICO HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS WHICH RELATE TO THE FIXED
PORTION. DISCLOSURES REGARDING THE FIXED PORTION OF THE CONTRACT AND THE GENERAL
ACCOUNT, HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF
THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF
STATEMENTS MADE IN PROSPECTUSES.
The Contracts offer a Fixed Account Option under which KILICO pays a fixed
interest rate for stated periods. This Prospectus describes only the element of
the Contract pertaining to the Separate Account except where it makes specific
reference to fixed accumulation and annuity elements.
The Contracts guarantee that payments allocated to the Fixed Account will earn a
minimum fixed interest rate of 3%. KILICO, at its discretion, may credit
interest in excess of 3%. KILICO reserves the right to change the rate of excess
interest credited as provided under the terms of the Contract. KILICO also
reserves the right to declare separate rates of excess interest for Purchase
Payments or amounts transferred at designated times, with the result that
amounts at any given designated time may be credited with a higher or lower rate
of excess interest than the rate or rates of excess interest previously credited
to such amounts and Purchase Payments paid or amounts transferred at any other
designated time.
THE CONTRACTS
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $1,000 and the minimum subsequent
payment is $500. Purchase Payments in excess of $1,000,000 require the prior
approval of KILICO. The maximum annual amount of Purchase Payments may also be
limited by the provisions of the retirement plan pursuant to which the Contract
has been purchased. An allocation to a Subaccount, the Fixed Account or a
Guarantee Period must be at least $500.
KILICO may at any time amend the Contract in accordance with changes in the law,
including applicable tax laws, regulations or rulings, and for other purposes.
A Contract Owner is allowed a "free look" period (generally 10 days, subject to
state variation) after receiving the Contract, to review it and decide whether
or not to keep it. If the Contract Owner decides to return the Contract, it may
be cancelled by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Contract will be cancelled and a refund will be made. The amount of the refund
will depend on the state in which the Contract is issued; however, it generally
will be an amount at least equal to the Separate Account Contract Value plus
amounts allocated to the General Account and the Guarantee Periods on the date
of receipt by KILICO, without any deduction for Withdrawal Charges or Records
Maintenance Charges. However, in some states applicable law requires that the
amount of the Purchase Payment be returned.
During the Accumulation Period, the Contract Owner may assign the Contract or
change a Beneficiary at any time by filing such assignment or change with
KILICO's home office at 1 Kemper Drive, Long Grove, Illinois 60049. No
assignment or Beneficiary change shall be binding on KILICO until received by
KILICO. KILICO assumes no responsibility for the validity of such assignment or
Beneficiary change. An assignment may subject the Owner to immediate tax
liability. (See "Tax Treatment of Withdrawals, Loans and Assignments.")
Amounts payable during the Annuity Period may not be assigned or encumbered and,
to the extent permitted by law, are not subject to levy, attachment or other
judicial process for the payment of the payee's debts or obligations.
The Beneficiary is designated by the Owner. If a Beneficiary is not named, or if
no named Beneficiary survives, the Beneficiary shall be the deceased Annuitant's
or deceased Owner's estate.
Assignment of interest in the Contract or change of Beneficiary designation
under a Qualified Plan Contract may be prohibited by the provisions of the
applicable plan.
11
<PAGE> 16
B. THE ACCUMULATION PERIOD.
1. APPLICATION OF PURCHASE PAYMENTS.
Purchase Payments are allocated to the Subaccount(s), Guarantee Periods, or
Fixed Account as selected by the Contract Owner. The amount of each Purchase
Payment credited to a Subaccount will be based on the next computed value of an
Accumulation Unit following receipt of payment in proper form by KILICO. The
value of an Accumulation Unit is determined when the net asset values of the
Portfolios of the Fund are calculated, which is generally at 3:00 p.m. Chicago
time on each day that the New York Stock Exchange is open for trading. Purchase
Payments allocated to a Guarantee Period or to the Fixed Account will begin
earning interest one day after receipt in proper form. However, with respect to
initial Purchase Payments, the amount will be credited only after an affirmative
determination by KILICO to issue the Contract, but no later than the second day
following receipt of the Purchase Payment. After the initial purchase, the
number of Accumulation Units credited is determined by dividing the Purchase
Payment amount allocated to a Subaccount by the Accumulation Unit value which is
next computed following receipt by KILICO of any Purchase Payment in good funds.
Purchase Payments will not be received except on those days when the New York
Stock Exchange is open for trading.
The number of Accumulation Units will not change because of a subsequent change
in value. The dollar value of an Accumulation Unit will vary to reflect the
investment experience of the Subaccount and the assessment of charges against
the Subaccount other than the Records Maintenance Charge. The number of
Accumulation Units will be reduced upon assessment of the Records Maintenance
Charge.
If KILICO has not been provided with information sufficient to establish a
Contract or to properly credit such Purchase Payment, it will promptly request
that the necessary information be furnished. If the requested information is not
furnished within five (5) business days of initial receipt of the Purchase
Payment, or if KILICO determines that it cannot otherwise issue the Contract
within the five (5) day period, the Purchase Payment will be returned to the
Owner, unless the Owner specifically consents to KILICO retaining the purchase
payment until the application is made complete.
KILICO will issue a Contract without having previously received a signed
application from the applicant in the following circumstances. A dealer may
inform KILICO of an applicant's answers to the questions necessary to issue a
Contract by transmitting to KILICO the applicable data in writing or by
electronic means. The dealer will also cause the initial Purchase Payment to be
paid to KILICO. If the information is in good order, KILICO will issue the
Contract. The Contract will be delivered to the owner with a letter requesting
the Owner to sign and return to KILICO a confirmation of the correctness of the
information in the Contract.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, a number of units are purchased based on
the Subaccount's Accumulation Unit value at the end of the Valuation Period
during which the allocation is made. When amounts are transferred out of or
deducted from a Subaccount, units are redeemed in a similar manner.
The Accumulation Unit value for each subsequent Valuation Period is the
investment experience factor for that period multiplied by the Accumulation Unit
value for the immediately preceding period. Each Valuation Period has a single
Accumulation Unit value which is applied to each day in the period.
Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
Valuation Period.
The investment experience factor of a Subaccount for a Valuation Period is
determined by dividing (1) by (2) and subtracting (3) from the result, where:
(1) is the net result of:
a. the net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gain distributions
made by the investments held in the Subaccount, if the "ex-dividend"
date occurs during the current Valuation Period; plus or minus
c. a charge or credit for any taxes reserved for the current Valuation
Period which KILICO determines to have resulted from the investment
operations of the Subaccount;
12
<PAGE> 17
(2) is the net asset value per share of the investment held in the
Subaccount, determined at the end of the last prior Valuation Period;
(3) is the factor representing the mortality and expense risk and
administrative cost charge stated in the Contract for the number of days in
the Valuation Period.
3. GUARANTEE PERIODS OF THE MVA OPTION.
An Owner may select, on the application form or with the initial order to
purchase, one or more Guarantee Periods with durations of one to ten years. Any
subsequently permitted Purchase Payments are allocated to Guarantee Periods as
selected by the Owner. The Guarantee Period, for each Purchase Payment or
portion thereof, selected by the Owner determines the Guaranteed Interest Rate.
KILICO pays interest at the Guaranteed Interest Rates in effect at the time the
Purchase Payment is received. The Guaranteed Interest Rate applies for the
entire duration of the Guarantee Period for that Purchase Payment remaining in
the Guarantee Period. Interest is credited daily at a rate equivalent to the
effective annual rate.
Set forth below is an illustration of how KILICO will credit interest during a
Guarantee Period. For the purpose of this example, certain assumptions were made
as indicated.
EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 4.0% Effective Annual Rate
</TABLE>
<TABLE>
<CAPTION>
INTEREST CREDITED CUMULATIVE
YEAR DURING YEAR INTEREST CREDITED
- ---- ----------------- -----------------
<S> <C> <C>
1........................................................... $1,600.00 $1,600.00
2........................................................... 1,664.00 3,264.00
3........................................................... 1,730.56 4,994.56
4........................................................... 1,799.78 6,794.34
5........................................................... 1,871.77 8,666.11
</TABLE>
Accumulated Value at the end of 5 years is:
$40,000 + $8,666.11 = $48,666.11
NOTE: THIS EXAMPLE ASSUMES NO WITHDRAWALS OF ANY AMOUNT DURING THE ENTIRE
FIVE-YEAR PERIOD. A MARKET VALUE ADJUSTMENT AND A WITHDRAWAL CHARGE APPLY TO ANY
INTERIM WITHDRAWAL OR TRANSFER (SEE, "WITHDRAWAL DURING ACCUMULATION PERIOD" AND
"TRANSFER DURING ACCUMULATION PERIOD.") THE HYPOTHETICAL INTEREST RATES ARE
ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE INTEREST RATES TO BE
GUARANTEED UNDER THE CONTRACT. ACTUAL INTEREST RATES GUARANTEED FOR ANY GIVEN
TIME MAY BE MORE OR LESS THAN THOSE SHOWN.
At the end of any Guarantee Period, a subsequent Guarantee Period begins. KILICO
provides written notification of the beginning of a subsequent Guarantee Period.
The subsequent Guarantee Period automatically renews for the same duration as
the terminating Guarantee Period unless the Owner elects another Guarantee
Period within thirty days after the end of the terminating Guarantee Period. The
Owner may choose a different Guarantee Period by preauthorized telephone
instructions or written notification to KILICO within thirty days after the
beginning of the subsequent Guarantee Period (or such longer period as stated in
KILICO's notification). An Owner should not select a subsequent Guarantee Period
that would extend beyond the Annuity Date then in effect for that Contract as
the Guarantee Period Amount available for annuitization in such Guarantee Period
would be subject to a Market Value Adjustment and any applicable Withdrawal
Charge. (See "Market Value Adjustment" below.)
The amount reinvested at the beginning of any subsequent Guarantee Period is
equal to the Guarantee Period Value in the Guarantee Period just ended. The
Guaranteed Interest Rate in effect when the subsequent Guarantee Period begins
applies for the entire duration of the subsequent Guarantee Period.
An Owner may call 1-800-621-5001 or write to KILICO, 1 Kemper Drive, Long Grove,
Illinois 60049 for the subsequent Guaranteed Interest Rates.
13
<PAGE> 18
4. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
KILICO declares the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate, but once
established, rates will be guaranteed for the duration of the respective
Guarantee Periods. KILICO advises an Owner of the Guaranteed Interest Rate for a
chosen Guarantee Period at the time a Purchase Payment is received, a transfer
is effectuated or a Guarantee Period renews. Any portion of an Owner's
Accumulated Guarantee Period Value withdrawn from the MVA Option will be subject
to any applicable Withdrawal Charge and Records Maintenance Charge and may be
subject to a Market Value Adjustment. (See "Market Value Adjustment" below.)
KILICO has no specific formula for establishing the Guaranteed Interest Rates
for the Guarantee Periods. The determination may be influenced by, but not
necessarily correspond to, interest rates generally available on the types of
investments acquired with the Purchase Payments received under the Contracts.
(See "The MVA Option".) KILICO, in determining Guaranteed Interest Rates, may
also consider, among other factors, the duration of a Guarantee Period,
regulatory and tax requirements, sales commissions and administrative expenses
borne by KILICO, and general economic trends.
KILICO'S MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED INTEREST
RATES TO BE DECLARED. KILICO CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
GUARANTEED INTEREST RATES.
5. CONTRACT VALUE.
Separate Account Contract Value on any Valuation Date can be determined by
multiplying the total number of Accumulation Units credited to the Contract for
a Subaccount by the value of an Accumulation Unit for that Subaccount on that
Valuation Date, then adding the values of the Owner's Contract interest in each
Subaccount in which the Contract is participating. That amount, when added to
the Owner's Accumulated Guarantee Period Value in the MVA Option and the Owner's
Contract interest in the Fixed Account, equals the Contract Value.
6. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, a Contract Owner may transfer the Contract Value
among the Subaccounts, the Guarantee Periods and the Fixed Account subject to
the following provisions: (i) the amount transferred must be at least $100
unless the total Contract Value attributable to a Subaccount, Guarantee Period
or Fixed Account is being transferred; (ii) the Contract Value remaining in a
Subaccount, Guarantee Period or Fixed Account must be at least $500 unless the
total value was transferred; (iii) transfers may not be made from any Subaccount
to the Fixed Account for a period of six months following any transfer from the
Fixed Account into one or more Subaccounts; and (iv) transfers from the Fixed
Account may be made one time during the Contract year in the thirty day period
following an anniversary of a Contract year. KILICO reserves the right to charge
a fee of $25 for each transfer in excess of 12 transfers per calendar year. In
addition, transfers of all or a portion of Guarantee Period Value will be
subject to the Market Value Adjustment described below unless the transfer is
effective within thirty days after the end of the applicable Guarantee Period.
Because a transfer before the end of a Guarantee Period is subject to a Market
Value Adjustment, the amount actually transferred from the Guarantee Period may
be more or less than the requested specific dollar amount.
KILICO will make transfers pursuant to proper written or telephone instructions
which specify in detail the requested changes. Transfers involving a Subaccount
will be based upon the Accumulation Unit values next determined following
receipt of valid, complete transfer instructions by KILICO. The transfer
privilege may be suspended, modified or terminated at any time (subject to state
requirements). KILICO disclaims all liability for acting in good faith in
following instructions which are given in accordance with procedures established
by KILICO, including requests for personal identifying information, that are
designed to limit unauthorized use of the privilege. Therefore, a Contract Owner
would bear the risk of loss in the event of a fraudulent telephone transfer.
If a Contract Owner authorizes a third party to transact transfers on the
Contract Owner's behalf, KILICO will reallocate the Contract Value pursuant to
the asset allocation program determined by such third party. However, KILICO
does not offer or participate in any asset allocation program and takes no
responsibility for any third party asset allocation program. KILICO may suspend
or cancel acceptance of a third party's instructions at any time and may
restrict the investment options that will be available for transfer under third
party authorizations.
14
<PAGE> 19
A Contract Owner may elect to have transfers made automatically among the
Subaccounts of the Separate Account on an annual, semiannual or quarterly basis
so that Contract Value is reallocated to match the percentage allocations in the
Contract Owner's predefined allocation elections. Transfers under this program
will not be subject to the $100 minimum transfer amounts described above. An
election to participate in the automatic asset reallocation program must be in
writing in the form prescribed by KILICO and returned to KILICO at its home
office.
7. WITHDRAWAL DURING ACCUMULATION PERIOD.
The Contract Owner may redeem all or a portion of the Contract Value and
previous withdrawals, plus or minus any applicable Market Value Adjustment and
less any Withdrawal Charge. Contract Owners should be aware that such
withdrawals may, under certain circumstances, be subject to adverse tax
consequences under the Internal Revenue Code. (See "Taxation of Partial and Full
Withdrawals.") A withdrawal of the entire Contract Value is called a surrender.
A Contract Owner may withdraw up to the greater of (i) the excess of Contract
Value over total Purchase Payments subject to Withdrawal Charges, less prior
withdrawals that were previously assessed a Withdrawal Charge, and (ii) 10% of
the Contract Value in any Contract Year, without assessment of any Withdrawal
Charge. If the Contract Owner withdraws an amount in excess of the above amount
in any Contract Year, the excess amount of Purchase Payments withdrawn are
subject to a Withdrawal Charge. The Withdrawal Charge is 7% in the first
Contribution Year, 6% in the second Contribution Year, 5% in the third and
fourth Contribution Years, 4% in the fifth Contribution Year, 3% in the sixth
Contribution Year, 2% in the seventh Contribution Year and 0% in the eighth and
later Contribution Years.
In the case of a Contract invested other than solely in one Subaccount or
Guarantee Period or the Fixed Account, a Contract Owner requesting a partial
withdrawal must specify what portion of the Owner's Contract interest is to be
redeemed. If a Contract Owner does not specify what portion of the Owner's
Contract interest is to be redeemed, KILICO will redeem Accumulation Units from
all Subaccounts, Guarantee Periods and the Fixed Account in which the Contract
Owner has an interest. The number of Accumulation Units redeemed from each
Subaccount and the amount redeemed from the Guarantee Periods and the Fixed
Account will be in approximately the proportion which the Owner's Contract
interest in each Subaccount, Guarantee Period and in the Fixed Account bears to
the Contract Value. In all cases, the Accumulation Units attributable to the
earliest Contribution Years will be redeemed first.
The Contract Owner may request a partial withdrawal subject to the following
conditions:
(1) Partial withdrawals are not permitted from the Fixed Account in the
first Contract Year.
(2) The amount requested must be at least $100 (before application of the
Market Value Adjustment), or the Owner's entire interest in the Subaccount,
Guarantee Period or the Fixed Account from which withdrawal is requested.
(3) The Owner's Contract interest in the Subaccount, Guarantee Period or
the Fixed Account from which the withdrawal is requested must be at least
$500 after the withdrawal is completed unless the total value was
withdrawn.
Election to withdraw shall be made in writing to KILICO at its home office at 1
Kemper Drive, Long Grove, Ill. 60049 and should be accompanied by the Contract
if the request is for total withdrawal. Withdrawal requests will not be received
except on KILICO business days which are those days when the New York Stock
Exchange is open for trading. The Withdrawal Value attributable to the
Subaccounts is determined on the basis of the Accumulation Unit values next
computed following receipt of the request in proper order. The Withdrawal Value
attributable to the Subaccounts will be paid within seven (7) days after the
date a proper written request is received by KILICO at its home office provided,
however, that KILICO may suspend the right of withdrawal or delay payment more
than seven (7) days (a) during any period when the New York Stock Exchange is
closed (other than customary weekend and holiday closings), (b) when trading in
the markets a Portfolio of the Fund normally utilizes is restricted or an
emergency exists as determined by the Securities and Exchange Commission, so
that disposal of the Subaccount's investments or determination of its
Accumulation Unit value is not reasonably practicable, or (c) for such other
periods as the Securities and Exchange Commission by order may permit for the
protection of Contract Owners or Unitholders. For withdrawal requests from the
MVA Option and the Fixed Account, KILICO may defer any payment for the period
permitted by the appropriate state of jurisdiction, but in no event for more
than six months after the written request is received by KILICO. During the
15
<PAGE> 20
period of deferral interest at the current Guaranteed Interest Rate for the same
Guarantee Period as declared by KILICO will continue to be credited.
8. MARKET VALUE ADJUSTMENT.
Any withdrawal (except payments of death benefits), transfer or any
annuitization of Guarantee Period Value other than if effected during the "free
look" period or within 30 days after a Guarantee Period terminates, may be
adjusted up or down by the application of a Market Value Adjustment. The Market
Value Adjustment is applied to the amount being withdrawn before deduction of
any applicable Withdrawal Charge.
The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, then the application of the
Market Value Adjustment results in a reduced Market Adjusted Value and hence a
lower payment upon withdrawal. Thus, it is possible that the amount available on
withdrawal could be less than the original Purchase Payment or the original
amount allocated to a Guarantee Period if interest rates increase. Conversely,
if the Guaranteed Interest Rate is higher than the applicable Current Interest
Rate, the application of the Market Value Adjustment results in an increased
Market Adjusted Value and, hence, a higher payment upon withdrawal.
The Market Value Adjustment (MVA) is determined by the application of the
following formula:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1 + I)
MVA = MPV X 3 3 ------- 4 (t/365) -1 4
(1 + J)
</TABLE>
Where I is the Guaranteed Interest Rate being credited to the Guarantee
Period Value (MPV) subject to the Market Value Adjustment,
J is the Current Interest Rate declared by KILICO, as of the effective date
of the application of the Market Value Adjustment, for current allocations
to a Guarantee Period the length of which is equal to the balance of the
Guarantee Period for the Guarantee Period Value subject to the Market Value
Adjustment, rounded to the next higher number of complete years, and
t is the number of days remaining in the Guarantee Period.
For an illustration showing an upward and a downward adjustment, see Appendix A.
9. GUARANTEED DEATH BENEFIT.
A death benefit will be paid to the designated Beneficiary upon any of the
following events during the Accumulation Period:
1. the death of the Owner, or a joint owner,
2. the death of the Annuitant if no contingent annuitant is named or
if the contingent annuitant does not survive the Annuitant, or
3. if a contingent annuitant is named and survives the Annuitant, the
death of the contingent annuitant.
The amount of the death benefit will depend on the age of the deceased Owner or
Annuitant at the time the death benefit becomes payable. If the deceased Owner
or Annuitant had not attained age 90 prior to the date of death, the greatest of
the following amounts will be paid to the designated Beneficiary: (a) the total
amount of Purchase Payments, less the aggregate dollar amount of all previous
partial withdrawals; (b) the Contract Value; (c) Purchase Payments less previous
partial withdrawals accumulated at 5.00% interest per year to the earlier of the
deceased's age 80 or the date of death plus the total amount of Purchase
Payments less the aggregate dollar amount of all partial withdrawals from age 80
to the date of death; and (d) the greatest anniversary value immediately
preceding the date of death determined as follows. The highest of the Contract
Values on each Contract anniversary prior to the deceased's attainment of age 81
is determined. The greatest anniversary value is equal to this amount, increased
by the dollar amount of any purchase payments made since that anniversary and
reduced by any withdrawals since that anniversary. If the deceased had attained
age 90 prior to the date of death, the Contract Value will be paid to the
designated Beneficiary. The Owner or Beneficiary, as appropriate, may elect
16
<PAGE> 21
to have all or a part of the death proceeds paid to the Beneficiary under one of
the Annuity Options described under "Annuity Options" below.
For Non-Qualified Plan Contracts, if the Beneficiary is the surviving spouse of
the Owner, the surviving spouse may elect to be treated as the successor Owner
of the Contract with no requirement to begin Death Benefit distribution.
10. GUARANTEED RETIREMENT INCOME BENEFIT.
Guaranteed Retirement Income Benefit is an optional benefit available under the
Contract which provides a minimum amount of fixed annuity guaranteed lifetime
income to the Annuitant subject to the conditions described below. The
Guaranteed Retirement Income Benefit option must be elected on the initial
application or order to purchase.
If the Guaranteed Retirement Income Benefit has been elected by the Contract
Owner on the initial application or order to purchase, it may be exercised only
within thirty days following the seventh or later Contract anniversary. In
addition, it may not be exercised prior to the Annuitant's attainment of age 60,
nor later than age 83, except that if the age of the Annuitant on the Date of
Issue of the Contract is at least age 20 but below age 44, it may be exercised
following the 15th or later Contract anniversary.
If the Guaranteed Retirement Income Benefit is exercised by an eligible Contract
Owner, the amount of the annuity payments will be based on the greater of:
1. the income provided by applying the Guaranteed Income Benefit base
to the guaranteed annuity factors; and
2. the income provided by applying the Contract Value to the current
annuity factors.
For the above purposes, the Guaranteed Retirement Income Benefit base is equal
to the amount of the Guaranteed Death Benefit that would have been paid under
the Contract. This amount is equal to the greatest of the following amounts: (a)
the total amount of Purchase Payments, less the aggregate dollar amount of all
previous partial withdrawals; (b) the Contract Value; (c) Purchase Payments less
previous partial withdrawals accumulated at 5.00% interest per year to the
earlier of the Annuitant's age 80 or the date of exercise of the benefit plus
the total amount of Purchase Payments less the aggregate dollar amount of all
partial withdrawals from age 80 to the date of exercise; and (d) the greatest
anniversary value immediately preceding the date of exercise of the benefit
determined as follows. The highest of the Contract Values on each Contract
anniversary prior to the Annuitant's attainment of age 81 is determined. The
greatest anniversary value is equal to this amount, increased by the dollar
amount of any purchase payments made since that anniversary and reduced by any
withdrawals since that anniversary. The guaranteed annuity factors are based on
the 1983a table projected using projection scale G, with interest at 2.5% (the
'Annuity 2000" table), except that if the Guaranteed Retirement Income Benefit
is exercised on the 10th year anniversary or later, its interest rate assumption
will be 3.50%.
Because the Guaranteed Retirement Income Benefit is based on conservative
actuarial factors, the level of income that it guarantees may often be less than
the level that would be provided by applying the Contract Value to current
annuity factors.
The Guaranteed Retirement Income Benefit will be paid in the amount determined
above and will be paid for the life of the Annuitant with a period certain based
on the Annuitant's age at the time the benefit is exercised and the type of
Contract, as follows:
<TABLE>
<CAPTION>
PERIOD CERTAIN YEARS
--------------------------
INDIVIDUAL
ANNUITANT'S AGE RETIREMENT
AT ELECTION ANNUITY NON-QUALIFIED
- --------------- ---------- -------------
<C> <C> <C>
35 to 75 10 10
76 9 10
77 8 10
78 7 10
79 7 10
80 7 10
81 7 9
82 7 8
83 7 7
</TABLE>
17
<PAGE> 22
CONTRACT CHARGES AND EXPENSES
Charges and deductions under the Contracts are made for KILICO's assumption of
mortality and expense risk and administrative expenses, and for an annual
Records Maintenance Charge. Subject to certain expense limitations, investment
management fees and other expenses of the Funds are indirectly borne by the
Contract Owner. KILICO will deduct state premium taxes from Contract Value when
paid by KILICO. Where applicable, the dollar amount of state premium taxes
previously paid or paid upon annuitization by KILICO will be charged back
against the Contract Value when and if the Contract is annuitized. Additionally,
where applicable, a Withdrawal Charge may be assessed by KILICO in the event of
early withdrawal or early annuitization. A Guaranteed Retirement Income Benefit
charge also applies if the Guaranteed Retirement Income Benefit is elected.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
During the Accumulation Period and the Annuity Period, KILICO assesses that
portion of each Subaccount with a daily asset charge for mortality and expense
risks and administrative costs, which amounts to an aggregate of 1.40% per annum
(consisting of 1.25% for mortality and expense risks and .15% for administrative
costs). The administrative charge is intended to cover the average anticipated
administrative expenses to be incurred over the period the Contracts are in
force. With an administrative charge based on a percentage of assets, however,
there is not necessarily a direct relationship between the amount of the charge
and the administrative costs of a particular account. Additionally, KILICO
deducts an annual Records Maintenance Charge of $30 for Contract as described
below. The Records Maintenance Charge is not assessed during the Annuity Period.
These charges may be decreased by KILICO without notice but may not exceed the
rate or amount shown above. If the daily asset charge is insufficient to cover
the risks and costs, any loss or deficiency will fall on KILICO. Conversely, if
the charges prove more than sufficient, the gain will accrue to KILICO, creating
a profit which would be available for any proper corporate purpose including,
among other things, payment of distribution expenses.
1. RECORDS MAINTENANCE CHARGE.
KILICO will assess an annual Records Maintenance Charge of $30 during the
Accumulation Period against each Contract which has a Contract Value of less
than $50,000 on the date of assessment whether or not any Purchase Payments have
been made during the year. The charge is assessed at the end of each Contract
Year, on surrender of a Contract and on surrender upon annuitization. This
charge is to reimburse KILICO for expenses incurred in establishing and
maintaining the records relating to the Contract. The imposition of the Records
Maintenance Charge will constitute a reduction in the net assets of each
Subaccount, Guarantee Period and the Fixed Account.
At any time the Records Maintenance Charge is assessed, an equal portion of the
applicable charge will be assessed against each Subaccount, Guarantee Period and
the Fixed Account in which the Contract is participating and a number of
Accumulation Units sufficient to equal the proper portion of the charge will be
redeemed from each Subaccount, and an amount deducted from the Fixed Account
Contract Value and Guarantee Period Value to meet the assessment.
2. MORTALITY RISK.
Variable Annuity payments reflect the investment experience of each Subaccount
but are not affected by changes in actual mortality experience or by actual
expenses incurred by KILICO.
The mortality risk assumed by KILICO arises from two contractual obligations.
First, in case of the death of the Contract Owner or of the Annuitant prior to
the deceased's 90th birthday, and prior to the Annuity Date, KILICO may, in some
cases, pay an amount greater than the Contract Value. (see "Guaranteed Death
Benefit", page 16) The second contractual obligation assumed by KILICO is to
continue to make annuity payments to each Annuitant for the entire life of the
Annuitant under Annuity Options involving life contingencies.
The latter assures each Annuitant that neither the Annuitant's own longevity nor
an improvement in life expectancy generally will have an adverse effect on the
annuity payments received under a Contract and relieves the Annuitant from the
risk of outliving the amounts accumulated for retirement.
18
<PAGE> 23
3. EXPENSE RISK.
KILICO also assumes the risk that all actual expenses involved in administering
the Contracts including Contract maintenance costs, administrative costs, data
processing costs and costs of other services may exceed the amount recovered
from the Records Maintenance Charge or the amount recovered from the
administrative cost portion of the daily asset charge.
4. ADMINISTRATIVE COSTS.
The daily asset charge for administrative costs is imposed to reimburse KILICO
for the expenses it incurs for administering the Contracts, which include, among
other things, responding to Contract Owner inquiries, processing changes in
Purchase Payment allocations and providing reports to Contract Owners.
5. EXCEPTIONS.
KILICO may offer, in its discretion, reduced fees and charges, including but not
limited to, Records Maintenance Charge and mortality and expense risk and
administrative charges, for certain sales that may result in savings of certain
costs and expenses. Reductions in these fees and charges will not be unfairly
discriminatory against any Contract Owner.
B. WITHDRAWAL CHARGE.
No sales charge is deducted from any Purchase Payment. However, a contingent
deferred sales charge ("Withdrawal Charge") will be used to cover expenses
relating to the sale of the Contracts, including commissions paid to sales
personnel, and other promotion and acquisition expenses. Also, withdrawals may
be subject to certain adverse tax consequences. (See "Taxation of Partial and
Full Withdrawals.")
Each Contract Year, a Contract Owner may withdraw up to the greater of (i) the
excess of Contract Value over total Purchase Payments subject to Withdrawal
Charges less prior withdrawals that were previously assessed a Withdrawal
Charge, and (ii) 10% of the Contract Value determined at the time the withdrawal
is requested, without assessment of any charge. If the Contract Owner withdraws
an amount in excess of the above amount, the Purchase Payments withdrawn in
excess of the above amount will be subject to a Withdrawal Charge. The
Withdrawal Charge applies in the first seven Contribution Years following each
Purchase Payment as shown below:
<TABLE>
<CAPTION>
YEAR OF
WITHDRAWAL WITHDRAWAL
AFTER PURCHASE CHARGE
-------------- ----------
<S> <C>
First.................................. 7%
Second................................. 6%
Third.................................. 5%
Fourth................................. 5%
Fifth.................................. 4%
Sixth.................................. 3%
Seventh................................ 2%
Eighth and following................... 0%
</TABLE>
Purchase Payments will be deemed to be surrendered in the order in which they
were received.
When a withdrawal is requested, the recipient will receive a check in the amount
requested. To the extent that any Withdrawal Charge is applicable, the Contract
Value will be reduced by the amount of the Withdrawal Charge in addition to the
actual dollar amount sent to the Owner.
Because the Contribution Years are based on the date each Purchase Payment is
made, Contract Owners may be subject to a Withdrawal Charge as indicated above,
even though the Contract may have been issued many years earlier. (For
additional details, see "Withdrawal During Accumulation Period.")
Subject to certain exceptions, State approvals, withdrawal charges will not be
assessed on withdrawals:
1. after an Owner has been confined in a hospital or skilled health
care facility for at least thirty days and the Owner remains confined at
the time of the request;
2. within thirty days following an Owner's discharge from a hospital
or skilled health care facility after a confinement of at least thirty
days; or
19
<PAGE> 24
3. if the Owner or Annuitant becomes disabled after the Contract is
issued and before attaining age 65.
Restrictions and provisions related to the nursing care or hospitalization
waiver are more fully described in endorsements issued with the Contract.
The Withdrawal Charges are intended to compensate KILICO for expenses in
connection with distribution of the Contracts. Under current assumptions, KILICO
anticipates Withdrawal Charges will not fully cover distribution expenses. To
the extent that distribution expenses are not recovered from Withdrawal Charges,
those expenses may be recovered from KILICO's general assets. Those assets may
include proceeds from the mortality and expense charge described above.
The Withdrawal Charge also applies at the time of annuitization to amounts
attributable to Accumulation Units in their seventh Contribution Year or
earlier. The amount annuitized is subject to the Withdrawal Charge, as
applicable. There shall be no Withdrawal Charge assessed upon annuitization so
long as annuity payments provide for payment under Annuity Options 2, 3 or 4, or
payments under Annuity Option 1 are scheduled to continue for at least five
years.
The Withdrawal Charge may be reduced or eliminated, but only to the extent
KILICO anticipates that it will incur lower sales expenses or perform fewer
services because of economies arising from the size of the particular group, the
average contribution per participant, or the use of mass enrollment procedures.
Units of a Subaccount sold to officers, directors and employees of KILICO and
Kemper Investors Fund, KINF investment advisers, and principal underwriter or
certain affiliated companies, or to any trust, pension, profit-sharing or other
benefit plan for such persons may be withdrawn without any Withdrawal Charge.
C. GUARANTEED RETIREMENT INCOME BENEFIT CHARGE
If the Guaranteed Retirement Income Benefit option is selected on the initial
application or order to purchase, we will deduct on each Contract Quarter
anniversary a pro rata portion of an annual charge equal to 0.30% of the
Contract Value. The quarterly charge will be deducted on a pro rata basis from
the Subaccounts, the Fixed Account and Guarantee Periods. The charge for the
Guaranteed Retirement Income Benefit will cease after the Annuitant attains age
83.
D. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
The net asset value of each of the Portfolios of the Funds reflects investment
management fees and certain general operating expenses already deducted from the
assets of the Portfolios. Subject to certain limitations, these fees and
expenses are indirectly borne by the Contract Owners. Investment management fees
are described on pages 8 and 9. Further detail about fees and expenses of the
Portfolios is provided in the attached prospectuses for the Funds and in the
Funds' statements of additional information.
E. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
on the amount of Purchase Payments. Where applicable, the dollar amount of state
premium taxes previously paid or payable upon annuitization by KILICO may be
charged against the Contract Value if not previously assessed, when and if the
Contract is annuitized. See "Appendix--State Premium Tax Chart" in the Statement
of Additional Information.
THE ANNUITY PERIOD
In addition to exercising the Guaranteed Retirement Income Benefit, Contracts
may be annuitized under one of several other Annuity Options. Annuity payments
will begin on the Annuity Date and under the Annuity Option selected by the
Owner. The Annuity Date must be at least one year after the Date of Issue and
may not be deferred beyond the Annuitant's 91st birthday subject to state
variation.
1. ANNUITY PAYMENTS.
Annuity payments will be determined on the basis of (i) the annuity table
specified in the Contract, (ii) the Annuity Option selected, and (iii) if
variable annuitization is elected, the investment performance of the Subaccount
selected. The Annuitant receives the value of a fixed number of Annuity Units
each month. The value of an Annuity Unit will reflect the investment performance
of the Subaccounts selected, and the amount of each annuity payment will vary
accordingly. Annuity payments may be subject to a Withdrawal Charge if made
within the seventh Contribution Year or earlier. If the Owner elects an annuity
which provides either an income benefit period of five years or more, or a
benefit under which payment is contingent upon the life of the payee(s), any
applicable Withdrawal Charges will be waived.
20
<PAGE> 25
2. ANNUITY OPTIONS.
The Contract Owner may elect to have annuity payments made under any one of the
Annuity Options specified in the Contract and described below. The Contract
Owner may decide at any time (subject to the provisions of any applicable
retirement plan and state variations) to commence annuity payments prior to the
Annuitant's 91st birthday. A change of Annuity Option is permitted if made
before the date annuity payments are to commence. If no other Annuity Option is
elected, monthly annuity payments will be made in accordance with Option 3 below
with a ten (10) year period certain. Generally, annuity payments will be made in
monthly installments. However, if the net proceeds available to apply under an
Annuity Option are less than $2,000, KILICO shall have the right to pay the
annuity in one lump sum. In addition, if the first payment provided would be
less than $25, KILICO shall have the right to change the frequency of payments
to quarterly, semiannual or annual intervals resulting in an initial payment of
at least $25.
The amount of periodic annuity payments will depend upon (a) the type of annuity
option selected; (b) for options involving life contingency, the age and sex of
the payee; and (c) the investment experience of the Subaccounts selected. For
example, if the annuity option selected is income for a specified period, the
shorter the period selected the fewer payments will be made and those payments
will have a higher value. If the annuity option selected is life income, it is
likely the payments will be in a smaller amount than income for a short
specified period. If an individual selects the life income with installments
guaranteed option, the payments will probably be in a smaller amount than for
the life income option. If an individual selects the joint and survivor annuity
option, the payments will be smaller than those measured by an individual life
income option. The age of the payee will also influence the amount of periodic
annuity payments because presumably the older the payee, the shorter the life
expectancy and the larger the payments. The sex of the payee will influence the
amount of periodic payments because females have longer life expectancies than
males and therefore the payments will be smaller. Finally, if the Contract Owner
participates in a Subaccount with higher investment performance, it is likely
the Contract Owner will receive a higher periodic payment.
If the Owner dies before the Annuity Date, Annuity Options which may be elected
are limited. The Annuity Options available are (a) Option 2 or (b) Option 1 or 3
for a period no longer than the life expectancy of the Beneficiary (but not less
than 5 years from the Owner's death). If the Beneficiary is not an individual,
the entire interest must be distributed within 5 years of the Owner's death. The
Death Benefit distribution must begin no later than one year from the Owner's
death or such later date as prescribed by federal regulation.
OPTION 1--INCOME FOR SPECIFIED PERIOD.
An annuity payable monthly for a selected number of years ranging from five to
thirty. Upon payee's death, if the Beneficiary is a natural person, KILICO will
automatically continue payments for the remainder of the certain period to the
Beneficiary. If the Beneficiary is either an estate or trust, KILICO will pay
the discounted value of the remaining payments in the specified period based on
the discount rates stated in the supplemental contract. Variable Annuity
payments under Option 1 reflect the payment of the mortality and expense risk
charge, even though there is no life contingency risk associated with Option 1.
OPTION 2--LIFE INCOME.
An annuity payable monthly during the lifetime of the payee, terminating with
the last monthly payment due prior to the death of the payee. If this Option is
elected, annuity payments terminate automatically and immediately on the death
of the payee without regard to the number or total amount of payments made.
Thus, it is possible for an individual to receive only one payment if death
occurred prior to the date the second payment was due.
OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.
An annuity payable monthly during the lifetime of the payee with the provision
that if, at the death of the payee, payments have been made for less than five,
ten, fifteen or twenty years as elected, and the Beneficiary is a natural
person, KILICO will automatically continue payments for the remainder of the
elected period to the Beneficiary. If the Beneficiary is either an estate or
trust, KILICO will pay the discounted value of the remaining payments in the
specified period based on the discount rates stated in the supplemental
contract.
OPTION 4--JOINT AND SURVIVOR ANNUITY.
An annuity payable monthly while both payees are living. Upon the death of
either payee, the monthly income payable will continue during the lifetime of
the surviving payee at the percentage of such full amount chosen at the time of
election of this Option. Annuity payments terminate automatically and
immediately upon the death of the surviving payee without regard to the number
or total amount of payments received.
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Payees under Option 1 by written notice to KILICO may cancel all or part of the
remaining payments due and receive that part of the remaining value of the
Contract.
3. ALLOCATION OF ANNUITY.
The Contract Owner may elect to have payments made on a fixed or variable basis,
or a combination of both. An Owner may exercise the transfer privilege during
the Accumulation Period for the purposes of such allocation. Any Fixed Account
Contract Value or Guarantee Period Value will be annuitized on a fixed basis.
Any Separate Account Contract Value will be annuitized on a variable basis.
Transfers during the Annuity Period are permitted subject to stated limitations.
The MVA Option is not available during the Annuity Period.
4. TRANSFER DURING ANNUITY PERIOD.
During the Annuity Period, the payee may transfer the value of the payee's
Contract interest in a Subaccount(s) to another Subaccount or to the Fixed
Account by written request to KILICO subject to the following limitations:
a. No transfer to a Subaccount may be made during the first year of the
Annuity Period; subsequent transfers are limited to one per year during the
Annuity Period.
b. A Contract's entire interest in a Subaccount must be transferred.
c. A transfer to a Subaccount, if notice to KILICO is received more than
seven (7) days prior to any annuity payment date, shall be effective during
the Valuation Period next succeeding the date such notice is received. If
received fewer than seven (7) days before any annuity payment date, the
transfer shall be effective during the Valuation Period next succeeding
that annuity payment date.
d. A transfer to the Fixed Account may be made effective only on an
anniversary of the first Annuity Date and upon not less than thirty (30)
days prior written notice to KILICO.
The Annuity Unit value of a Subaccount shall be determined as of the end of the
Valuation Period next preceding the effective date of the transfer. The transfer
privilege may be suspended, modified or terminated at any time (subject to state
requirements). Payees should consider the appropriateness of each Subaccount's
investment objectives and risks as an investment during the Annuity Period.
5. ANNUITY UNIT VALUE.
The value of an Annuity Unit is determined independently for each of the
Subaccounts.
For each Subaccount, the Annuity Unit value for any Valuation Period is
determined by multiplying the Annuity Unit value for the immediately preceding
Valuation Period by the net investment factor for the Valuation Period for which
the Annuity Unit value is being calculated, and multiplying the result by an
interest factor which offsets the effect of the assumed investment earnings rate
of 2.5% per annum which is assumed in the annuity tables contained in the
Contract.
The net investment factor for each Subaccount for any Valuation Period is
determined by dividing (a) by (b) where:
(a) Is the value of an Accumulation Unit for the applicable Subaccount as
of the end of the current Valuation Period, plus or minus the per share
charge or credit for taxes reserved.
(b) Is the value of an Accumulation Unit for the applicable Subaccount as
of the end of the immediately preceding Valuation Period, plus or minus the
per share charge or credit for taxes reserved.
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
At the time annuity payments begin, the value of the Owner's Contract interest
is determined by multiplying the applicable Accumulation Unit values at the end
of the Valuation Period falling on the 20th day of a month or 7th day of a month
immediately preceding the date the first annuity payment is due by the
respective number of Accumulation Units credited to the Owner's Contract
interest as of the end of such Valuation Period, less the dollar amount of
premium taxes not previously deducted, if applicable, and less the amount of the
Withdrawal Charge, if applicable.
There is no Withdrawal Charge assessed so long as annuity payments provide for
payments under Annuity Options 2, 3 or 4 or payments under Annuity Option 1 are
scheduled to continue for at least five years.
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The first annuity payment is determined by multiplying the benefit per $1,000 of
value shown in the applicable annuity table by the number of thousands of
dollars of Contract Value less deduction for Debt and premium taxes, if
applicable.
A 2.5% per annum assumed investment rate is built into the annuity tables
contained in the Contracts. If the actual net investment rate exceeds 2.5% per
annum, payments will increase at a rate equal to the amount of such excess.
Conversely, if the actual rate is less than 2.5% per annum, annuity payments
will decrease.
7. SUBSEQUENT PERIODIC PAYMENTS UNDER VARIABLE ANNUITY.
The amount of the second and subsequent annuity payments is determined by
multiplying the number of Annuity Units by the Annuity Unit value as of the
Valuation Period next preceding the date on which each annuity payment is due.
The dollar amount of the first annuity payment as determined above is divided by
the Annuity Unit value as of the Annuity Date to establish the number of Annuity
Units representing each annuity payment. The number of Annuity Units determined
for the first annuity payment remains constant for the second and subsequent
monthly payments.
8. FIXED ANNUITY PAYMENTS.
The amount of each payment under a Fixed Annuity will be determined from tables
prepared by KILICO. Such tables show the monthly payment for each $1,000 of
Contract Value allocated to provide a Fixed Annuity. Payment will be based on
the Contract Value as of the date immediately preceding the date the annuity
payment is due. Fixed Annuity payments will not change regardless of investment,
mortality or expense experience.
9. DEATH BENEFIT.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, will depend upon the form of annuity payment in effect
at the time of death. (See "Annuity Options.")
FEDERAL INCOME TAXES
A. INTRODUCTION
The following discussion of the federal income tax treatment of the Contract is
not exhaustive, does not purport to cover all situations, and is not intended as
tax advice. A qualified tax adviser should always be consulted with regard to
the application of law to individual circumstances. This discussion is based on
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Department
regulations, and interpretations existing on the date of this Prospectus. These
authorities, however, are subject to change by Congress, the Treasury
Department, and judicial decisions.
This discussion does not address state or local tax consequences associated with
the purchase of a Contract. In addition, KILICO MAKES NO GUARANTEE REGARDING ANY
TAX TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CONTRACT OR OF ANY TRANSACTION
INVOLVING A CONTRACT.
B. KILICO'S TAX STATUS
KILICO is taxed as a life insurance company under the Code. Since the operations
of the Separate Account are a part of, and are taxed with, the operations of
KILICO, the Separate Account is not separately taxed as a "regulated investment
company" under the Code. Under existing federal income tax laws, investment
income and capital gains of the Separate Account are not taxed to the extent
they are applied under a Certificate. KILICO does not anticipate that it will
incur any federal income tax liability attributable to such income and gains of
the Separate Account, and therefore KILICO does not intend to make provision for
any such taxes. If KILICO is taxed on investment income or capital gains of the
Separate Account, then KILICO may impose a charge against the Separate Account
in order to make provision for such taxes.
C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code, except as described below, any increase
in the Contract Value of a Non-Qualified Plan Contract is generally not taxable
to the Owner or Annuitant until received, either in the form of
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annuity payments, as contemplated by the Contract, or in some other form of
distribution. However, certain requirements must be satisfied in order for this
general rule to apply, including: (1) the Contract must be owned by an
individual (or treated as owned by an individual), (2) the investments of the
Separate Account must be "adequately diversified" in accordance with Treasury
Department regulations, (3) KILICO, rather than the Owner, must be considered
the owner of the assets of the Separate Account for federal tax purposes, and
(4) the Contract must provide for appropriate amortization, through annuity
payments, of the Contract's Purchase Payments and earnings, e.g., the Annuity
Date must not occur at too advanced an age.
NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons" such as a corporation, trust or other similar entity, as
opposed to a natural person, are not treated as annuity contracts for federal
tax purposes. The investment income on Contracts is taxed as ordinary income
that is received or accrued by the Owner during the taxable year. There are
several exceptions to this general rule for non-natural Owners. First, Contracts
will generally be treated as held by a natural person if the nominal owner is a
trust or other entity which holds the Contract as an agent for a natural person.
However, this special exception will not apply in the case of any employer who
is the nominal owner of a Contract under a non-qualified deferred compensation
arrangement for its employees.
In addition, exceptions to the general rule for non-natural Owners will apply
with respect to (1) Contracts acquired by an estate of a decedent by reason of
the death of the decedent, (2) certain Qualified Contracts, (3) certain
Contracts purchased by employers upon the termination of certain qualified
plans, (4) certain Contracts used in connection with structured settlement
agreements, and (5) Contracts purchased with a single premium when the annuity
starting date (as defined in the tax law) is no later than a year from purchase
of the Contract and substantially equal periodic payments are made, not less
frequently than annually, during the annuity period.
DIVERSIFICATION REQUIREMENTS. For a Contract to be treated as an annuity for
federal income tax purposes, the investments of the Separate Account must be
"adequately diversified" in accordance with Treasury Department Regulations. The
Secretary of the Treasury has issued regulations which prescribe standards for
determining whether the investments of the Separate Account are "adequately
diversified." If the Separate Account failed to comply with these
diversification standards, a Contract would not be treated as an annuity
contract for federal income tax purposes and the Contract Owner would generally
be taxable currently on the excess of the Contract Value over the Purchase
Payments paid for the Certificate.
Although KILICO does not control the investments of the Fund, it expects that
the Fund will comply with such regulations so that the Separate Account will be
considered "adequately diversified."
OWNERSHIP TREATMENT. In certain circumstances, a variable annuity contract owner
may be considered the owner, for federal income tax purposes, of the assets of
the separate account used to support his or her contract. In those
circumstances, income and gains from such separate account assets would be
includible in the contract owner's gross income. The Internal Revenue Service
(the "Service") has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In addition, the Treasury Department
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor, rather than the insurance company, to be treated
as the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular sub-accounts [of
a separate account] without being treated as owners of the underlying assets."
As of the date of this Prospectus, no such guidance has been issued.
The ownership rights under this Contract are similar to, but different in
certain respects from, those described by the Service in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the Owner of this Contract has the choice of many more investment
options to which to allocate Purchase Payments and Contract Values, and may be
able to transfer among investment options more frequently than in such rulings.
These differences could result in the Owner being treated as the owner of the
assets of the Separate Account and thus subject to current taxation on the
income and gains from those assets. In addition, KILICO does not know what
standards will be set forth in the regulations or rulings which the Treasury
Department has stated it expects to issue. KILICO therefore reserves the right
to modify the Contract as necessary to attempt to prevent the Owner from being
considered the owner of the assets of the Separate Account.
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DELAYED ANNUITY DATES. If the Contract's Annuity Date occurs (or is scheduled to
occur) at a time when the Annuitant has reached an advanced age, E.G., past age
85, it is possible that the Contract would not be treated as an annuity for
federal income tax purposes. In that event, the income and gains under the
Contract could be currently includible in the Owner's income.
The remainder of this discussion assumes that the Contract will be treated as an
annuity Contract for federal income tax purposes and that KILICO will be treated
as the owner of the Separate Account assets.
2. TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal from a Non-Qualified Contract, amounts
received are includible in income to the extent the Contract Value before the
withdrawal exceeds the "investment in the contract." In the case of a full
withdrawal, amounts received are includible in income to the extent they exceed
the "investment in the contract." For these purposes, the investment in the
contract at any time equals the total of the Purchase Payments made under the
Contract to that time (to the extent such payments were neither deductible when
made nor excludible from income as, for example, in the case of certain employer
contributions to Qualified Plan Contracts) less any amounts previously received
from the Contract which were not included in income.
Other than in the case of certain Qualified Plan Contracts, any assignment or
pledge (or agreement to assign or pledge) any portion of the Certificate Value,
is treated as a withdrawal of such amount or portion. (Assignments and pledges
are permitted only in limited circumstances under Qualified Plan Contracts.) The
investment in the contract is increased by the amount includible in income with
respect to such assignment or pledge, though it is not affected by any other
aspect of the assignment or pledge (including its release). If an individual
transfers a Contract without adequate consideration to a person other than the
owner's spouse (or to a former spouse incident to divorce), the owner will be
taxed on the difference between the Contract Value and the "investment in the
contract" at the time of transfer. In such case, the transferee's investment in
the Contract will be increased to reflect the increase in the transferor's
income.
The Contract provides a death benefit that in certain circumstances may exceed
the greater of the Purchase Payments and the Contract Value. As described
elsewhere in this Prospectus, KILICO imposes certain charges with respect to the
death benefit. It is possible that those charges (or some portion thereof) could
be treated for federal income tax purposes as a partial withdrawal from the
Contract.
There may be special income tax issues present in situations where the Owner and
the Annuitant are not the same person and are not married to one another. A tax
advisor should be consulted in those situations.
3. TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as ordinary income is
equal to the excess of the payment over the exclusion amount. In the case of
variable annuity payments, the exclusion amount is the "investment in the
contract" (defined above) allocated to the variable annuity option, adjusted for
any period certain or refund feature, when payments begin to be made divided by
the number of payments expected to be made (determined by Treasury Department
regulations which take into account the annuitant's life expectancy and the form
of annuity benefit selected). In the case of fixed annuity payments, the
exclusion amount is the amount determined by multiplying (1) the payment by (2)
the ratio of the investment in the contract allocated to the fixed annuity
option, adjusted for any period certain or refund feature, to the total expected
value of annuity payments for the term of the contract (determined under
Treasury Department regulations).
Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments cease
because of the death of the Annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the annuitant in his or her last taxable year.
4. TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a Contract because of the death of an Owner or
the Annuitant. Prior to the Annuity Date, such death benefit proceeds are
includible in income as follows: (1) if distributed in a lump sum, they are
taxed in the same manner as a full withdrawal, as described above, or (2) if
distributed under an annuity option, they are taxed in the same manner as
annuity payments, as described above. After the Annuity Date, where a guaranteed
period exists under an annuity option and the Annuitant dies before the end of
that period, payments made to the Beneficiary for the remainder of that period
are includible in income as follows: (1) if
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received in a lump sum, they are includible in income to the extent that they
exceed the unrecovered investment in the contract at that time, or (2) if
distributed in accordance with the existing annuity option selected, they are
fully excludable from income until the remaining investment in the contract is
deemed to be recovered, and all annuity payments thereafter are fully includible
in income.
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
There is a 10% penalty tax on the taxable amount of any payment from a
Non-Qualified Plan Contract unless the payment is: (a) received on or after the
Owner reaches age 59 1/2; (b) attributable to the Owner's becoming disabled (as
defined in the tax law); (c) made to a Beneficiary on or after the death of the
Owner or, if the Owner is not an individual, on or after the death of the
primary Annuitant (as defined in the tax law); (d) made as a series of
substantially equal periodic payments (not less frequently than annually) for
the life (or life expectancy) of the Annuitant or for the joint lives (or joint
life expectancies) of the Annuitant and designated Beneficiary (as defined in
the tax law); (e) made under a Contract purchased with a single premium when the
annuity starting date (as defined in the tax law) is no later than a year from
purchase of the annuity and substantially equal periodic payments are made, not
less frequently than annually, during the annuity period; or (f) made with
respect to certain annuities issued in connection with structured settlement
agreements. (A similar penalty tax, applicable to distributions from certain
Qualified Plan Contracts, is discussed below.)
6. AGGREGATION OF CONTRACTS
In certain circumstances, the amount of an Annuity Payment or a withdrawal from
a Non-Qualified Plan Contract that is includible in income may be determined by
combining some or all of the Non-Qualified Plan Contracts owned by an
individual. For example, if a person purchases a Contract offered by this
Prospectus and also purchases at approximately the same time an immediate
annuity, the Service may treat the two contracts as one contract. In addition,
if a person purchases two or more deferred annuity contracts from the same
insurance company (or its affiliates) during any calendar year, all such
contracts will be treated as one contract. The effects of such aggregation are
not clear; however, it could affect the amount of a withdrawal or an annuity
payment that is taxable and the amount which might be subject to the penalty tax
described above.
D. QUALIFIED PLANS
The Contracts are also designed for use in connection with retirement plans
which receive favorable treatment under section 408 of the Code ("Qualified
Plans"). Such Contracts are referred to as "Qualified Plan Contracts." Numerous
special tax rules apply to the participants in Qualified Plans and to Qualified
Plan Contracts. Therefore, no attempt is made in this Prospectus to provide more
than general information about use of the Contract with the various types of
Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of plan
and the terms and conditions of the plan itself. For example, for both
withdrawals and annuity payments under certain Qualified Plan Contracts, there
may be no "investment in the contract" and the total amount received may be
taxable. Both the amount of the contribution that may be made, and the tax
deduction or exclusion that the Owner may claim for such contribution, are
limited under Qualified Plans. If this Contract is used in connection with a
Qualified Plan, the Owner and Annuitant must be the same individual. If a joint
Annuitant is named, all distributions made while the Annuitant is alive must be
made to the Annuitant. Also, if a joint Annuitant is named who is not the
Annuitant's spouse, the annuity options which are available may be limited,
depending on the difference in ages between the Annuitant and joint Annuitant.
Furthermore, the length of any guarantee period may be limited in some
circumstances to satisfy certain minimum distribution requirements under the
Code.
In addition, special rules apply to the time at which distributions must
commence under a Qualified Plan Contract and the form in which the distributions
must be paid. For example, failure to comply with minimum distribution
requirements applicable to Qualified Plans will result in the imposition of an
excise tax. This excise tax generally equals 50% of the amount by which a
minimum required distribution exceeds the actual distribution from the Qualified
Plan. In the case of "Individual Retirement Annuities" ("IRAs"), distributions
of minimum amounts (as specified in the tax law) must generally commence by
April 1 of the calendar year following the calendar year in which the owner
attains age 70 1/2. In the case of certain other Qualified Plans, distributions
of such minimum amounts must generally commence by the later of this date or
April 1 of the calendar year following the calendar year in which the employee
retires.
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There is also a 10% penalty tax on the taxable amount of any payment from
certain Qualified Plan Contracts. There are exceptions to this penalty tax which
vary depending on the type of Qualified Plan. In the case of an IRA, exceptions
provide that the penalty tax does not apply to a payment (a) received on or
after the Owner reaches age 59 1/2, (b) received on or after the Owner's death
or because of the Owner's disability (as defined in the tax law), or (c) made as
a series of substantially equal periodic payments (not less frequently than
annually) for the life (or life expectancy) of the Owner or for the joint lives
(or joint life expectancies) of the Owner and designated beneficiary (as defined
in the tax law). These exceptions, as well as certain others not described
herein, generally apply to taxable distributions from other Qualified Plan
Contracts.
When issued in connection with a Qualified Plan, a Contract will be amended as
generally necessary to conform to the requirements of the plan. However, Owners,
Annuitants, and Beneficiaries are cautioned that the rights of any person to any
benefits under Qualified Plans may be subject to the terms and conditions of the
plans themselves, regardless of the terms and conditions of the Contract. In
addition, KILICO shall not be bound by terms and conditions of Qualified Plans
to the extent such terms and conditions contradict the Contract, unless KILICO
consents.
1. QUALIFIED PLAN TYPES
Following are brief descriptions of the various types of Qualified Plans in
connection with which KILICO may issue a Contract.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." IRAs are subject to limits on the
amounts that may be contributed, the persons who may be eligible and on the time
when distributions may commence. Also, distributions from certain other types of
Qualified Plans may be "rolled over" on a tax-deferred basis into an IRA.
IRAs generally may not provide life insurance coverage, but they may provide a
death benefit that equals the greater of the premiums paid and the Certificate
Value. The Certificate provides a death benefit that in certain circumstances
may exceed the greater of the Purchase Payments and the Certificate Value. It is
possible that the Certificate's death benefit could be viewed as violating the
prohibition on investment in life insurance contracts with the result that the
Certificate would not be viewed as satisfying the requirements of an IRA.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). Section 408(k) of the Code allows
employers to establish simplified employee pension plans for their employees,
using the employees' IRAs for such purposes, if certain criteria are met. Under
these plans the employer may, within specified limits, make deductible
contributions on behalf of the employees to IRAs. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the
treatment of the Certificate's death benefit for purposes of the tax rules
governing IRAs (which would include SEP-IRAs). Employers and employees intending
to use the Certificate in connection with such plans should seek competent
advice.
E. FEDERAL INCOME TAX WITHHOLDING
KILICO will withhold and remit to the U.S. Government a part of the taxable
portion of each distribution made under a Contract unless the distributee
notifies KILICO at or before the time of the distribution that he or she elects
not to have any amounts withheld. In certain circumstances, KILICO may be
required to withhold tax. The withholding rates applicable to the taxable
portion of periodic annuity payments are the same as the withholding rates
generally applicable to payments of wages. In addition, the withholding rate
applicable to the taxable portion of non-periodic payments (including
withdrawals prior to the maturity date) is 10%. As discussed above, the
withholding rate applicable to eligible rollover distributions is 20%.
DISTRIBUTION OF CONTRACTS
The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. KILICO pays commissions to the
seller which may vary but are not anticipated to exceed in the aggregate an
amount equal to six and one-quarter percent of purchase payments. In addition to
commissions, KILICO may, from time to time, pay or allow additional promotional
incentives, in the form of cash or other compensation, to broker-dealers that
sell the Contracts. In some instances, such other incentives may be offered only
to certain licensed broker-dealers that sell or are expected to sell during
specified time periods certain minimum amounts of the Contracts or other
contracts issued by KILICO. The
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Contracts are distributed through the principal underwriter for the Separate
Account, which is Investors Brokerage Services, Inc. ("IBS"), 1 Kemper Drive,
Long Grove, Illinois, 60010, a wholly owned subsidiary of KILICO, which enters
into selling group agreements with affiliated and unaffiliated broker-dealers.
All of the investment options are not available to all Contract Owners. The
investment options are available only under Contracts that are sold or serviced
by broker-dealers that have entered into a selling group agreement that
authorizes the sale of Contracts with the investment options specified in this
Prospectus. Other distributors may sell and service contracts with different
investment options.
VOTING RIGHTS
Proxy materials in connection with any shareholder meeting of a Fund will be
delivered to each Contract Owner with Subaccount interests invested in such Fund
as of the record date for voting at such meeting. Such proxy materials will
include an appropriate form which may be used to give voting instructions.
KILICO will vote such Fund shares held in each Subaccount in accordance with
instructions received from persons having a Subaccount interest in such Fund
shares. Fund shares as to which no timely voting instructions are received will
be voted by KILICO in proportion to the voting instructions received from all
persons in a timely manner. KILICO will also vote any Fund shares attributed to
amounts it has accumulated in the Subaccounts in the same proportion that
Contract Owners vote. A Fund is not required to hold annual shareholders'
meetings. They will, however, hold special meetings as required or deemed
desirable for such purposes as electing trustees, changing fundamental policies
or approving an investment advisory agreement.
Contract Owners of all Contracts participating in each Subaccount shall have
voting rights with respect to the Portfolio invested in by that Subaccount,
based upon each Contract Owner's proportionate interest in that Subaccount as
measured by units. The person having such voting rights will be the Contract
Owner before surrender, the Annuity Date or the death of the Annuitant, and
thereafter, the payee entitled to receive Variable Annuity payments under the
Contract. During the Annuity Period, voting rights attributable to a Contract
will generally decrease as Annuity Units attributable to an Annuitant decrease.
REPORTS TO CONTRACT OWNERS AND INQUIRIES
Immediately after each Contract anniversary, Contract Owners will be sent
statements for their own Contract showing the amount credited to each Subaccount
and to the Fixed Account Option. In addition, Contract Owners transferring
amounts among the investment options or making additional payments will receive
written confirmation of such transactions. Upon request, any Contract Owner will
be sent a current statement in a form similar to that of the annual statement
described above. Each Contract Owner will also be sent annual and semi-annual
reports for the Portfolios that correspond to the Subaccounts in which the
Contract Owner is invested and a list of the securities held in each such
Portfolio, as required by the 1940 Act. In addition, KILICO will calculate for a
Contract Owner the portion of a total amount that must be invested in a selected
Guarantee Period so that the portion grows to equal the original total amount at
the expiration of the Guarantee Period.
A Contract Owner may direct inquiries to the individual who sold him or her the
Contract or may call 1-800-621-5001 or write to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049.
DOLLAR COST AVERAGING
A Contract Owner may predesignate a portion of the Contract Value under a
Contract attributable to a Subaccount to be automatically transferred on a
monthly, quarterly, semiannual or annual basis for a specified duration to one
or more of the other Subaccounts, Guarantee Periods and the Fixed Account during
the Accumulation Period. A Contract Owner may also elect such transfers from a
Guarantee Period or from the Fixed Account on a monthly or quarterly basis for a
minimum duration of one year. Transfers from a Guarantee Period will be subject
to a Market Value Adjustment unless effective within 30 days after the Guarantee
Period ends. A Contract Owner may enroll in this program at the time the
Contract is issued or anytime thereafter by properly completing the Dollar Cost
Averaging enrollment form and returning it to KILICO at its home office at least
five (5) business days prior to the second Tuesday of a month which is the date
that all dollar cost averaging transfers will be made ("Transfer Date").
A Contract Owner may also for purposes of Dollar Cost Averaging allocate all or
a portion of the initial Purchase Payment to the Kemper Money Market Subaccount
#2 which is the only Subaccount with no deduction for the
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<PAGE> 33
1.40% charge for mortality and expense risks and administrative costs. The
Contract Owner must transfer all of the Subaccount Value out of Kemper Money
Market Subaccount #2 within one year from the initial Purchase Payment. If an
Owner terminates Dollar Cost Averaging or does not deplete all Contract Value in
Kemper Money Market Subaccount #2 within one year, KILICO will automatically
transfer any remaining Subaccount Value in Kemper Money Market Subaccount #2 to
Kemper Money Market Subaccount #1.
Transfers will be made in the amounts designated by the Contract Owner and must
be at least $100 per Subaccount, Guarantee Period or Fixed Account. The total
Contract Value in an account at the time Dollar Cost Averaging is elected must
be at least equal to the amount designated to be transferred on each Transfer
Date multiplied by the duration selected. Dollar Cost Averaging will cease
automatically if the Contract Value does not equal or exceed the amount
designated to be transferred on each Transfer Date and the remaining amount will
be transferred.
Dollar Cost Averaging will terminate when (i) the number of designated monthly
transfers has been completed, (ii) the Contract Value attributable to the
transferring account is insufficient to complete the next transfer, (iii) the
Contract Owner requests termination in writing and such writing is received by
KILICO at its home office at least five (5) business days prior to the next
Transfer Date in order to cancel the transfer scheduled to take effect on such
date, or (iv) the Contract is surrendered or annuitized.
If the Fixed Account has a balance of at least $10,000, a Contract Owner may
elect automatic calendar quarter transfers of interest accrued in the Fixed
Account to one or more of the Subaccounts or Guarantee Periods. A Contract Owner
may enroll in this program at any time by completing the proper Dollar Cost
Averaging enrollment form and returning it to KILICO at its home office at least
ten (10) days prior to the end of the calendar quarter. The Transfer Date will
be within five business days of the end of the calendar quarter.
Following the Issue Date, a Contract Owner may initiate, reinstate or change
Dollar Cost Averaging or change existing Dollar Cost Averaging terms by properly
completing the new enrollment form and returning it to KILICO at its home office
at least five (5) business days, ten (10) business days for General Account
transfers, prior to the next Transfer Date such transfer is to be made.
Election of Dollar Cost Averaging is not available during the Annuity Period.
SYSTEMATIC WITHDRAWAL PLAN
KILICO administers a Systematic Withdrawal Plan ("SWP") which allows certain
Contract Owners to pre-authorize periodic withdrawals during the Accumulation
Period. Contract Owners entering into a SWP agreement instruct KILICO to
withdraw selected amounts from the Fixed Account, or from any of the Subaccounts
or Guarantee Periods on a monthly, quarterly, semi-annual or annual basis.
Currently the SWP is available to Contract Owners who request a minimum $100
periodic payment. A market value adjustment will apply to any withdrawals under
the SWP from a Guarantee Period unless effected within 30 days after the
Guarantee Period ends. SWP withdrawals from the Fixed Account are not available
in the first Contract Year and are limited to the amount that is free of
Withdrawal Charges. If the amounts distributed under the SWP from the
Subaccounts or Guarantee Periods exceed the amount free of Withdrawal Charge
then the Withdrawal Charge will be applied on any amounts exceeding the free
withdrawal. WITHDRAWALS TAKEN UNDER THE SWP MAY BE SUBJECT TO THE 10% FEDERAL
TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME TAXES AND WITHHOLDING. SEE
"FEDERAL INCOME TAXES." Contract owners interested in SWP may obtain an
application and full information concerning this program and its restrictions
from their representative or KILICO's home office. The right is reserved to
amend the SWP on thirty days' notice. The SWP may be terminated at any time by
the Contract Owner or KILICO.
29
<PAGE> 34
BUSINESS
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. KILICO is
licensed in the District of Columbia and all states except New York. KILICO is a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company.
CORPORATE CONTROL EVENTS
On January 4, 1996 (the acquisition date), an investor group comprised of Zurich
Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and Insurance
Partners Offshore (Bermuda), L.P. (together with IP, "Insurance Partners")
acquired all of the issued and outstanding common stock of Kemper. As a result
of the change in control, Zurich and Insurance Partners own 80 percent and 20
percent, respectively, of Kemper and therefore KILICO.
The acquisition of KILICO was accounted for using the purchase method of
accounting. The consolidated financial statements of KILICO prior to January 4,
1996, were prepared on a historical cost basis and have been labeled as
"preacquisition" throughout this Prospectus.
Under purchase accounting, KILICO's assets and liabilities have been marked to
their relative fair market values as of the acquisition date. The difference
between the allocated cost of $745.6 million of acquiring KILICO and the net
fair market values of KILICO's assets and liabilities as of the acquisition date
resulted in $254.9 million of goodwill. KILICO is amortizing goodwill on a
straight-line basis over twenty-five years. KILICO has presented January 4, 1996
(the acquisition date) as the opening purchase accounting balance sheet for
comparative purposes throughout this Prospectus.
Purchase accounting adjustments primarily affected the recorded historical
values of fixed maturities, mortgage loans, other invested assets, deferred
insurance acquisition costs, future policy benefits and deferred income taxes.
(See note captioned "Summary of Significant Accounting Policies" in the notes to
the consolidated financial statements below.)
STRATEGIC INITIATIVES
Since late 1991, KILICO has intensified the management of its real
estate-related investments due to adverse market conditions. KILICO also
successfully implemented strategies over the last several years to reduce both
its joint venture operating losses and the level of its real estate-related
investments. These strategies included individual property sales, refinancings
and restructurings, as well as bulk sale transactions completed in December 1995
in anticipation of the 1996 change in control. As a result of these strategies,
KILICO reduced its holdings of real estate-related investments from 36.2 percent
of its total invested assets and cash at year-end 1991 to 5.9 percent at
year-end 1996.
Further addressing the quality of its investment portfolio, KILICO has reduced
its holdings of below investment-grade securities to 0.3 percent of its total
invested assets and cash at year-end 1996.
The management, operations and strategic directions of KILICO were integrated
during 1992 and 1993 with those of another Kemper subsidiary, Federal Kemper
Life Assurance Company ("FKLA"). The integration was designed to streamline
management, control costs, improve profitability, increase operating
efficiencies and productivity, and to expand both companies' distribution
capabilities. Headquartered in Long Grove, Illinois, FKLA markets term and
interest-sensitive life insurance, as well as certain annuity products through
brokerage general agents and other independent distributors. As described below,
KILICO has emphasized different products and distribution methods.
NARRATIVE DESCRIPTION OF BUSINESS
KILICO offers both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual term
life, universal life and variable life insurance products through various
distribution channels. KILICO offers investment-oriented products, guaranteed
returns or a combination of both, to help policyholders meet multiple insurance
and financial objectives. Financial institutions, securities brokerage firms,
insurance agents and financial planners are important distribution channels for
KILICO's products. In 1996, INVEST Financial Corporation, an affiliated company
until June 28, 1996 and EVEREN Securities, Inc., an
30
<PAGE> 35
affiliated company until September 13, 1995, accounted for approximately 24
percent and 12 percent, respectively, of KILICO's first-year sales, compared
with 37 percent and 21 percent, respectively, in 1995. KILICO's sales mainly
consist of deposits received on certain long duration annuity contracts as well
as reinsurance assumed from FKLA during 1996. (See note captioned "Reinsurance"
in the notes to the consolidated financial statements and see the table
captioned "Sales" below.)
Annuities have accounted for approximately 98 percent of KILICO's sales in
recent years. KILICO's annuities generally have surrender charges that are a
specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
Over the last several years, in part reflecting the current interest rate
environment, KILICO has increased its emphasis on marketing its separate account
products. Unlike the fixed-rate annuity business where KILICO manages spread
revenue, variable annuities pose minimal investment risk for KILICO, as
policyholders invest in one or more of several underlying investment funds.
KILICO, in turn, receives administrative fee revenue. KILICO's separate account
assets totaled $2.1 billion at December 31, 1996, compared with $1.8 billion and
$1.5 billion at December 31, 1995 and 1994, respectively. KILICO's sales of its
separate account annuities were $254.8 million in 1996, $151.1 million in 1995
and $250.8 million in 1994. Despite KILICO's strategy to emphasize the sale of
variable annuities, such sales declined in 1995, compared with 1994, due to
competitive conditions in certain distribution channels, in part reflecting
KILICO's financial strength and performance ratings and uncertainty concerning
KILICO's ownership during this period. Rating improvements in 1996 (see
"Rankings and ratings" below) and the 1996 change in control helped to increase
KILICO's sales in 1996, compared with 1995.
In order to increase variable annuity sales, KILICO introduced Kemper PASSPORT
in 1992. Kemper PASSPORT is a variable and market value adjusted annuity
featuring a choice of investment portfolios, an increasing estate benefit,
tax-free transfers and guaranteed rates for a variety of terms. In 1994, KILICO
changed Kemper PASSPORT from a single premium annuity to one with a flexible
premium structure and also added a small capitalization equity subaccount as
another investment portfolio option. In 1995 and 1996, KILICO also added several
new subaccounts and new investment managers as investment portfolio choices for
certain purchasers of the Kemper Advantage III variable annuity product. During
late 1996, KILICO also introduced POWER V, a flexible premium variable life
insurance product.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted general account annuity sales for KILICO during
1996. Beginning in the second half of 1994 and in early 1995, KILICO began
raising crediting rates on certain of its existing and new general account
products, reflecting both competitive conditions and a rising interest rate
environment. As a result of these actions, sales of general account annuities
increased and represented 62.0 percent of KILICO's total sales in 1995, compared
with 46.0 percent in 1994. During late 1995, as interest rates fell, KILICO
began reducing crediting rates on certain of its existing and new general
account products reflecting both competitive conditions and the falling interest
rate environment. As a result of these events, as well as a strong stock and
bond market during 1996, which influenced potential buyers of fixed annuity
products to purchase variable annuity products, sales of general account
annuities decreased to 34.8 percent of KILICO's total sales in 1996.
Beginning in 1995, KILICO began to sell term life insurance products in order to
balance its product mix and asset-liability structure. In December 1996, KILICO
also assumed $7.3 million of term life insurance premiums from FKLA. Excluding
the amounts assumed from FKLA, KILICO's total term life sales, including new and
renewal premiums, amounted to $565 thousand in 1996, compared with $236 thousand
in 1995.
NAIC RATIOS
The National Association of Insurance Commissioners (the "NAIC") annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System ("IRIS") ratios. There presently are twelve IRIS ratios. The
primary purpose of the ratios is to provide an "early warning" of any negative
developments. The NAIC reports the ratios to state regulators who may then
contact the companies if three or more ratios fall outside the NAIC's "usual
ranges".
Based on statutory financial data as of December 31, 1996, KILICO had only one
ratio outside the usual ranges. KILICO's change in reserving ratio reflected the
level of interest-sensitive life surrenders and withdrawals during 1996 as well
as the 1996 reinsurance agreement with FKLA. Other than certain states
requesting quarterly
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<PAGE> 36
financial reporting and/or explanations of the underlying causes for certain
ratios, no state regulators have taken any action due to KILICO's IRIS ratios
for 1996 or earlier years.
GUARANTY ASSOCIATION ASSESSMENTS
From time to time, mandatory assessments are levied on KILICO by life and health
guaranty associations of most states in which KILICO is licensed, to cover
losses to policyholders of insolvent or rehabilitated insurance companies. These
associations levy assessments (up to prescribed limits) on all member insurers
in a particular state, in order to pay claims on the basis of the proportionate
share of premiums written by member insurers in the lines of business in which
the insolvent or rehabilitated insurer engaged. These assessments may be
deferred or forgiven in certain states if they would threaten an insurer's
financial strength, and, in some states, these assessments can be partially
recovered through a reduction in future premium taxes.
In the early 1990s, there were a number of failures of life insurance companies.
KILICO's financial statements include provisions for all known assessments that
will be levied against KILICO by various state guaranty associations as well as
an estimate of amounts (net of estimated future premium tax recoveries) that
KILICO believes will be assessed in the future for failures which have occurred
to date and for which the life insurance industry has estimated the cost to
cover losses to policyholders. Assessments levied against KILICO and charged to
expense in 1996, 1995 and 1994 amounted to $601 thousand, $5.8 million and zero,
respectively. Such amounts relate to accrued guaranty fund assessments of $5.8
million, $5.0 million and $4.0 million at December 31, 1996, 1995 and 1994,
respectively. No assessments were charged to expense during 1994 as KILICO had
established adequate accruals for all known insolvencies where an estimate of
the cost to cover losses to policyholders was available as of December 31, 1994.
Additional assessments charged to expense in 1996 and 1995 reflect accruals for
the life insurance industry's new or revised loss estimates for certain
insolvent insurance companies.
RISK-BASED CAPITAL
Since the early 1990s, reflecting a recessionary environment and the
insolvencies of a few large life insurance companies, both state and federal
legislators have increased scrutiny of the existing insurance regulatory
framework. While various initiatives, such as a new model investment law and the
codification of statutory accounting principles, are being considered for future
implementation by the NAIC, it is not presently possible to predict the future
impact of potential regulatory changes on KILICO.
Under asset adequacy and risk-based capital rules in Illinois, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The new asset adequacy rules are designed to assure that
reserves and assets are adequate to cover liabilities under a variety of
economic scenarios. The focus of the new capital rules is a risk-based formula
that applies prescribed factors to various risk elements in an insurer's
business and investments to develop a minimum capital requirement designed to be
proportional to the amount of risk assumed by the insurer. KILICO has capital
levels substantially exceeding any which would mandate action under the
risk-based capital rules and is in compliance with applicable asset adequacy
rules.
RESERVES AND REINSURANCE
The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type (in millions):
<TABLE>
<CAPTION>
PREACQUISITION
---------------------------
DECEMBER 31 JANUARY 4 DECEMBER 31 DECEMBER 31
1996 1996 1995 1994
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
General account annuities.................... $3,507 $3,805 $3,794 $4,010
Interest-sensitive life insurance............ 743 780 779 833
Term life reserves........................... 7 -- -- --
Ceded future policy benefits................. 427 503 503 643
------ ------ ------ ------
Total.............................. $4,684 $5,088 $5,076 $5,486
====== ====== ====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions in which KILICO insured liabilities of approximately
$516 million in 1992 and $416 million in 1991 with Fidelity Life Association
("FLA"), an affiliated mutual insurance company. FLA shares directors,
management, operations and
32
<PAGE> 37
employees with FKLA pursuant to an administrative and management services
agreement. FLA produces whole life policies not produced by FKLA or KILICO as
well as other policies similar to certain FKLA policies. At December 31, 1996,
KILICO's reinsurance recoverable from FLA related to these coinsurance
transactions totaled approximately $427.0 million. KILICO remains primarily
liable to its policyholders for this amount. Utilizing FKLA's employees, KILICO
is the servicing company for this coinsured business and is reimbursed by FLA
for the related servicing expenses. Excluding this coinsurance, KILICO, because
it is primarily an annuity company, reinsures only a very limited portion of its
business. During December 1996, KILICO assumed on a yearly renewable term basis
approximately $14.4 billion (face amount) of term life insurance from FKLA. As a
result of this transaction, KILICO recorded premiums and reserves of
approximately $7.3 million. (See the note captioned "Reinsurance" in the notes
to the consolidated financial statements below.)
COMPETITION
KILICO is in a highly competitive business and competes with a large number of
other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with securities
brokerage and investment advisory firms as well as other institutions that
manage assets, produce financial products or market other types of investment
products.
KILICO's principal methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents. Certain of
KILICO's financial strength ratings and claims-paying/performance ratings,
however, were lower in 1994 and 1995 than in earlier years, and were under
review in 1994 and 1995, due to uncertainty with respect to Kemper's and
KILICO's ownership. These ratings impacted sales efforts in certain markets;
however, increases in KILICO's financial strength ratings and
claims-paying/performance ratings in January 1996 favorably impacted variable
annuity sales during 1996 and should continue to favorably impact future sales.
To address its competition, KILICO has adopted certain business strategies.
These include systematic reductions of investment risk and strengthening of its
capital position; continued focus on existing and new variable annuity and
variable life insurance products; distribution through diversified channels; and
ongoing efforts to continue as a low-cost provider of insurance products and
high-quality services to agents and policyholders through the use of technology.
EMPLOYEES
At December 31, 1996, KILICO utilized the services of approximately 514
employees of FKLA, which are also shared with FLA. On January 1, 1996,
approximately 160 employees of Zurich Life Insurance Company of America
("ZLICA"), an affiliated company, became employees of FKLA in connection with
the integration of ZLICA's operations with those of FKLA's. On January 5, 1996,
KILICO, FKLA, FLA and ZLICA began to operate under the trade name Zurich Kemper
Life. On July 1, 1996, Kemper acquired 100 percent of the issued and outstanding
common stock of ZLICA from Zurich.
REGULATION
KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions in which KILICO is licensed to
do business. These departments enforce laws and regulations designed to assure
that insurance companies maintain adequate capital and surplus, manage
investments according to prescribed character, standards and limitations and
comply with a variety of operational standards. The departments also make
periodic examinations of individual companies and review annual and other
reports on the financial condition of each company operating within their
respective jurisdictions. Regulations, which often vary from state to state,
cover most aspects of the life insurance business, including market practices,
forms of policies and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
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<PAGE> 38
In addition, variable life insurance and annuities offered by KILICO, and the
related separate accounts, are subject to regulation by the Securities and
Exchange Commission (the "SEC").
KILICO believes it is in compliance in all material respects with all applicable
regulations.
INVESTMENTS
A changing marketplace has affected the life insurance industry and to
accommodate customers' increased preference for safety over higher yields,
KILICO has systematically reduced its investment risk and strengthened its
capital position.
KILICO's cash flow is carefully monitored and its investment program is
regularly and systematically planned to provide funds to meet all obligations
and to optimize investment return. For securities, portfolio management is
handled by an affiliated company, Zurich Kemper Investments, Inc. ("ZKI"), and
its subsidiaries and affiliates, with KILICO's real estate-related investments
being handled by a Kemper real estate subsidiary. Investment policy is directed
by KILICO's board of directors. KILICO's investment strategies take into account
the nature of each annuity and life insurance product, the respective crediting
rates and the estimated future policy benefit maturities. (See "INVESTMENTS"
below.)
PROPERTIES
KILICO shares 99,000 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois.
LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to its
insurance business. Based upon the advice of legal counsel, KILICO's management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.
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<PAGE> 39
SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1996 and for the opening balance sheet as of the
acquisition date, January 4, 1996. Such information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in this Prospectus. All amounts are shown in millions.
<TABLE>
<CAPTION>
PREACQUISITION
-----------------------------------------------
DECEMBER 31
DECEMBER 31 JANUARY 4 -----------------------------------------------
1996 1996 1995 1994 1993 1992
----------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE..................... $ 356.2 $ -- $ 68.1(1) $ 330.5 $ 337.4 $ 353.6
======== ======== ======== ======== ======== ========
NET INCOME EXCLUDING REALIZED
INVESTMENT RESULTS.............. $ 25.6 $ -- $ 74.2 $ 61.9 $ 33.7 $ 10.3
======== ======== ======== ======== ======== ========
NET INCOME (LOSS)................. $ 34.4 $ -- $ (133.0)(1) $ 26.4 $ 14.0 $ (51.9)
======== ======== ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account assets..... $2,127.2 $1,761.1 $1,761.1 $1,508.0 $1,499.5 $1,140.3
======== ======== ======== ======== ======== ========
Total assets...................... $7,717.9 $7,682.7 $7,581.7 $7,537.1 $8,113.7 $6,845.9
======== ======== ======== ======== ======== ========
Future policy benefits............ $4,256.5 $4,585.1 $4,573.2 $4,843.7 $5,040.0 $5,040.7
======== ======== ======== ======== ======== ========
Stockholder's equity.............. $ 751.0 $ 745.6 $ 605.9 $ 434.0 $ 654.6 $ 488.7
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Total revenue and net income (loss) for 1995 were adversely impacted by real
estate-related investment losses. Such losses reflect a change in KILICO's
strategy with respect to its real estate-related investments in connection
with the January 4, 1996 acquisition of Kemper by the Zurich-led investor
group. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
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<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As discussed in the note captioned "Summary of Significant Accounting Policies"
in the notes to the consolidated financial statements, Kemper, and therefore
KILICO, were acquired on January 4, 1996, by an investor group led by Zurich. In
connection with the acquisition, KILICO's assets and liabilities were marked to
their respective fair market values as of the acquisition date in conformity
with the purchase accounting method required under generally accepted accounting
principles.
KILICO's financial statements as of January 4, 1996, and as of and for the year
ended December 31, 1996, have been adjusted to reflect the effects of such
purchase accounting adjustments. KILICO's financial statements for the years
ended December 31, 1995 and 1994 have been prepared on a historical cost basis
and do not reflect such purchase accounting adjustments.
RESULTS OF OPERATIONS
KILICO recorded net income of $34.4 million in 1996, compared with net loss of
$133.0 million in 1995 and net income of $26.4 million in 1994. The increase in
net income in 1996, compared with 1995 and 1994, was primarily due to a decrease
in the level of real estate-related realized investment losses. KILICO's
strategy with respect to its real estate-related investments changed
dramatically as of year-end 1995 in connection with the Zurich-led investor
group's acquisition of Kemper. This change, as further discussed below, resulted
in significant reductions in real estate-related investments and significant
realized capital losses in the second half of 1995.
The following table reflects the components of net income (loss):
NET INCOME (LOSS)
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
PREACQUISITION
-----------------
1996 1995 1994
----- ------- ------
<S> <C> <C> <C>
Operating earnings............... $25.6 $ 74.2 $ 61.9
Net realized investment gains
(losses)....................... 8.8 (207.2) (35.5)
----- ------- ------
Net income (loss)...... $34.4 $(133.0) $ 26.4
===== ======= ======
</TABLE>
The following table reflects the major components of realized investment results
included in net income (loss) above. (See "INVESTMENTS" below, and the note
captioned "Invested Assets and Related Income" in the notes to the consolidated
financial statements.)
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
PREACQUISITION
-----------------
1996 1995 1994
----- ------- ------
<S> <C> <C> <C>
Real estate-related gains
(losses)....................... $11.4 $(211.6) $(27.1)
Fixed maturity write-downs....... (.9) (4.7) --
Other gains (losses), net........ (1.7) 9.1 (8.4)
----- ------- ------
Total.................. $ 8.8 $(207.2) $(35.5)
===== ======= ======
</TABLE>
The higher level of real estate-related losses in 1995, compared with both 1996
and 1994, reflected realized capital losses predominately from real
estate-related bulk sale transactions in December 1995, as well as a higher
level of write-downs on real estate-related investments. These sales and
write-downs in 1995, reflect Zurich's and Insurance Partners' strategies,
adopted by KILICO, with respect to the disposition of real estate-related
investments. Other realized investment gains and losses for 1996, 1995 and 1994
relate primarily to the sale of fixed maturity investments. The fixed maturity
losses generated in 1996 and 1994 arose primarily from the sale of fixed
maturity investments, consisting of lower yielding U.S. Treasury bonds and
collateralized mortgage obligations in 1996 and investment-grade corporate
securities and collateralized mortgage obligations in 1994, related to
repositionings of KILICO's fixed maturity investment portfolio. The proceeds
from the repositionings,
36
<PAGE> 41
together with cash and short-term investments, were reinvested into higher
yielding corporate bonds and asset-backed securities in 1996 and U.S. government
and agency guaranteed mortgage pass-through securities issued by the Government
National Mortgage Association and the Federal National Mortgage Association in
1994. (See "INVESTMENTS" below.)
Operating earnings decreased to $25.6 million in 1996, compared with $74.2
million and $61.9 million in 1995 and 1994, respectively, primarily due to
purchase accounting adjustments which reduced investment income and increased
expenses. Operating income increased in 1995, compared with 1994, primarily due
to an increase in fees and other income, reductions in operating expenses and an
increase in the net deferral of insurance acquisition costs, partially offset by
an increase in commissions, taxes, licenses and fees.
Investment income was lower in 1996, compared with both 1995 and 1994, primarily
reflecting purchase accounting adjustments related to the amortization of
premiums on fixed maturity investments. Under purchase accounting, the market
value of KILICO's fixed maturity investments as of January 4, 1996 became
KILICO's new cost basis in such investments. The difference between the new cost
basis and original par is then amortized against investment income over the
remaining effective lives of the fixed maturity investments. As a result of the
interest rate environment as of January 4, 1996, the market value of KILICO's
fixed maturity investments was approximately $133.9 million greater than
original par. The amortization of such premiums reduced investment income by
approximately $22.7 million in 1996, compared with 1995 and 1994.
Investment income and interest credited also declined in 1996, compared with
1995 and 1994, as a result of a decrease in total invested assets and future
policy benefits. Such decreases were the result of surrender and withdrawal
activity over the last three years.
Investment income was also negatively impacted during 1996, compared with 1995
and 1994, by a higher level of cash and short-term investments held in the first
quarter of 1996. The increase in cash and short-term investments in the first
quarter of 1996 was caused in part by the cash proceeds received from bulk sales
of real estate-related investments in late December 1995. The reduction in real
estate-related investments reflects KILICO's current strategy to continue to
reduce its investments in, and overall exposure to, real estate-related
investments.
Investment income was positively impacted in 1996, 1995 and 1994 from the
benefits of capital contributions to KILICO and from reductions in the level of
nonperforming real estate-related investments, primarily from the sales of
certain real estate-related investments to affiliated non-life realty companies.
These sales totaled $3.5 million in 1995 and $154.0 million in 1994 and resulted
in no realized gain or loss to KILICO. Investment income in 1996 and 1995 also
benefitted from the above-mentioned repositionings of KILICO's investment
portfolio, however, the full benefits of KILICO's 1996 repositioning will not
occur until 1997.
The following table reflects KILICO's sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
PREACQUISITION
------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Annuities:
General account...................... $140.6 $247.6 $214.2
Separate account..................... 254.8 151.1 250.8
------ ------ ------
Total annuities................... 395.4 398.7 465.0
------ ------ ------
Life Insurance:
Term life............................ 7.8 .2 --
Interest-sensitive life.............. .6 .2 .8
------ ------ ------
Total life........................ 8.4 .4 .8
------ ------ ------
Total sales............. $403.8 $399.1 $465.8
====== ====== ======
</TABLE>
Sales of annuity products consist of total deposits received. The decrease in
1996 general account (fixed annuity) sales, compared with 1995, and the increase
in general account annuity sales in 1995, compared with 1994, is reflective of
the fluctuating interest rate environments and the stock and bond markets during
1996 and 1995, respectively, which made variable annuities more attractive to
consumers in 1996, and fixed annuities more attractive to consumers during 1995.
The increase in separate account (variable sales) in 1996, compared with
37
<PAGE> 42
1995 and 1994, was in part due to improvements in KILICO's financial strength
and performance ratings in January 1996, the addition of new separate account
investment fund options, new investment fund managers and a strong underlying
stock and bond market. Sales of variable annuities not only increase
administrative fees earned but they also pose minimal investment risk for
KILICO, as policyholders invest in one or more of several underlying investment
funds which invest in stocks and bonds. Separate account sales declined in 1995,
compared with 1994, due to competitive conditions in certain distribution
channels, in part reflecting KILICO's financial strength and performance ratings
which were lower in 1995 and 1994, compared with 1996, and uncertainty
concerning KILICO's ownership. KILICO believes that the increase in its
financial strength and performance ratings in January 1996 together with
KILICO's association with Zurich, will continue to assist in KILICO's future
sales efforts.
Beginning in 1995, KILICO began to sell low-cost term life insurance products
offering initial level premiums for 5, 10, 15 and 20 years in order to balance
its product mix and asset-liability structure. In December 1996, KILICO also
assumed $7.3 million of term life insurance premiums from FKLA. (See the note
captioned "Reinsurance" in the notes to the consolidated financial statements.)
Excluding the amounts assumed from FKLA, KILICO's total term life sales,
including new and renewal premiums, amounted to $565 thousand in 1996, compared
with $236 thousand in 1995. Face amount of new business issued during 1996 and
1995 amounted to approximately $319 million and $120 million, respectively.
Included in fees and other income are administrative fees received from KILICO's
separate account products of $25.3 million in 1996, compared with $21.9 million
and $20.8 million in 1995 and 1994, respectively. Administrative fee revenue
increased in each of the last three years due to growth in average separate
account assets. Other income also included surrender charge revenue of $5.4
million in 1996, compared with $7.7 million and $7.4 million in 1995 and 1994,
respectively, as total general account and separate account policyholder
surrenders and withdrawals decreased in 1996, compared with 1995. The decrease
in surrender charge revenue also reflects that 57 percent of KILICO's fixed and
variable annuity liabilities are subject to minimal (5 percent or less) or no
surrender charges, compared with 56 percent in 1995 and 43 percent in 1994. Also
included in other income in 1995 is a ceding commission experience adjustment
which resulted in income of $4.4 million related to certain reinsurance
transactions entered into by KILICO during 1992. (See the note captioned
"Reinsurance" in the notes to the consolidated financial statements.)
POLICYHOLDER SURRENDERS AND WITHDRAWALS
(in millions)
<TABLE>
<CAPTION>
PREACQUISITION
---------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
General account..................... $652.0 $755.9 $652.5
Separate account.................... 196.7 205.6 150.3
------ ------ ------
Total.......................... $848.7 $961.5 $802.8
====== ====== ======
</TABLE>
Reflecting the current interest rate environment and other competitive market
factors, KILICO adjusts its crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and withdrawal
activity. KILICO can also improve spread revenue over time by increasing
investment income. Beginning in late 1994, as a result of rising interest rates
and other competitive market factors, KILICO began to increase crediting rates
on certain interest-sensitive products which adversely impacted spread income.
The declines in interest rates during the last three quarters of 1995, however,
and the current interest rate environment during 1996, have mitigated at
present, competitive pressures to increase existing renewal crediting rates
further.
Policyholder withdrawals increased during 1995, compared with 1994, due to
planned reductions in fixed annuity crediting rates, a rising interest rate
environment during the last half of 1994 and early 1995, uncertainty regarding
KILICO's ownership and KILICO's financial strength ratings and
claims-paying/performance ratings. KILICO's crediting rate increases in late
1994 and in early 1995 were designed to reduce the level of future withdrawals.
As a result of increases in renewal crediting rates and declining interest rates
in the last three quarters of 1995, policyholder surrenders and withdrawals in
1996 declined from the level of surrenders and withdrawals in 1995. KILICO
expects that the level of surrender and withdrawal activity experienced should
remain at a similar level in 1997 given current projections for relatively
stable interest rates.
Commissions, taxes, licenses and fees were lower in 1996, compared with 1995,
but were higher in 1995, compared with 1994, primarily reflecting the level of
guaranty fund assessments in each of those years. Expenses
38
<PAGE> 43
for such assessments totaled $601 thousand, $5.8 million, and zero in 1996, 1995
and 1994, respectively. (See "Guaranty association assessments" "Business"
above.)
Operating expenses declined in 1995, compared with 1994, primarily as a result
of a decrease in personnel. Personnel declined during 1995 as a result of
uncertainty concerning KILICO's ownership. Operating expenses increased in 1996,
compared with 1995, as a result of restaffing after the completion of the
merger.
Operating earnings were negatively impacted by the net deferral of insurance
acquisition costs and the amortization of the value of business acquired in
1996, compared with the net deferral of insurance acquisition costs in 1995 and
1994. Deferred insurance acquisition costs, and the related amortization
thereof, for policies sold prior to January 4, 1996 have been replaced under
purchase accounting by the value of business acquired. The value of business
acquired reflects the present value of the right to receive future cash flows
from insurance contracts existing at the date of acquisition. The amortization
of the value of business acquired is calculated assuming an interest rate equal
to the liability or contract rate on the value of the business acquired. (See
note captioned "Summary of Significant Accounting Policies" in the notes to the
consolidated financial statements.) Deferred insurance acquisition costs are
established on all new policies sold after January 4, 1996.
The net amortization of the value of business acquired in 1996 was adversely
affected by net realized capital gains in 1996, while the net deferral of
insurance acquisition costs in 1995 and 1994 was positively affected by realized
capital losses, partially offset by the level of policyholder surrenders and
withdrawals in 1995 and 1994. Net realized capital gains and policyholder
surrenders tend to accelerate the amortization of both the value of business
acquired and deferred insurance acquisition costs as they tend to decrease
KILICO's projected future estimated gross profits. Net realized capital losses
tend to defer such amortization into future periods as they tend to increase
KILICO's projected future estimated gross profits.
The higher level of deferral of policy acquisition costs in 1995, compared with
1994, reflected an increase in the amount of imputed interest capitalized due to
improvements in projected future revenue streams primarily as a result of the
decline in the level of nonperforming real estate-related investments. The
amortization of policy acquisition costs was favorably impacted during 1995 due
to real estate-related capital losses. Excluding the effects of the real
estate-related capital losses, the amortization of policy acquisition costs
increased in 1995, compared with 1994, primarily as a result of improved net
operating earnings during 1995.
The difference between the cost of acquiring KILICO and the net fair market
value of KILICO's assets and liabilities as of January 4, 1996 was recorded as
goodwill. The amortization of goodwill increased expenses by $10.2 million in
1996, compared with 1995 and 1994. KILICO is amortizing goodwill on a
straight-line basis over twenty-five years.
39
<PAGE> 44
INVESTMENTS
KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors, its
evaluation of risk and return in various markets, consistency with KILICO's
business strategy and investment guidelines approved by the board of directors,
the interest rate environment, liability durations and changes in market and
business conditions. In addition, as previously discussed, KILICO's strategy
with respect to its real estate-related investments changed dramatically by
year-end 1995.
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
1996 1996
--------------- ---------------
<S> <C> <C> <C> <C>
Cash and short-term investments............................. $ 74 1.6% $ 398 8.4%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1........................................ 3,231 71.5 3,096 65.2
NAIC(1) Class 2........................................ 621 13.7 570 12.0
Below investment grade:
Performing............................................. 13 .3 78 1.6
Nonperforming.......................................... 1 -- 5 .1
Joint venture mortgage loans................................ 111 2.4 110 2.3
Third-party mortgage loans.................................. 107 2.4 145 3.1
Other real estate-related investments....................... 50 1.1 34 .7
Policy loans................................................ 288 6.4 289 6.1
Other....................................................... 24 .6 20 .5
------ ----- ------ -----
Total(2).......................................... $4,520 100.0% $4,745 100.0%
====== ===== ====== =====
</TABLE>
- ---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
the notes to the consolidated financial statements.
FIXED MATURITIES
KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's equity, net of any applicable income tax expense. The aggregate
unrealized depreciation on fixed maturities at December 31, 1996 was $63.2
million, compared with no unrealized appreciation or depreciation, at January 4,
1996 as a result of purchase accounting adjustments. KILICO does not record a
net deferred tax benefit for the aggregate unrealized depreciation on
investments. Fair values are sensitive to movements in interest rates and other
economic developments and can be expected to fluctuate, at times significantly,
from period to period.
At December 31, 1996, investment-grade fixed maturities and cash and short-term
investments accounted for 86.8 percent of KILICO's invested assets and cash,
compared with 85.6 percent at January 4, 1996. Approximately 58.4 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1996,
compared with 66.0 percent at January 4, 1996.
Approximately 36.4 percent of KILICO's investment-grade fixed maturities at
December 31, 1996 were mortgage-backed securities, down from 45.7 percent at
January 4, 1996, due to sales and paydowns during 1996. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. KILICO has not made any investments in interest-only
or other similarly volatile tranches of mortgage-backed securities. KILICO's
mortgage-backed investments are generally of AAA credit quality, and the markets
for these investments have been and are expected to remain liquid. KILICO plans
to continue to reduce its holding of such investments over time.
40
<PAGE> 45
As a result of the previously discussed 1996 repositioning of KILICO's fixed
maturity portfolio, approximately 8.8 percent of KILICO's investment-grade fixed
maturities at December 31, 1996 consisted of corporate asset-backed securities.
The majority of KILICO's investments in asset-backed securities were backed by
manufactured housing loans, auto loans and home equity loans.
Future investment income from mortgage-backed securities and other asset-backed
securities may be affected by the timing of principal payments and the yields on
reinvestment alternatives available at the time of such payments. As a result of
purchase accounting adjustments to fixed maturities, most of KILICO's
mortgage-backed securities are carried at a premium over par. Prepayment
activity resulting from a decline in interest rates on such securities purchased
at a premium would accelerate the amortization of the premiums which would
result in reductions of investment income related to such securities. At
December 31, 1996, KILICO had unamortized premiums and discounts of $24.7
million and $5.7 million, respectively, related to mortgage-backed and asset-
backed securities. KILICO believes that as a result of the purchase accounting
adjustments and the current interest rate environment, anticipated prepayment
activity is expected to result in reductions to future investment income similar
to those reductions experienced by KILICO in 1996.
Amortization of the discount or premium from mortgage-backed and asset-backed
securities is recognized using a level effective yield method which considers
the estimated timing and amount of prepayments of the underlying loans and is
adjusted to reflect differences which arise between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. To
the extent that the estimated lives of such securities change as a result of
changes in prepayment rates, the adjustment is also included in net investment
income.
The table below provides information about KILICO's mortgage-backed and
asset-backed securities that are sensitive to changes in interest rates. The
expected maturity dates have been calculated on a security by security basis
using prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current interest
rate and economic environment.
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1996 1997 1998 1999 2000 2001 THEREAFTER TOTAL 1996
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:...........
Mortgage-backed bonds..... $1,402.0 $161.4 $239.0 $261.4 $166.1 $ 61.8 $512.3 $1,402.0 $1,402.0
Average yield........... 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83%
Asset-backed bonds........ $ 339.3 $ 31.4 $ 38.1 $ 36.6 $ 44.4 $ 51.0 $137.8 $ 339.3 $ 339.3
Average yield........... 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82%
-------- -------- --------
$1,741.3 $1,741.3 $1,741.3
======== ======== ========
</TABLE>
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1996, is 4.6 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately 1.7
years, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.3 years.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 8 issuers at December 31, 1996, totaled 0.3 percent
of cash and invested assets at December 31, 1996, compared with 1.7 percent at
January 4, 1996. (See note captioned "Invested Assets and Related Income" in the
notes to the consolidated financial statements.) Below investment-grade
securities are generally unsecured and often subordinated to other creditors of
the issuers. These issuers may have relatively higher levels of indebtedness and
be more sensitive to adverse economic conditions than investment-grade issuers.
KILICO has significantly reduced its exposure to below investment-grade
securities since 1991. This strategy takes into account the more conservative
nature of today's consumer and the resulting demand for higher-quality
investments in the life insurance and annuity marketplace.
REAL ESTATE-RELATED INVESTMENTS
The $267.7 million real estate-related portfolio held by KILICO, consisting of
joint venture and third-party mortgage loans and other real estate-related
investments, constituted 5.9 percent of cash and invested assets at December 31,
1996, compared with $288.9 million, or 6.1 percent, at January 4, 1996. The
decrease in real estate-related investments during 1996 was primarily due to
asset sales.
41
<PAGE> 46
As reflected in the "Real estate portfolio" table below, KILICO has continued to
fund both existing projects and legal commitments. The future legal commitments
were $197.4 million at December 31, 1996. This amount represented a net decrease
of $50.8 million since January 4, 1996, primarily due to sales and fundings in
1996. As of December 31, 1996, KILICO expects to fund approximately $39.6
million of these legal commitments, along with providing capital to existing
projects. The disparity between total legal commitments and the amount expected
to be funded relates principally to standby financing arrangements that provide
credit enhancements to certain tax-exempt bonds, which KILICO does not presently
expect to fund. The total legal commitments, along with estimated working
capital requirements, are considered in KILICO's evaluation of reserves and
write-downs. (See note captioned "Financial Instruments--Off- Balance-Sheet
Risk" in the notes to the consolidated financial statements.)
Generally, at the inception of a real estate loan, KILICO anticipated that it
would roll over the loan and reset the interest rate at least one time in the
future, although KILICO is not legally committed to do so. KILICO anticipates
that as certain mortgages mature they could be rolled over, restructured or
foreclosed if not earlier disposed of.
Excluding the $7.5 million of real estate owned and $11.7 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $248.5 million
at December 31, 1996, after reserves and write-downs. Of this amount, $210.3
million are on accrual status with a weighted average interest rate of
approximately 8.6 percent. Of these accrual loans, 17.0 percent have terms
requiring current periodic payments of their full contractual interest, 58.2
percent require only partial payments or payments to the extent of cash flow of
the borrowers, and 24.8 percent defer all interest to maturity.
The equity investments in real estate at December 31, 1996 consisted of KILICO's
other equity investments in joint ventures. These equity investments include
KILICO's share of periodic operating results. KILICO, as an equity owner or
affiliate thereof, has the ability to fund, and historically has elected to
fund, operating requirements of certain joint ventures.
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
OTHER REAL ESTATE-RELATED
MORTGAGE LOANS INVESTMENTS
---------------- ------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ -------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 4, 1996..................... $110.2 $144.5 $ 22.3 $ .5 $11.4 $288.9(1)
Additions (deductions):
Fundings....................................... 9.6 2.5 -- 15.0 -- 27.1
Interest added to principal.................... 4.5 3.1 -- -- -- 7.6
Sales/paydowns/distributions................... (13.1) (36.8) (10.1) (16.1) (2.6) (78.7)
Purchases from affiliated realty companies..... 4.8 1.3 16.5 -- -- 22.6
Operating gain................................. -- -- -- -- .3 .3
Transfers to real estate owned................. -- -- -- 1.5 (1.5) --
Realized investments gains (losses)............ (2.9) 2.9 6.3 7.1 4.1 17.5
Other transactions, net........................ (2.1) (10.9) (4.1) (.5) -- (17.6)
------ ------ ------ ------ ----- ------
Balance at December 31, 1996................... $111.0 $106.6 $ 30.9 $ 7.5 $11.7 $267.7(3)
====== ====== ====== ====== ===== ======
</TABLE>
- ---------------
(1) Net of $15.5 million reserve and write-downs. Excludes $5.6 million of real
estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued by KILICO generally to
provide financing for Kemper's or KILICO's joint ventures for various
purposes.
(3) Net of $11.8 million reserve and write-downs. Excludes $9.7 million of real
estate-related accrued interest.
REAL ESTATE CONCENTRATIONS
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships. (See notes
captioned
42
<PAGE> 47
"Unconsolidated Investors" and "Concentration of Credit Risk" in the notes to
the consolidated financial statements.)
REAL ESTATE OUTLOOK
The following table is a summary of KILICO's troubled real estate-related
investments:
TROUBLED REAL ESTATE-RELATED INVESTMENTS
(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
1996 1996
----------- ---------
<S> <C> <C>
Potential problem loans(1)...................... $ 3.2 $17.9
Past due loans(2)............................... -- --
Nonaccrual loans(3)............................. 43.5 3.5
Restructured loans (currently performing)(4).... -- .2
Real estate owned............................... 7.5 .5
----- -----
Total................................. $54.2 $22.1
===== =====
</TABLE>
- ---------------
(1) These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which KILICO anticipates may go into
nonaccrual, past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful. Loans on
nonaccrual status after reserves and write-downs amounted to $38.2 million
and $3.5 million at December 31, 1996 and January 4, 1996, respectively.
(4) KILICO defines a "restructuring" of debt as an event whereby KILICO, for
economic or legal reasons related to the debtor's financial difficulties,
grants a concession to the debtor it would not otherwise consider. Such
concessions either stem from an agreement between KILICO and the debtor or
are imposed by law or a court. By this definition, restructured loans do not
include any loan that, upon the expiration of its term, both repays its
principal and pays interest then due from the proceeds of a new loan that
KILICO, at its option, may extend (roll over).
KILICO evaluates its real estate-related investments (including accrued
interest) using an estimate of the investments' observable market price, net of
estimated costs to sell. (See note captioned "Summary of Significant Accounting
Policies" in the notes to the consolidated financial statements.) Real
estate-related reserves amounted to $9.5 million and $15.4 million at December
31, 1996 and January 4, 1996, respectively. Because KILICO's real estate review
process includes estimates, there can be no assurance that current estimates
will prove accurate over time due to changing economic conditions and other
factors.
KILICO's real estate-related investments are expected to continue to decline
further through future sales. Although the real estate-related investments have
been valued using an estimate of the investment's observable market price, net
of estimated costs to sell, KILICO's net income could be materially reduced in
future periods if real estate market conditions worsen in areas where KILICO's
portfolio is located or if Kemper's and KILICO's plans with respect to certain
projects change.
The increase in nonaccrual loans at December 31, 1996, compared with January 4,
1996, reflects certain negative developments in January 1997 related to the
zoning of undeveloped land in Hawaii. As a result of the uncertainty related to
the zoning process, KILICO placed the related real estate-related investments on
nonaccrual status at December 31, 1996 and increased its real estate-related
reserves by $5.3 million.
KILICO continues to devote significant attention to its real estate portfolio,
enhancing monitoring of the portfolio and formulating specific action plans
addressing nonperforming and potential problem loans. KILICO is continuing to
analyze various potential transactions designed to further reduce both its joint
venture operating losses and the amount of its real estate-related investments.
Specific types of transactions under consideration (and previously utilized)
include loan sales, property sales and mortgage refinancings. However, there can
be no assurance that such efforts will result in continued improvements in the
performance of KILICO's real estate portfolio.
43
<PAGE> 48
NET INVESTMENT INCOME
KILICO's pre-tax net investment income totaled $299.7 million in 1996, compared
with $348.4 million in 1995 and $353.1 million in 1994. Included in pre-tax net
investment income is KILICO's share of the operating losses from equity
investments in real estate consisting of other income less depreciation,
interest and other expenses. Such operating results exclude interest expense on
loans by KILICO which are on nonaccrual status. As previously discussed,
KILICO's net investment income in 1996, compared with 1995 and 1994, has been
negatively impacted by purchase accounting adjustments.
KILICO's total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
FOREGONE INVESTMENT INCOME
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
PREACQUISITION
-----------------
1996 1995 1994
---- ----- -----
<S> <C> <C> <C>
Fixed maturities............................. $ .7 $ .4 $--
Real estate-related investments.............. .5 20.5 28.4
---- ----- -----
Total................................. $1.2 $20.9 $28.4
==== ===== =====
Basis points................................. 3 43 55
==== ===== =====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of KILICO's share of interest expense on these loans excluded
from KILICO's share of joint venture operating results. Based on the level of
nonaccrual real estate-related investments at December 31, 1996, KILICO
estimates foregone investment income in 1997 will increase compared with the
1996 level. Any increase in nonperforming securities, and either worsening or
stagnant real estate conditions, would increase the expected adverse effect on
KILICO's future investment income and realized investment results.
Future net investment income, results of operations and cash flow will reflect
KILICO's current levels of investments in investment-grade securities, real
estate fundings treated as equity investments, nonaccrual real estate loans and
joint venture operating losses. KILICO expects, however, that any adverse
effects should be offset, to some extent, by certain advantages that it expects
to realize over time from its other investment strategies, its product mix and
its continuing cost-control measures. Other mitigating factors include marketing
advantages that could result from KILICO having lower levels of investment risk,
higher financial strength and claims-paying ability ratings and earnings
improvements from KILICO's ability to adjust crediting rates on annuities and
interest-sensitive life products over time.
REALIZED INVESTMENT RESULTS
Reflected in net income (loss) are after-tax realized investment gains of $8.8
million in 1996, compared with after-tax realized investment losses of $207.2
million and $35.5 million in 1995 and 1994, respectively. (See note captioned
"Invested Assets and Related Income" in the notes to the consolidated financial
statements.)
Unrealized gains and losses on fixed maturity investments are not reflected in
KILICO's net income (loss). These changes in unrealized value are included
within a separate component of stockholder's equity, net of any applicable
income taxes. If and to the extent a fixed maturity investment suffers an
other-than-temporary decline in value, however, such security is written down to
net realizable value, and the write-down adversely impacts net income.
KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.
A valuation allowance has been established, and is evaluated as of each reported
period end, to reduce the deferred tax asset for investment losses to the amount
that, based upon available evidence, is in management's judgment more likely
than not to be realized. (See note captioned "Income Taxes" in the notes to the
consolidated financial statements.)
44
<PAGE> 49
INTEREST RATES
In 1994, rapidly rising short-term interest rates resulted in a much flatter
yield curve as the Federal Reserve Board raised rates five times during the year
and once during first-quarter 1995. Interest rates subsequently declined through
the remainder of 1995. In 1996, however, interest rates again began to rise.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, KILICO can adjust its crediting rates on fixed
annuities and other interest-bearing liabilities. However, competitive
conditions and contractual commitments do not always permit the reduction in
crediting rates to fully or immediately reflect reductions in investment yield,
which can result in narrower spreads.
The rising interest rate environment in 1996 contributed to an increase in net
investment income as well as to both realized and unrealized fixed maturity
investment losses. Also, lower renewal crediting rates on annuities, compared
with competitors' higher new money crediting rates, influenced certain annuity
holders to seek alternative products. KILICO mitigates this risk somewhat by
charging surrender fees which decrease over time when annuity holders withdraw
funds prior to maturity on certain annuity products. Approximately 57 percent of
KILICO's fixed and variable annuity liabilities as of December 31, 1996,
however, were no longer subject to significant surrender fees.
As interest rates rose during 1996, KILICO's capital resources were adversely
impacted by unrealized loss positions from its fixed maturity investments.
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of KILICO's
liquidity are deposits for fixed annuities, investment income, other operating
revenue and cash provided from maturing or sold investments. (See the
Policyholder surrenders and withdrawals table and related discussion and
"INVESTMENTS" above.)
RATINGS
Ratings are an important factor in establishing the competitive position of life
insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios,
including those of KILICO. Any reductions in KILICO's claims-paying ability or
financial strength ratings could result in its products being less attractive to
consumers. Any reductions in KILICO's parent's ratings could also adversely
impact KILICO's financial flexibility.
Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating.
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $751.0 million at December 31, 1996, compared with
$745.6 million at January 4, 1996. The 1996 increase in stockholder's equity was
primarily due to net income of $34.4 million and an $18.4 million capital
contribution, offset by a $47.4 million decrease in stockholder's equity related
to the change in the unrealized loss position of KILICO's fixed maturity
investment portfolio due to rising interest rates during 1996.
45
<PAGE> 50
DIRECTORS AND EXECUTIVE OFFICERS OF KILICO
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
John B. Scott (52) Chief Executive Officer, President and Director of Federal
Chief Executive Officer since Kemper Life Assurance Company (FKLA) and Fidelity Life
February 1992. President since Association (FLA) since 1988. Chief Executive Officer,
November 1993. Director since 1992. President and Director of Zurich Life Insurance Company of
America (ZLICA) and Zurich Direct, Inc. (ZD) since March
1996. Chairman of the Board and Director of Investors
Brokerage Services, Inc. (IBS) and Investors Brokerage
Services Insurance Agency, Inc. (IBSIA) since 1993. Chairman
of the Board of FKLA and FLA from April 1988 to January
1996. Chairman of the Board of KILICO from February 1992 to
January 1996. Executive Vice President and Director of
Kemper Corporation (Kemper) from January 1994 and March
1996, respectively. Executive Vice President of Kemper
Financial Companies, Inc. from January 1994 to January 1996
and Director from 1992 to January 1996.
Eliane C. Frye (49) Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996.
Director of ZD from March 1996 to March 1997. Director of
IBS and IBSIA since 1995. Senior Vice President of KILICO,
FKLA and FLA from 1993 to 1995. Vice President of FKLA and
FLA from 1988 to 1993.
Frederick L. Blackmon (45) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and Chief
Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice
1995. President and Chief Financial Officer of ZLICA since March
1996. Senior Vice President and Chief Financial Officer of
ZD since March 1996. Director of ZD from March 1996 to March
1997. Treasurer and Chief Financial Officer of Kemper since
January 1996. Chief Financial Officer of Alexander Hamilton
Life Insurance Company from April 1989 to November 1995.
James C. Harkensee (38) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice
1996. President of ZD since 1995. Director of ZD from March 1996
to March 1997. Vice President of ZLICA from 1992 to 1995.
Chief Actuary of ZLICA from 1991 to 1994. Assistant Vice
President of ZLICA from 1990 to 1992. Vice President of ZD
from 1994 to 1995.
James E. Hohmann (41) Senior Vice President and Chief Actuary of FKLA since
Senior Vice President and Chief December 1995. Senior Vice President and Chief Actuary of
Actuary since December 1995. FLA since January 1996. Senior Vice President and Chief
Actuary of ZLICA since March 1996. Senior Vice President and
Chief Actuary of ZD since March 1996. Director of ZD from
March 1996 to March 1997. Managing Principal (Partner) of
Tillinghast-Towers Perrin from January 1991 to December
1995. Consultant/Principal (Partner) of Tillinghast-Towers
Perrin from November 1986 to January 1991.
Edward K. Loughridge (42) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of
Zurich-American Insurance Group from February 1992 to March
1996.
Phillip D. Meserve (47) Senior Vice President of FKLA, FLA, ZLICA and ZD since March
Senior Vice President since March 1997. Director of IBSIA and IBS since March and May, 1997,
1997 respectively. Managing Director of Equitable Distributors
from May 1996 to March 1997. Supervisor of Banker's Trust
from April 1995 to April 1996. Senior Vice President of
Fidelity Investments Insurance Services from February 1992
to March 1995.
</TABLE>
46
<PAGE> 51
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Debra P. Rezabek (41) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996. Vice
General Counsel since 1992. Corporate President of KILICO, FKLA and FLA since 1995. General
Secretary since January 1996. Counsel and Director of Government Affairs of FKLA and FLA
since 1992 and of KILICO since 1993. Senior Vice President,
General Counsel and Corporate Secretary of ZLICA since March
1996. Senior Vice President, General Counsel and Corporate
Secretary of ZD since March 1996. Director of ZD from March
1996 to March 1997. Secretary of IBS and IBSIA since 1993.
Director of IBS and IBSIA from 1993 to 1996. Assistant
General Counsel of FKLA and FLA from 1988 to 1992. General
Counsel and Assistant Secretary of KILICO, FKLA and FLA from
1992 to 1996. Assistant Secretary of Kemper since January
1996.
George Vlaisavljevich (54) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.
Loren J. Alter (58) Director of FKLA, FLA and Zurich Kemper Investments, Inc.
Director since January 1996. (ZKI) since January 1996. Director of ZLICA since May 1979.
Executive Vice President of Zurich Insurance Company since
1979. President, Chief Executive Officer and Director of
K-Corp. since January 1996.
William H. Bolinder (53) Chairman of the Board and Director of FKLA and FLA since
Chairman of the Board and Director January 1996. Chairman of the Board of ZLICA and ZD since
since January 1996. March 1995. Chairman of the Board of Kemper since January
1996. Vice Chairman and Director of ZKI since January 1996.
Member of the Corporate Executive Board of Zurich Insurance
Group since October 1994. Chairman of the Board of American
Guarantee and Liability Insurance Company, Zurich American
Insurance Company of Illinois, American Zurich Insurance
Company and Steadfast Insurance Company since 1995. Chief
Executive Officer of American Guarantee and Liability
Insurance Company, Zurich American Insurance Company of
Illinois, American Zurich Insurance Company and Steadfast
Insurance Company from 1986 to June 1995. President of
Zurich Holding Company of America since 1986. Manager of
Zurich Insurance Company, U.S. Branch since 1986.
Underwriter for Zurich American Lloyds since 1986.
David A. Bowers (51) Director of FKLA, FLA and ZLICA since May 1997. Executive
Director since May 1997. Vice President, Corporate Secretary and General Counsel of
Zurich-American Insurance Group since August 1985.
Daniel L. Doctoroff (38) Director of FKLA, FLA and Kemper since January 1996.
Director since January 1996. Director of ZLICA since March 1996. Director of ZD since
March 1997. Managing Partner of Insurance Partners Advisors,
L.P. since February 1994. Vice President of Keystone, Inc.
since October 1992. Managing Director of Rosecliff Inc./Oak
Hill Partners, Inc. since August 1987. Director of Bell &
Howell Company since 1989; Specialty Foods Corporation since
1993; and Capstar Hotel Company since 1995.
Markus Rohrbasser (42) Director of FKLA, FLA and ZLICA since May 1997. Chief
Director since May 1997. Financial Officer and Member of the Corporate Executive
Board of Zurich Insurance Company since January 1997. Member
of Enlarged Corporate Executive Board and Chief Executive
Officer of Union Bank of Switzerland (North America) from
1992 to 1997.
</TABLE>
47
<PAGE> 52
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Paul H. Warren (41) Director of FKLA , FLA and Kemper since January 1996.
Director since January 1996. Director of ZLICA since March 1996. Partner of Insurance
Partners Advisors, L.P. since March 1994. Managing Director
of International Insurance Advisors since March 1992. Vice
President of J.P. Morgan from June 1986 to March 1992.
Director of Unionamerica Holdings plc since June 1993;
Unionamerica Insurance Company since September 1993; Tarquin
plc since November 1994; Chairman Underwriting Agencies Ltd.
since November 1994; and Corporate Health Dimensions since
March 1997.
</TABLE>
48
<PAGE> 53
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-----------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G)
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ LONG TERM
NAME AND COMPENSATION AWARD(S) SARS INCENTIVE PLAN
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(2) ($)(3) (#)(4) PAYOUTS ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John B. Scott.................... 1996 $212,500 $ 94,000 $ -- $ -- $ -- $212,500
Chief Executive Officer(1) 1995 172,800 129,600 20,035 -- 15,360
1994 163,200 160,800 396,801 125,280 16,080
Jerome J. Cwiok.................. 1996 112,500 46,000 -- -- -- 74,750
Executive Vice President(1) 1995 95,000 67,500 23,381 -- 9,000
1994 84,896 59,000 113,926 40,600 2,000
Eliane C. Frye................... 1996 105,000 41,750 -- -- -- 69,750
Executive Vice President(1) 1995 91,200 67,200 9,261 -- 10,560
1994 73,800 58,560 57,525 38,976 1,920
James E. Hohmann................. 1996 113,333 56,750 -- -- -- 81,500
Senior Vice President and
Chief Actuary(1)
Frederick L. Blackmon............ 1996 100,583 47,000 27,924 -- -- 71,250
Senior Vice President and
Chief Financial Officer(1)
<CAPTION>
(A)
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION ($)(5)(6)(7)
- ------------------------------------------------------------
<S> <C>
John B. Scott.................... $142,498
Chief Executive Officer(1) 260,106
256,915
Jerome J. Cwiok.................. 32,882
Executive Vice President(1) 28,357
9,922
Eliane C. Frye................... 58,520
Executive Vice President(1) 41,546
57,913
James E. Hohmann................. 11,333
Senior Vice President and
Chief Actuary(1)
Frederick L. Blackmon............ 11,226
Senior Vice President and
Chief Financial Officer(1)
</TABLE>
- ---------------
(1) Also served in same positions for FKLA, ZLICA and FLA. An allocation of the
time devoted to duties as executive officer of KILICO has been made. All
compensation items reported in the Summary Compensation Table reflect this
allocation.
(2) The amounts disclosed in this column include:
(a) Amounts paid as non-preferential dividend equivalents on shares of
restricted stock and phantom stock units.
(b) The cash value of shares of Kemper common stock when awarded under the
Kemper Anniversary Award Plan. Employees were awarded shares on an
increasing scale beginning with their 10th year of employment and every 5
years thereafter, with a pro rata award at retirement.
(c) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.
(d) Relocation expense reimbursements of $109,760 in 1994 and $15,474 in
1995 for Mr. Cwiok and $21,437 in 1996 for Mr. Blackmon.
(e) Compensation income reported in 1994 of $384,822 for Mr. Scott and
$55,974 for Ms. Frye, based on the market value on the vesting date of
restricted stock awarded under Kemper's long-term incentive plans.
(3) Due to the June 1994 vesting of all outstanding shares of restricted stock
granted in 1992 or earlier and the cancellation of shares awarded in 1993
and 1994, no shares of restricted stock were held by any of the named
executive officers on or after December 31, 1995.
(4) Options were granted under Kemper stock option plans maintained for selected
officers and employees of Kemper and its subsidiaries.
(5) The amounts in this column include:
(a) The amounts of employer contributions allocated to the accounts of the
named persons under profit sharing plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.
(b) Distributions from the Kemper and FKLA supplemental plans.
49
<PAGE> 54
(6) Pursuant to the Conseco Merger Agreement, the restricted stock awards for
1993 and 1994 were cancelled. To replace these awards, on June 30, 1994, the
Committee, under the Kemper Bonus Restoration Plan and in its sole
discretion, granted cash awards to the named executive officers and other
affected executives entitling each of them to receive an amount in cash
immediately prior to the effective time of the then-planned Conseco merger
equal to the product of the number of shares of restricted stock previously
granted to such individual under the 1993 Senior Executive Long-Term
Incentive Plan multiplied by the consideration payable in the merger. As a
result of the termination of the Conseco Merger Agreement, no cash awards
were paid pursuant to the Kemper Bonus Restoration Plan.
In January 1995, the board of directors, upon the advice of the Committee,
approved the adoption of the Kemper 1995 Executive Incentive Plan under
which active employee holders of the previously cancelled shares of
restricted stock were granted phantom stock units by the Committee equal to
the number of shares cancelled plus an added amount representing 20 percent
of the aggregate cancelled shares. The 20 percent supplement was awarded in
recognition of the imposition of new vesting periods on the phantom awards
(to the extent the restricted stock held prior to cancellation would
otherwise have vested in June 1994 had stockholder approval of the affected
restricted stock plan been obtained as earlier anticipated).
By their terms, the phantom stock units associated with cancelled shares of
restricted stock originally awarded in 1993, as supplemented, would have
vested on December 31, 1995 and entitle the holders to a cash payment (net
of any required tax withholding) determined by the value of Kemper's common
stock based on an average trading range to December 31, 1995, and those
phantom stock units associated with the cancelled restricted stock
originally awarded in 1994 could similarly have vested and been paid on
December 31, 1996, subject to ongoing employment to the respective vesting
dates. Notwithstanding these vesting provisions, the phantom stock units
earlier vested and entitled payment upon the consummation of a "change of
control" of Kemper. Dividend equivalents were payable to holders of the
phantom stock units as compensation income when and as dividends were paid
on Kemper's outstanding common stock, and the Executive Incentive Plan
provided for standard anti-dilution adjustments.
Phantom units awarded to the named executive officers subject to vesting on
December 31, 1995 and December 31, 1996, were Mr. Scott 5,400 and 12,600
phantom units, respectively, Ms. Frye 1,680 and 1,680 phantom units,
respectively, and Mr. Cwiok 0 and 1,680 phantom units, respectively. All
phantom stock units vested and were paid immediately prior to the
effectiveness of the January 4, 1996 acquisition of Kemper by Zurich and
Insurance Partners. Messrs. Scott and Cwiok and Ms. Frye received allocated
cash out payments of $430,272, $41,832 and $80,317, respectively, in 1996.
(7) Pursuant to the terms of a Termination Protection Agreement with Kemper
dated March 17, 1994, Mr. Scott received payments in 1995 and 1996. These
payments were made by Kemper and no portion of the payments were allocated
to KILICO.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(A) (B) (C) (D)
NUMBER OF UNEXERCISED
OPTIONS/SARS AT
FY-END (#)(1)
SHARES ACQUIRED ON
NAME EXERCISE (#) VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John B. Scott(2)........................ 133,325 $1,525,185 --
<CAPTION>
(A) (E)
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS/
SARS AT FY-END ($)(1)
NAME EXERCISABLE/UNEXERCISABLE
- ---------------------------------------------------------------------------------------------
<S> <C>
John B. Scott(2)........................ --
</TABLE>
- ---------------
(1) All unexercised Kemper stock options were cancelled immediately prior to the
January 4, 1996 effectiveness of the acquisition of Kemper by Zurich and
Insurance Partners. Optionees were paid the spread between their option
exercise price and $49.80 per share. Mr. Cwiok and Ms. Frye received $84,150
and $112,370, respectively, in 1996 as a result of such payments.
(2) Includes options granted related to service for FKLA.
50
<PAGE> 55
EXPERTS
The consolidated balance sheets of KILICO as of December 31, 1996 and January 4,
1996 and the related consolidated statements of operations, stockholder's
equity, and cash flows for the periods from January 4, 1996 to December 31, 1996
and for each of the years in the two year period ended December 31, 1995 have
been included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP covering KILICO's
financial statements contains an explanatory paragraph that states as a result
of the acquisition of its parent, Kemper Corporation, the consolidated financial
information for the periods after the acquisition is presented on a different
cost basis than that for the periods before the acquisition and, therefore, is
not comparable.
LEGAL MATTERS
Legal matters with respect to the organization of KILICO, its authority to issue
annuity contracts and the validity of the Contract, have been passed upon by
Frank Julian, Associate General Counsel for KILICO. Katten Muchin & Zavis,
Washington, D.C., has advised KILICO on certain legal matters concerning federal
securities laws applicable to the issue and sale of the Certificates.
SPECIAL CONSIDERATIONS
KILICO reserves the right to amend the Contract and Certificates to meet the
requirements of any applicable federal or state laws or regulations. KILICO will
notify the Owner in writing of any such amendments.
An Owner's rights under a Contract may be assigned as provided by applicable
law. An assignment will not be binding upon KILICO until it receives a written
copy of the assignment. The Owner is solely responsible for the validity or
effect of any assignment. The Owner, therefore, should consult a qualified tax
advisor regarding the tax consequences, as an assignment may be a taxable event.
AVAILABLE INFORMATION
KILICO is subject to the informational requirements of the Securities Exchange
Act of 1934 and in accordance therewith files reports and other information with
the Securities and Exchange Commission (the "Commission"). Such reports and
other information can be inspected and copied at the public reference facilities
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500
West Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies
of such materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
KILICO has filed registration statements (the "Registration Statements") with
the Commission under the Securities Act of 1933 relating to the Contracts and
Certificates offered by this Prospectus. This Prospectus has been filed as part
of the Registration Statements and does not contain all of the information set
forth in the Registration Statements, and reference is hereby made to such
Registration Statements for further information relating to KILICO and the
Contracts and Certificates. The Registration Statements may be inspected and
copied, and copies can be obtained at prescribed rates in the manner set forth
in the preceding paragraph.
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements; Independent Auditors' Report, Financial
Statements of the Separate Account. The Statement of Additional Information
should be read in conjunction with this Prospectus.
FINANCIAL STATEMENTS
The financial statements of KILICO that are included in this Prospectus should
be considered primarily as bearing on the ability of KILICO to meet its
obligations under the Contracts. The Contracts are not entitled to participate
in earnings, dividends or surplus of KILICO.
[Unaudited Interim Financial Statements to be filed by amendment]
51
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1996 and as of
January 4, 1996, and the related consolidated statements of operations,
stockholder's equity, and cash flows for the periods from January 4, 1996 to
December 31, 1996 (post-acquisition), and for each of the years in the two-year
period ended December 31, 1995 (pre-acquisition). In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and the financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned post-acquisition consolidated financial
statements and financial statement schedules present fairly, in all material
respects, the financial position of Kemper Investors Life Insurance Company and
subsidiaries as of December 31, 1996 and as of January 4, 1996, and the results
of their operations and their cash flows for the post-acquisition period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned pre-acquisition consolidated financial statements
present fairly, in all material respects, the financial position of Kemper
Investors Life Insurance Company and subsidiaries and the results of their
operations and their cash flows for the pre-acquisition periods, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 4, 1996, an investor group as described in Note 1, acquired all of the
outstanding stock of Kemper Investors Life Insurance Company in a business
combination accounted for as a purchase. As a result of the acquisition, the
consolidated financial information for the periods after the acquisition is
presented on a different cost basis than that for the periods before the
acquisition and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 21, 1997
52
<PAGE> 57
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
1996 1996
----------- ----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value (cost:
December 31, 1996, $3,929,650; January 4, 1996,
$3,749,323)............................................... $3,866,431 $3,749,323
Short-term investments...................................... 71,696 372,515
Joint venture mortgage loans................................ 110,971 110,194
Third-party mortgage loans.................................. 106,585 144,450
Other real estate-related investments....................... 50,157 34,296
Policy loans................................................ 288,302 289,390
Other invested assets....................................... 23,507 19,215
---------- ----------
Total investments................................. 4,517,649 4,719,383
Cash........................................................ 2,776 25,811
Accrued investment income................................... 115,199 104,402
Goodwill.................................................... 244,688 254,883
Value of business acquired.................................. 189,639 190,222
Deferred insurance acquisition costs........................ 26,811 --
Federal income tax receivable............................... 3,840 112,646
Reinsurance recoverable..................................... 427,165 502,836
Receivable on sales of securities........................... 32,569 902
Other assets and receivables................................ 30,277 10,540
Assets held in separate accounts............................ 2,127,247 1,761,110
---------- ----------
Total assets...................................... $7,717,860 $7,682,735
========== ==========
LIABILITIES
Future policy benefits...................................... $4,256,521 $4,585,148
Ceded future policy benefits................................ 427,165 502,836
Benefits and claims payable to policyholders................ 36,142 4,535
Other accounts payable and liabilities...................... 59,462 30,030
Deferred income taxes....................................... 60,362 53,472
Liabilities related to separate accounts.................... 2,127,247 1,761,110
---------- ----------
Total liabilities................................. 6,966,899 6,937,131
---------- ----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value,
authorized 300,000 shares; outstanding 250,000 shares..... 2,500 2,500
Additional paid-in capital.................................. 761,538 743,104
Unrealized loss on investments.............................. (47,498) --
Retained earnings........................................... 34,421 --
---------- ----------
Total stockholder's equity........................ 750,961 745,604
---------- ----------
Total liabilities and stockholder's equity........ $7,717,860 $7,682,735
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE> 58
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
PREACQUISITION
----------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $299,688 $ 348,448 $353,084
Realized investment gains (losses).......................... 13,602 (318,700) (54,557)
Premium income.............................................. 7,822 236 --
Fees and other income....................................... 35,095 38,101 31,950
-------- --------- --------
Total revenue..................................... 356,207 68,085 330,477
-------- --------- --------
BENEFITS AND EXPENSES
Benefits and interest credited to policyholders............. 237,349 245,615 248,494
Commissions, taxes, licenses and fees....................... 28,135 31,793 26,910
Operating expenses.......................................... 24,678 20,837 25,324
Deferral of insurance acquisition costs..................... (27,820) (36,870) (31,852)
Amortization of insurance acquisition costs................. 2,316 14,423 20,809
Amortization of value of business acquired.................. 21,530 -- --
Amortization of goodwill.................................... 10,195 -- --
-------- --------- --------
Total benefits and expenses....................... 296,383 275,798 289,685
-------- --------- --------
Income (loss) before income tax expense (benefit)........... 59,824 (207,713) 40,792
Income tax expense (benefit)................................ 25,403 (74,664) 14,431
-------- --------- --------
Net income (loss)................................. $ 34,421 $(133,049) $ 26,361
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE> 59
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
PREACQUISITION
-------------------------
DECEMBER 31 JANUARY 4 DECEMBER 31 DECEMBER 31
1996 1996 1995 1994
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
CAPITAL STOCK, beginning and end of period...... $ 2,500 $ 2,500 $ 2,500 $ 2,500
-------- -------- --------- ---------
ADDITIONAL PAID-IN CAPITAL, beginning of
period........................................ 743,104 491,994 491,994 409,423
Capital contributions from parent............... 18,434 -- -- 82,500
Adjustment to reflect purchase accounting
method........................................ -- 251,110 -- --
Transfer of limited partnership interest to
parent........................................ -- -- -- 71
-------- -------- --------- ---------
End of period......................... 761,538 743,104 491,994 491,994
-------- -------- --------- ---------
UNREALIZED GAIN (LOSS) ON INVESTMENTS,
beginning of period........................... -- 68,502 (236,443) 93,096
Unrealized gain (loss) on revaluation of
investments, net.............................. (47,498) -- 304,945 (329,539)
Adjustment to reflect purchase accounting
method........................................ -- (68,502) -- --
-------- -------- --------- ---------
End of period......................... (47,498) -- 68,502 (236,443)
-------- -------- --------- ---------
RETAINED EARNINGS, beginning of period.......... -- 42,880 175,929 149,568
Net income (loss)............................... 34,421 -- (133,049) 26,361
Adjustment to reflect purchase accounting
method........................................ -- (42,880) -- --
-------- -------- --------- ---------
End of period......................... 34,421 -- 42,880 175,929
-------- -------- --------- ---------
Total stockholder's equity............ $750,961 $745,604 $ 605,876 $ 433,980
======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE> 60
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
PREACQUISITION
-------------------------
1996 1995 1994
----------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................... $ 34,421 $(133,049) $ 26,361
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses (gains)............... (13,602) 318,700 54,557
Interest credited and other charges.............. 230,298 237,984 242,591
Deferred insurance acquisition costs............. (25,504) (22,447) (11,043)
Amortization of value of business acquired....... 21,530 -- --
Amortization of goodwill......................... 10,195 -- --
Amortization of discount and premium on
investments.................................... 25,743 4,586 (1,383)
Deferred income taxes............................ (897) 38,423 20,809
Net change in Federal income tax receivable...... 108,806 (86,990) 809
Other, net....................................... (22,283) (29,905) (14,161)
----------- --------- -----------
Net cash provided from operating
activities................................ 368,707 327,302 318,540
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity................ 264,383 320,143 144,717
Fixed maturities sold prior to maturity.......... 891,995 297,637 910,913
Mortgage loans, policy loans and other invested
assets......................................... 168,727 450,573 536,668
Cost of investments purchased or loans originated:
Fixed maturities................................. (1,369,091) (549,867) (1,447,393)
Mortgage loans, policy loans and other invested
assets......................................... (119,044) (131,966) (281,059)
Short-term investments, net......................... 300,819 (168,351) 198,299
Net change in receivable and payable for securities
transactions..................................... (31,667) (1,397) (16,553)
Net reductions in other assets...................... 105 1,996 2,678
----------- --------- -----------
Net cash provided by investing activities... 106,237 218,768 48,270
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits......................................... 141,159 247,778 215,034
Withdrawals...................................... (700,084) (755,917) (652,513)
Capital contributions from parent................... 18,434 -- 82,500
Other............................................... 42,512 (35,309) 3,871
----------- --------- -----------
Net cash used in financing activities....... (497,979) (543,448) (351,108)
----------- --------- -----------
Net increase (decrease) in cash........ (23,035) 2,622 15,702
CASH, beginning of period............................. 25,811 23,189 7,487
----------- --------- -----------
CASH, end of period................................... $ 2,776 $ 25,811 $ 23,189
=========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE> 61
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). On January 4, 1996, an investor group comprised of
Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and
Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance
Partners") acquired all of the issued and outstanding common stock of Kemper. As
a result of the change in control, Zurich and Insurance Partners own 80 percent
and 20 percent, respectively, of Kemper and therefore the Company.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated.
PURCHASE ACCOUNTING METHOD
The acquisition of the Company on January 4, 1996, was accounted for using the
purchase method of accounting. The consolidated financial statements of the
Company prior to January 4, 1996, were prepared on a historical cost basis in
accordance with generally accepted accounting principles. The accompanying
financial statements and notes thereto prepared prior to January 4, 1996 have
been labeled "preacquisition". The accompanying consolidated financial
statements of the Company as of January 4, 1996 (the acquisition date) and as of
and for the year ended December 31, 1996, have been prepared in conformity with
the purchase method of accounting. The Company has presented January 4, 1996
(the acquisition date), as the opening purchase accounting balance sheet for
comparative purposes throughout the accompanying financial statements and notes
thereto.
Under purchase accounting, the Company's assets and liabilities have been marked
to their relative fair market values as of the acquisition date. The difference
between the cost of acquiring the Company and the net fair market values of the
Company's assets and liabilities as of the acquisition date has been recorded as
goodwill. The Company is amortizing goodwill on a straight-line basis over
twenty-five years. The allocated cost of acquiring the Company was $745.6
million and the acquisition resulted in goodwill of $254.9 million as of January
4, 1996.
The Company reviews goodwill to determine if events or changes in circumstances
may have affected the recoverability of the outstanding goodwill as of each
reporting period. In the event that the Company determines that goodwill is not
recoverable, it would amortize such amounts as additional goodwill expense in
the accompanying financial statements. As of December 31, 1996, the Company
believes that no such adjustment is necessary.
Purchase accounting adjustments primarily affected the recorded historical
values of fixed maturities, mortgage loans, other invested assets, deferred
insurance acquisition costs, future policy benefits and deferred income taxes.
Deferred insurance acquisition costs, and the related amortization thereof, for
policies sold prior to January 4, 1996, have been replaced by the value of
business acquired.
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
A 15 percent discount rate was used to determine such value and represents the
rate of return required by Zurich and Insurance Partners to invest in the
business being acquired. In selecting the rate of return used to value the
policies purchased, the Company considered the magnitude of the risks associated
with each of the actuarial assumptions used in determining expected future cash
flows, the cost of capital available to fund the acquisition, the perceived
likelihood of changes in insurance regulations and tax laws, the complexity of
the Company's business, and the prices paid (i.e., discount rates used in
determining other life insurance company valuations) on similar blocks of
business sold in recent periods.
57
<PAGE> 62
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The value of the business acquired is amortized over the estimated contract life
of the business acquired in relation to the present value of estimated gross
profits using current assumptions based on an interest rate equal to the
liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2001 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(in thousands) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ---------------------------------------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1996................................................ $190,222 $(31,427) $ 9,897 $168,692
1997................................................ 168,692 (26,330) 10,152 152,514
1998................................................ 152,514 (26,769) 9,085 134,830
1999................................................ 134,830 (26,045) 8,000 116,785
2000................................................ 116,785 (24,288) 6,834 99,331
2001................................................ 99,331 (21,538) 5,867 83,660
</TABLE>
The projected ending balance of the value of business acquired will be further
adjusted to reflect the impact of unrealized gains or losses on fixed maturities
held as available for sale in the investment portfolio. Such adjustments are not
recorded in the Company's net income but rather are recorded as a credit or
charge to stockholder's equity, net of income tax. As of December 31, 1996, this
adjustment increased the value of business acquired and stockholder's equity by
approximately $20.9 million and $13.6 million, respectively.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets or liabilities at the date of the financial
statements. As a result, actual results reported as revenue and expenses could
differ from the estimates reported in the accompanying financial statements. As
further discussed in the accompanying notes to the consolidated financial
statements, significant estimates and assumptions affect deferred insurance
acquisition costs, the value of business acquired, provisions for real
estate-related losses and reserves, other-than-temporary declines in values for
fixed maturities, the valuation allowance for deferred income taxes and the
calculation of fair value disclosures for certain financial instruments.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities and interest-sensitive life insurance products consists of
investment income, and policy charges such as mortality, expense and surrender
charges. Expenses consist of benefits and interest credited to contracts, policy
maintenance costs and amortization of deferred insurance acquisition costs. Also
reflected in fees and other income is a ceding commission experience adjustment
received in 1995 as a result of certain reinsurance transactions entered into by
the Company during 1992. (See note captioned "Reinsurance".)
Premiums for term life policies are reported as earned when due. Profits for
such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.
DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new business after January 4, 1996, principally
commission expense and certain policy issuance and underwriting expenses, have
been deferred to the extent they are recoverable from estimated future gross
profits on the related contracts and policies. The deferred insurance
acquisition costs for annuities, separate account business and
interest-sensitive life insurance products are being amortized over the
estimated contract life in relation to the present value of estimated gross
profits. Deferred insurance acquisition costs related to such interest-sensitive
products also reflect the estimated impact of unrealized gains or losses on
fixed maturities held as available for sale in the investment portfolio, through
a credit or charge to stockholder's equity, net of income
58
<PAGE> 63
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
tax. The deferred insurance acquisition costs for term-life insurance products
are being amortized over the premium paying period of the policies.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 4.0 percent to 7.5 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.5 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 3.0 percent to 12.0
percent.
Liabilities for future term life policy benefits have been computed principally
by a net level premium method. Anticipated rates of mortality are based on the
1975-1980 Select and Ultimate Table modified by Company experience, including
withdrawals. Estimated future investment yields are a level 7 percent for
reinsurance assumed and for direct business, 8 percent for three years; 7
percent for year four; and 6 percent thereafter.
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities are carried at fair value. Short-term
investments are carried at cost, which approximates fair value. (See note
captioned "Fair Value of Financial Instruments".)
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed and
asset-backed securities, over the estimated life of the security. Such
amortization is included in net investment income. Amortization of the discount
or premium from mortgage-backed and asset-backed securities is recognized using
a level effective yield method which considers the estimated timing and amount
of prepayments of the underlying loans and is adjusted to reflect differences
which arise between the prepayments originally anticipated and the actual
prepayments received and currently anticipated. To the extent that the estimated
lives of such securities change as a result of changes in prepayment rates, the
adjustment is also included in net investment income. The Company does not
accrue interest income on fixed maturities deemed to be impaired on an
other-than-temporary basis, or on mortgage loans, real estate-related bonds and
other real estate loans where the likelihood of collection of interest is
doubtful.
Mortgage loans are carried at their unpaid balance, net of unamortized discount
and any applicable reserves or write-downs. Other real estate-related
investments net of any applicable reserve and write-downs include notes
receivable from real estate ventures; investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures; common
stock carried at fair value and real estate owned carried at fair value.
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. At year-end
1995, reflecting the Company's change in strategy with respect to its real
estate portfolio, and the disposition thereof, and on January 4, 1996,
reflecting the acquisition of the Company, real estate-related investments were
valued using an estimate of the investments observable market price, net of
estimated costs to sell. Prior to year-end 1995, the Company evaluated its real
estate-related assets (including accrued interest) by estimating the
probabilities of loss utilizing various projections that included several
factors relating to the borrower, property, term of the loan, tenant
composition, rental rates, other supply and demand factors and overall economic
conditions. Generally, at that time, the reserve was based upon the excess of
the loan amount over the estimated future cash flows from the loan, discounted
at the loan's contractual rate of interest taking into consideration the effects
of recourse to, and subordination of loans held by, affiliated non-life realty
companies.
Under purchase accounting, the market value of the Company's policy loans and
other invested assets consisting primarily of venture capital investments and a
leveraged lease, became the Company's new cost basis in such investments.
Investments in policy loans and other invested assets after January 4, 1996 are
carried at cost. Other
59
<PAGE> 64
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
invested assets also include equity securities, not related to real
estate-related investments, which are carried at fair value.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Net unrealized gains or losses
on revaluation of investments are credited or charged to stockholder's equity.
Such unrealized gains are recorded net of deferred income tax expense, while
unrealized losses are not tax benefitted.
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at fair value.
INCOME TAX
The operations of the Company prior to January 4, 1996 have been included in the
consolidated Federal income tax return of Kemper. Income taxes receivable or
payable have been determined on a separate return basis, and payments have been
received from or remitted to Kemper pursuant to a tax allocation arrangement
between Kemper and its subsidiaries, including the Company. The Company
generally had received a tax benefit for losses to the extent such losses can be
utilized in Kemper's consolidated Federal tax return. Subsequent to January 4,
1996, the Company and its subsidiaries will file separate Federal income tax
returns.
Deferred taxes are provided on the temporary differences between the tax and
financial statement basis of assets and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts. Federal
income tax refunded by Kemper under the tax allocation arrangement for the
period from January 1, 1996 to January 4, 1996 and for the years ended December
31, 1995 and 1994 amounted to $108.8 million, $25.2 million and $10.7 million,
respectively. The Company paid $28.1 million of Federal income taxes directly to
the United States Treasury Department during 1996.
Not reflected in the statement of cash flows are rollovers of mortgage loans,
other loans and investments totaling approximately $57.0 million in 1994.
60
<PAGE> 65
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale. The carrying
value (estimated fair value) of fixed maturities compared with amortized cost,
adjusted for other-than-temporary declines in value, were as follows:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
VALUE COST GAINS LOSSES
(in thousands) -------- --------- ----- ------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. treasury securities and obligations of U.S.
government agencies and authorities.................. $ 92,238 $ 93,202 $ -- $ (964)
Obligations of states and political subdivisions,
special revenue and nonguaranteed.................... 30,853 31,519 -- (666)
Debt securities issued by foreign governments.......... 105,394 108,456 504 (3,566)
Corporate securities................................... 1,896,615 1,935,511 5,918 (44,814)
Mortgage and asset-backed securities................... 1,741,331 1,760,962 1,990 (21,621)
---------- ---------- ------ --------
Total fixed maturities.......................... $3,866,431 $3,929,650 $8,412 $(71,631)
========== ========== ====== ========
JANUARY 4, 1996
U.S. treasury securities and obligations of U.S.
government agencies and authorities.................. $ 215,637 $ 215,637 $ -- $ --
Obligations of states and political subdivisions,
special revenue and nonguaranteed.................... 24,241 24,241 -- --
Debt securities issued by foreign governments.......... 139,361 139,361 -- --
Corporate securities................................... 1,695,268 1,695,268 -- --
Mortgage and asset-backed securities................... 1,674,816 1,674,816 -- --
---------- ---------- ------ --------
Total fixed maturities.......................... $3,749,323 $3,749,323 $ -- $ --
========== ========== ====== ========
</TABLE>
Upon default or indication of potential default by an issuer of fixed maturity
securities, the Company-owned issue(s) of such issuer would be placed on
nonaccrual status and, since declines in fair value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value
during the fiscal quarter in which the impairment was determined to have become
other than temporary. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $267.7 million real estate portfolio at December 31, 1996 consists
of joint venture and third-party mortgage loans and other real estate-related
investments.
61
<PAGE> 66
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
At December 31, 1996 and January 4, 1996, total impaired loans were as follows:
<TABLE>
<CAPTION>
December 31 January 4
1996 1996
(in millions) ----------- ---------
<S> <C> <C>
Impaired loans without reserves--gross...................... $39.8 $ --
Impaired loans with reserves--gross......................... 7.6 21.9
----- -----
Total gross impaired loans........................... 47.4 21.9
Reserves related to impaired loans.......................... (4.4) (6.5)
----- -----
Net impaired loans................................... $43.0 $15.4
===== =====
</TABLE>
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. At December 31, 1996, the Company's deficit in equity
investments considered in determining reserves and write-downs amounted to $5.9
million. The Company had an average balance of $30.8 million and $124.2 million
in impaired loans for 1996 and 1995, respectively. Cash payments received on
impaired loans are generally applied to reduce the outstanding loan balance.
At December 31, 1996 and January 4, 1996, loans on nonaccrual status amounted to
$43.5 million and $3.5 million, respectively. The Company's nonaccrual loans are
generally included in impaired loans.
At December 31, 1996, securities carried at approximately $6.1 million were on
deposit with governmental agencies as required by law.
At December 31, 1996, the Company had six separate asset-backed securities
included in fixed maturity investments from trusts formed to securitize assets
underwritten by Green Tree Financial Corporation, which in aggregate amounted to
$90.7 million. No other investments exceeded ten percent of the Company's
stockholder's equity at December 31, 1996.
Proceeds from sales of investments in fixed maturities prior to maturity were
$892.0 million, $297.6 million and $910.9 million during 1996, 1995 and 1994,
respectively. Gross gains of $9.9 million, $21.2 million and $6.0 million and
gross losses of $16.2 million, $11.9 million and $55.9 million were realized on
sales of fixed maturities in 1996, 1995 and 1994, respectively.
The following table sets forth the maturity aging schedule of fixed maturity
investments at December 31, 1996:
<TABLE>
<CAPTION>
Carrying Amortized
Value Cost Value
(in thousands) -------- ----------
<S> <C> <C>
One year or less............................................ $ 36,814 $ 36,862
Over one year through five.................................. 643,741 648,811
Over five years through ten................................. 1,170,034 1,200,620
Over ten years.............................................. 274,511 282,395
Securities not due at a single maturity date(1)............. 1,741,331 1,760,962
---------- ----------
Total fixed maturities............................... $3,866,431 $3,929,650
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 4.6 years.
62
<PAGE> 67
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
PREACQUISITION
------------------------
1996 1995 1994
(in thousands) -------- --------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................. $250,683 $ 269,934 $274,231
Dividends on equity securities.............................. 646 681 1,751
Income from short-term investments.......................... 9,130 13,159 10,668
Income from mortgage loans.................................. 20,257 40,494 41,713
Income from policy loans.................................... 20,700 19,658 18,517
Income from other real estate-related investments........... 4,917 15,565 21,239
Income from other loans and investments..................... 2,480 1,555 3,533
-------- --------- --------
Total investment income.............................. 308,813 361,046 371,652
Investment expense.......................................... (9,125) (12,598) (18,568)
-------- --------- --------
Net investment income................................ $299,688 $ 348,448 $353,084
======== ========= ========
</TABLE>
Realized gains (losses) for the years ended December 31, 1996, 1995 and 1994,
were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------------
PREACQUISITION
--------------------------
1996 1995 1994
(in thousands) -------- --------- --------
<S> <C> <C> <C>
Real estate-related........................................ $ 17,462 $(325,611) $(41,720)
Fixed maturities........................................... (6,344) 9,336 (49,857)
Equity securities.......................................... -- (346) 28,243
Other...................................................... 2,484 (2,079) 8,777
-------- --------- --------
Realized investment gains (losses) before income tax
expense (benefit)..................................... 13,602 (318,700) (54,557)
Income tax expense (benefit)............................... 4,761 (111,545) (19,095)
-------- --------- --------
Net realized investment gains (losses)................... $ 8,841 $(207,155) $(35,462)
======== ========= ========
</TABLE>
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity securities and other--the
difference between fair value and cost. The change in unrealized investment
gains (losses) by class of investment for the years ended December 31, 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
------------------------------------------------
PREACQUISITION
--------------------
DECEMBER 31
DECEMBER 31 JANUARY 4 --------------------
1996 1996 1995 1994
(in thousands) ------------ ---------- -------- ---------
<S> <C> <C> <C> <C>
Fixed maturities....................................... $(63,219) $-- $351,964 $(351,646)
Equity securities...................................... 1,256 -- 180 (32,710)
Adjustment to deferred insurance acquisition costs..... 1,307 -- (14,277) 11,325
Adjustment to value of business acquired............... 20,947 -- -- --
-------- --- -------- ---------
Unrealized gain (loss) before income tax expense
(benefit)......................................... (39,709) -- 337,867 (373,031)
Income tax expense (benefit)........................... 7,789 -- 32,922 (43,492)
-------- --- -------- ---------
Net unrealized gain (loss) on investments....... $(47,498) $-- $304,945 $(329,539)
======== === ======== =========
</TABLE>
63
<PAGE> 68
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) UNCONSOLIDATED INVESTEES
At December 31, 1996, the Company, along with other Kemper subsidiaries,
directly held partnership interests in a number of real estate joint ventures.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation
accounting methods are not utilized as the Company, in most instances, does not
own more than 50 percent in the aggregate, and in any event, major decisions of
the partnership must be made jointly by all partners.
As of December 31, 1996 and January 4, 1996, the Company's net equity investment
in unconsolidated investees amounted to $11.7 million and $11.4 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $223 thousand for the year ended December 31, 1996,
compared with net losses of $453 thousand, and $6.3 million for the years ended
December 31, 1995 and 1994, respectively.
Also at January 4, 1996, the Company had joint venture-related loans totaling
$21.8 million before reserves to partnerships in which Lumbermens Mutual
Casualty Company, an affiliate until August 1993 ("Lumbermens"), had equity
interests. These joint venture-related loans were sold during 1996.
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in
mortgage-backed securities (see "INVESTMENTS" beginning on page 10) and real
estate.
The Company's real estate portfolio is distributed by geographic location and
property type, as shown in the following two tables:
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
California..................... 35.2%
Illinois....................... 13.5
Hawaii......................... 11.0
Colorado....................... 7.9
Oregon......................... 7.6
Washington..................... 7.4
Florida........................ 5.4
Texas.......................... 4.2
Ohio........................... 2.7
Other states................... 5.1
-----
Total................ 100.0%
=====
</TABLE>
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
Hotel.......................... 38.8%
Land........................... 24.4
Office......................... 14.1
Residential.................... 9.1
Retail......................... 2.6
Industrial..................... 1.0
Other.......................... 10.0
-----
Total................ 100.0%
=====
</TABLE>
Real estate markets have been depressed in recent periods in areas where most of
the Company's real estate portfolio is located. Portions of California's and
Hawaii's real estate market conditions have continued to be worse than in many
other areas of the country. Real estate markets in northern California and
Illinois continue to show some stabilization and improvement.
64
<PAGE> 69
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Undeveloped land represented approximately 24.4 percent of the Company's real
estate portfolio at December 31, 1996. To maximize the value of certain land and
other projects, additional development has been proceeding or has been planned.
Such development of existing projects would continue to require funding, either
from the Company or third parties. In the present real estate markets,
third-party financing can require credit enhancing arrangements (e.g., standby
financing arrangements and loan commitments) from the Company. The values of
development projects are dependent on a number of factors, including Kemper's
and the Company's plans with respect thereto, obtaining necessary construction
and zoning permits and market demand for the permitted use of the property. The
values of certain development projects have been written down as of December 31,
1995, reflecting changes in plans in connection with the Zurich-led acquisition
of Kemper. There can be no assurance that such permits will be obtained as
planned or at all, nor that such expenditures will occur as scheduled, nor that
Kemper's and the Company's plans with respect to such projects may not change
substantially.
Approximately half of the Company's real estate loans are on properties or
projects where the Company, Kemper, or their affiliates have taken ownership
positions in joint ventures with a small number of partners. (See note captioned
"Unconsolidated Investees".)
At December 31, 1996, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), have interests constituted
approximately $101.3 million, or 37.8 percent, of the Company's real estate
portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At
December 31, 1996, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
At December 31, 1996, loans to and investments in a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens,
constituted approximately $53.0 million, or 19.8 percent, of the Company's real
estate portfolio. The Company's interest in the MLP is a less than one percent
limited partnership interest and Kemper's interest is 75 percent at December 31,
1996. At December 31, 1996, MLP-related commitments accounted for approximately
$9.4 million of the Company's off-balance-sheet legal commitments, which the
Company expects to fund.
At December 31, 1996, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates totaled approximately $(5.3) million.
Negative amounts represent the Company's share of project related operating
losses in excess of the Company's investment. Prime Group-related commitments,
however, accounted for $145.2 million of the off-balance-sheet legal commitments
at December 31, 1996, of which the Company expects to fund $15.9 million.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
PREACQUISITION
----------------------
1996 1995 1994
(in thousands) ------- --------- -------
<S> <C> <C> <C>
Current.................................................... $26,300 $(113,087) $(6,898)
Deferred................................................... (897) 38,423 21,329
------- --------- -------
Total............................................ $25,403 $ (74,664) $14,431
======= ========= =======
</TABLE>
Included in the 1995 current tax benefit is the recognition of a net operating
loss carryover at December 31, 1995 which was utilized against taxable income on
Kemper's consolidated short-period Federal income tax return for the January 1
through January 4, 1996 tax year. Beginning January 5, 1996, the Company and its
subsidiaries will each file a stand alone Federal income tax return. Previously,
the Company had filed a consolidated Federal income tax return with Kemper. In
1996, the Company and Kemper settled all outstanding balances under the tax
allocation agreement.
65
<PAGE> 70
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The actual income tax expense (benefit) for 1996, 1995 and 1994 differed from
the "expected" tax expense (benefit) for those years as displayed below.
"Expected" tax expense (benefit) was computed by applying the U.S. Federal
corporate tax rate of 35 percent in 1996, 1995, and 1994 to income (loss) before
income tax expense (benefit).
<TABLE>
<CAPTION>
PREACQUISITION
---------------------
1996 1995 1994
(in thousands) ------- -------- -------
<S> <C> <C> <C>
Computed expected tax expense (benefit)..................... $20,938 $(72,700) $14,277
Difference between "expected" and actual tax expense
(benefit):
State taxes............................................... 913 (1,370) 645
Amortization of goodwill.................................. 3,568 -- --
Foreign tax credit........................................ -- (183) (155)
Other, net................................................ (16) (411) (336)
------- -------- -------
Total actual tax expense (benefit)................ $25,403 $(74,664) $14,431
======= ======== =======
</TABLE>
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company only records deferred tax
assets if future realization of the tax benefit is more likely than not, with a
valuation allowance recorded for the portion that is not likely to be realized.
The Company has established a valuation allowance to reduce the deferred Federal
tax asset related to real estate and other investments to the amount that, based
upon available evidence, is, in management's judgment, more likely than not to
be realized. Any reversals of the valuation allowance are contingent upon the
recognition of future capital gains in the Company's Federal income tax return
or a change in circumstances which causes the recognition of the benefits to
become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred Federal tax asset or liability from
unrealized gains or losses on investments.
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred Federal tax liability were as follows:
<TABLE>
<CAPTION>
PREACQUISITION
---------------------
DECEMBER 31
DECEMBER 31 JANUARY 4 ---------------------
1996 1996 1995 1994
(in thousands) ----------- --------- --------- --------
<S> <C> <C> <C> <C>
Deferred Federal tax assets:
Unrealized losses on investments................ $ 16,624 $ -- $ -- $ 85,331
Life policy reserves............................ 46,452 46,654 42,512 51,519
Real estate-related............................. 20,642 27,736 21,920 39,360
Other investment-related........................ 5,409 1,773 1,725 7,435
Other........................................... 8,159 9,750 6,864 6,415
-------- -------- --------- --------
Total deferred Federal tax assets............ 97,286 85,913 73,021 190,060
Valuation allowance............................. (31,825) (15,201) (15,201) (100,532)
-------- -------- --------- --------
Total deferred Federal tax assets after
valuation allowance........................ 65,461 70,712 57,820 89,528
-------- -------- --------- --------
Deferred Federal tax liabilities:
Deferred insurance acquisition costs............ 9,384 -- 111,523 108,663
Value of business acquired...................... 66,373 66,578 -- --
Other investment-related........................ 28,855 37,919 -- --
Unrealized gains on investments................. -- -- 37,919 --
Depreciation and amortization................... 15,473 15,490 18,767 18,878
Other........................................... 5,738 4,197 2,320 3,351
-------- -------- --------- --------
Total deferred Federal tax liabilities....... 125,823 124,184 170,529 130,892
-------- -------- --------- --------
Net deferred Federal tax liabilities.............. $(60,362) $(53,472) $(112,709) $(41,364)
======== ======== ========= ========
</TABLE>
The valuation allowance is subject to future adjustments based on, among other
items, the Company's estimates of future operating earnings and capital gains.
66
<PAGE> 71
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The tax returns through the year 1986 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1987 through 1993 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received cash capital contributions of $18.4 million and $82.5
million during 1996 and 1994, respectively.
The Company has loans to joint ventures, consisting primarily of mortgage loans
on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1996 and January 4, 1996, joint venture
mortgage loans totaled $111.0 million and $110.2 million, respectively, and
during 1996, 1995 and 1994, the Company earned interest income on these joint
venture loans of $9.5 million, $19.6 million and $22.0 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Zurich Kemper Investments, Inc. ("ZKI"), an affiliated company, and
the information systems of Kemper Service Company ("KSvC"), a ZKI subsidiary,
based on the Company's share of administrative, legal, marketing, investment
management, information systems and operation and support services. During 1996,
1995 and 1994, expenses allocated to the Company from ZKI and KSvC amounted to
$1.7 million, $4.4 million and $6.5 million, respectively. The Company also paid
to ZKI investment management fees of $3.6 million, $3.4 million and $6.0 million
during 1996, 1995 and 1994, respectively. In addition, expenses allocated to the
Company from FKLA during 1996, 1995 and 1994 amounted to $10.5 million, $14.3
million and $11.1 million, respectively.
During 1995 and 1994, the Company sold certain mortgages and real estate-related
investments, net of reserves, amounting to approximately $3.5 million and $154.0
million, respectively, to an affiliated non-life realty company, in exchange for
cash. No gain or loss was recognized on these sales. During 1996, the Company
purchased approximately $24.5 million of real estate-related investments from
such affiliated non-life realty subsidiaries for cash. The Company also paid to
Kemper real estate subsidiaries $1.8 million in both 1996 and 1995, related to
the management of the Company's real estate portfolio.
(8) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
In 1992 and 1991, the Company entered into 100 percent indemnity reinsurance
agreements ceding $515.7 million and $416.3 million, respectively, of its
fixed-rate annuity liabilities to FLA. FLA is a mutual insurance company that
shares common management and common board members with the Company, FKLA and
Kemper. As of December 31, 1996 and January 4, 1996, the reinsurance recoverable
related to the fixed-rate annuity liabilities ceded to FLA amounted to $427.0
million and $502.8 million, respectively. During 1995, the Company recorded
income of $4.4 million related to a ceding commission experience adjustment from
the 1992 reinsurance agreement.
In December 1996, the Company assumed on a yearly renewable term basis
approximately $14.4 billion (face amount) of term life insurance from FKLA. As a
result of this transaction, the Company recorded premiums and reserves of
approximately $7.3 million. The difference between the cash transferred, which
represents the statutory reserves of the business assumed, and the reserves
recorded under generally accepted accounting
67
<PAGE> 72
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
principles, of approximately $18.4 million, was deemed to be a capital
contribution from Kemper and was recorded as additional paid-in-capital during
1996.
The Company's retention limit on term life insurance is $300 thousand (face
amount) on the life of any one individual with the excess amounts ceded to
outside reinsurers. The term life insurance business assumed from FKLA during
1996 did not have any individual contracts greater than $300 thousand in face
amount. Reserves ceded to outside reinsurers on the Company's direct business
amounted to approximately $94 thousand as of December 31, 1996.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a welfare plan that provides medical and life insurance benefits
to its retired and active employees and the Company is allocated a portion of
the costs of providing such benefits. The Company is self insured with respect
to medical benefits, and the plan is not funded except with respect to certain
disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.7 million and $687 thousand at December 31, 1996 and
January 4, 1996, respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.75 percent and 7.25 percent for 1996 and 1995, respectively.
The assumed health care trend rate used was based on projected experience for
1996 and 1997, 10 percent in 1998, gradually declining to 5.0 percent by the
year 2001 and remaining at that level thereafter.
A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1996 and January 4, 1996 by $56 thousand and $146 thousand,
respectively.
During 1994, the Company adopted certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement. The effect of adopting these policies was
immaterial.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although none of the Company or its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of or lending to real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
68
<PAGE> 73
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" below for
the discussion regarding the Company's loan commitments and standby financing
agreements.
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1996 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders. The Company is
also contingently liable for any future guaranty fund assessments related to
insolvencies of unaffiliated insurance companies, for which the life insurance
industry has been unable to estimate the cost to cover losses to policyholders.
No specific amount can be reasonably estimated for such insolvencies as of
December 31, 1996.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1996, the Company had future legal loan commitments and stand-by
financing agreements totaling $197.4 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be secured by assets of the joint ventures, including
first mortgage liens on the real estate. The Company's criteria in making these
arrangements are the same as for its mortgage loans and other real estate
investments. The Company presently expects to fund approximately $39.6 million
of these arrangements. These commitments are included in the Company's analysis
of real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
(12) DERIVATIVE FINANCIAL INSTRUMENTS
The Company was party to derivative financial instruments in the normal course
of business for other than trading purposes to hedge exposures in foreign
currency fluctuations related to certain foreign fixed maturity securities held
by the Company. The Company sold its interest in such securities during 1996.
The following table summarizes various information regarding these derivative
financial instruments as of January 4, 1996:
<TABLE>
<CAPTION>
WEIGHTED
(In thousands) WEIGHTED AVERAGE
AVERAGE REPRICING
NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY
JANUARY 4, 1996 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS)
--------------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Non-trading foreign exchange forward options................ $43,754 $112 $112 .32 30
</TABLE>
The Company's hedges relating to foreign currency exposure were implemented
using forward contracts on foreign currencies. These are generally
short-duration contracts with U.S. money-center banks. The Company records
realized and unrealized gains and losses on such investments in net income on a
current basis. The amounts of gain (loss) included in net income during 1996,
1995 and 1994 totaled $227 thousand, $(1.0) million and $6.4 million,
respectively.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. (See note captioned "Invested Assets and Related
Income".) Fair value estimates for financial instruments not carried at fair
value are generally determined using discounted cash flow models and assumptions
that are based on judgments regarding current and future economic conditions and
the risk characteristics of the investments. Although fair value estimates are
calculated using assumptions that management believes are appropriate, changes
in assumptions could significantly affect the estimates and such estimates
should be used with care.
69
<PAGE> 74
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Fixed maturities and equity securities: Fair values for fixed maturity
securities and for equity securities were determined by using market quotations,
or independent pricing services that use prices provided by market makers or
estimates of fair values obtained from yield data relating to instruments or
securities with similar characteristics, or fair value as determined in good
faith by the Company's portfolio manager, ZKI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments were estimated based
upon the investments observable market price, net of estimated costs to sell.
The estimates of fair value should be used with care given the inherent
difficulty of estimating the fair value of real estate due to the lack of a
liquid quotable market.
Other loans and investments: The carrying amounts reported in the consolidated
balance sheet for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1996 to be 4.75 percent, while the assumed average
market crediting rate was 5.8 percent in 1996.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1996 and January 4, 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JANUARY 4, 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities(1)........................... $3,866,431 $3,866,431 $3,749,323 $3,749,323
Cash and short-term investments............... 74,472 74,472 398,326 398,326
Mortgage loans and other real estate-related
assets..................................... 267,713 267,713 288,940 288,940
Policy loans.................................. 288,302 288,302 289,390 289,390
Other invested assets......................... 23,507 23,507 19,215 19,215
Financial instruments recorded as liabilities:
Life policy benefits.......................... 4,249,264 4,101,588 4,585,148 4,585,148
</TABLE>
- ---------------
(1) Includes $112 thousand carrying value and fair value for January 4, 1996, of
derivative securities used to hedge the foreign currency exposure on certain
specific foreign fixed maturity investments.
70
<PAGE> 75
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. (See "Restrictions on dividends" on page
6.) The maximum amount of dividends which can be paid by the Company without
prior approval in 1997 is $40.9 million. The Company paid no cash dividends in
1996, 1995 or 1994.
The Company's net income (loss) and stockholder's equity as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income (loss)........................................... $ 37,287 $(64,707) $ 44,491
======== ======== ========
Statutory surplus........................................... $411,837 $383,374 $416,243
======== ======== ========
</TABLE>
71
<PAGE> 76
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Certificate upon a withdrawal. The
5% assumed Guaranteed Interest Rate is the rate required to be used in the
"Summary of Expenses." In these examples, the withdrawal occurs one year after
the Date of Issue. The Market Value Adjustment operates in a similar manner for
transfers. No Withdrawal Charge applies to transfers.
The Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at
the end of the five-year Guarantee Period. After one year, when the withdrawals
occur in these examples, the Guarantee Period Value is $42,000.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate KILICO is then crediting
(at the time of the withdrawal) on new Certificates with the same Guarantee
Period as the time remaining in your Guarantee Period rounded to the next higher
number of complete years. One year after the Purchase Payment there would have
been four years remaining in your Guarantee Period. These examples also show the
Withdrawal Charge (if any) which would be calculated separately after the Market
Value Adjustment.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment and KILICO is then crediting 6.5%
for a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:
The Market Value Adjustment is a reduction of $2,316.67 from the Guarantee
Period Value:
- 2,316.67 = -.0551589 X 42,000.00
The Market Adjusted Value would be:
$39,683.33 = $42,000.00 - $2,316.67
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 10% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$2,142.90 = $39,683.33 X .90 X .06
Thus, the amount payable on a full withdrawal would be:
$37,540.43 = $39,683.33 - $2,142.90
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,158.34 = -.0551589 X $21,000.00
The Market Adjusted Value would be:
$19,841.66 = $21,000.00 - $1,158.34
- ---------------
-.0551589* = 3 (1 + .05) 4 (4) -1
----------
* Actual calculation utilizes 10 decimal places. (1 + .065)
72
<PAGE> 77
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$952.39 = ($19,841.46 - .10 X $39,683.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$18.889.07 = $19,841.46 -$952.39
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and KILICO is then crediting 4% for a four-year Guarantee Period. Upon a
full withdrawal, the market value adjustment factor would be:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
+.0390198 = 3 (1 + .05) 4 (4) -1
----------
(1 + .04)
</TABLE>
The Market Value Adjustment is an increase of $1638.83 to the Guarantee Period
Value:
$1,638.83 = $42,000.00 X .0390198
The Market Adjusted Value would be:
$43,638.33 = $42,000.00 +$1,638.83
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,356.47 = $43,638.33 X .90 X .06
Thus, the amount payable on withdrawal would be:
$41,281.85 = $43,638.33 - $2,356.47
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$819.42 = $21,000.00 X .0390198
The Market Adjusted Value of $21,000.00 would be:
$21,819.42 = $21,000.00 + $819.42
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$1,047.34 = ($21,819.42 - .1 X $43,638.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$20,772.08 = $21,819.42 - $1,047.34
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
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<PAGE> 78
APPENDIX B
KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND
VARIABLE ANNUITY IRA AND SIMPLE IRA DISCLOSURE STATEMENT
This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of Individual Retirement Annuities (IRAs) and Simple
Individual Retirement Annuities (SIMPLE IRA). Internal Revenue Service
regulations require that this be given to each person desiring to establish an
IRA or a SIMPLE IRA. Further information can be obtained from Kemper Investors
Life Insurance Company and from any district office of the Internal Revenue
Service.
A. REVOCATION
Within 7 days of the date you signed your enrollment application, you may revoke
the Contract and receive back 100% of your money. To do so, wire Kemper
Investors Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049, or
call 1-800-621-5001.
B. STATUTORY REQUIREMENTS
This Contract is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), or of Section 408(p) of the Code for use as a
SIMPLE IRA, whichever is applicable. The Contract has not been approved as to
form for use as an IRA or a SIMPLE IRA by the Internal Revenue Service. Such
approval by the Internal Revenue Service is a determination only as to form of
the Contract, and does not represent a determination on the merits of the
Contract.
1. The amount in your IRA must be fully vested at all times and the entire
interest of the owner must be nonforfeitable.
2. The Contract must be nontransferable by the owner.
3. The Contract must have flexible premiums.
4. You must start receiving distributions on or before April 1 of the year
following the year in which you reach age 70 1/2 (the required beginning
date)(see "Required Distributions").
5. Except in the case of a rollover contribution or a direct transfer (see
"Rollovers and Direct Transfers"), or a contribution made in accordance with the
terms of a Simplified Employee Pension (SEP), (1) all contributions to an IRA
must be cash contributions which do not exceed $2,000 for any taxable year, and
(2) all contributions to a SIMPLE IRA must be cash contributions, including
matching or nonelective employer contributions (see "SIMPLE IRAs"), which do not
exceed $6,000 for any year (as adjusted for inflation).
6. The Contract must be for the exclusive benefit of you and your beneficiaries.
C. ROLLOVERS AND DIRECT TRANSFERS
1. A rollover is a tax-free transfer from one retirement program to another that
you cannot deduct on your tax return. There are two kinds of tax-free rollover
payments under an IRA. In one, you transfer amounts from one IRA to another.
With the other, you transfer amounts from a qualified employee benefit plan or
tax-sheltered annuity to an IRA. Tax-free rollovers can be made from a SIMPLE
IRA to another SIMPLE IRA or to a SIMPLE Individual Retirement Account under
section 408(p) of the Code. An individual can make a tax-free rollover to an IRA
from a SIMPLE IRA after a two-year period has expired since the individual first
participated in a SIMPLE plan.
2. You must complete the transfer by the 60th day after the day you receive the
distribution from your IRA or other qualified employee benefit plan or SIMPLE
IRA.
3. A rollover distribution may be made to you only once a year. The one-year
period begins on the date you receive the rollover distribution, not on the date
you roll it over (reinvest it).
4. A direct transfer to an IRA of funds in an IRA from one trustee or insurance
company to another is not a rollover. It is a transfer that is not affected by
the one-year waiting period.
5. All or a part of the premium for this Contract used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or
tax-sheltered annuity, or from a direct transfer from another IRA. All or
74
<PAGE> 79
part of the premium for this Contract used as a SIMPLE IRA may be paid from a
rollover from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the
extent permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE
Individual Retirement Account.
6. Beginning January 1, 1993, a distribution that is eligible for rollover
treatment from a qualified employee benefit plan or tax-sheltered annuity will
be subject to twenty percent (20%) withholding by the Internal Revenue Service
even if you roll the distribution over within the 60-day rollover period. One
way to avoid this withholding is to make the distribution as a direct transfer
to the IRA trustee or insurance company.
D. ALLOWANCE OF DEDUCTION
1. In general, the amount you can contribute each year to an IRA is the lesser
of $2,000 or your taxable compensation for the year. If you have more than one
IRA, the limit applies to the total contributions made to your own IRAs for the
year. Generally, if you work the amount that you earn is compensation. Wages,
salaries, tips, professional fees, bonuses and other amounts you receive for
providing personal services are compensation. If you own and operate your own
business as a sole proprietor, your net earnings reduced by your deductible
contributions on your behalf to self-employed retirement plans is compensation.
If you are an active partner in a partnership and provide services to the
partnership, your share of partnership income reduced by deductible
contributions made on your behalf to qualified retirement plans is compensation.
All taxable alimony and separate maintenance payments received under a decree of
divorce or separate maintenance is compensation.
2. If neither you nor your spouse are covered for any part of the year by a
qualified retirement plan, the amount you can deduct each year is also the
lesser of $2,000 or your taxable compensation. If either you or your spouse are
covered by a qualified retirement plan, the $2,000 deduction limit is reduced
$10 for each $50 that your adjusted gross income exceeds $40,000 (married filing
jointly), $25,000 (single) or zero (married filing separately).
3. Contributions to your IRA can be made at any time. If you make the
contribution between January 1 and April 15, however, you may elect to treat the
contribution as made either in that year or in the preceding year. You may file
a tax return claiming deduction for your IRA contribution before the
contribution is actually made. You must, however, make the contribution by the
due date of your return not including extensions.
4. You cannot make a contribution other than a rollover contribution to your IRA
for the year in which you reach age 70 1/2 or thereafter.
5. IRA contributions of up to $2,000 can be made for you and for your spouse if
the combined compensation of you and your spouse is at least equal to the amount
contributed. Both of you cannot participate in the same IRA account or contract.
E. SEP-IRA'S
1. The maximum deductible contribution for a Simplified Employee Pension (SEP)
IRA is the lesser of $30,000 or 15% of compensation.
2. A SEP must be established and maintained by an employer (corporation,
partnership, sole proprietor). Information about the Kemper SEP is available
upon request.
F. SIMPLE IRAS
1. A SIMPLE IRA must be established with your employer using a qualified salary
reduction agreement.
2. You may elect to have your employer contribute to your SIMPLE IRA, under a
qualified salary reduction agreement, an amount (expressed as a percentage of
your compensation) not to exceed $6,000 (as adjusted for inflation) for the
year. In addition to these employee elective contributions, your employer is
required to make each year either (1) a matching contribution equal to up to 3
percent, and not less than 1 percent, of your SIMPLE IRA contribution for the
year, or (2) a nonelective contribution equal to 2 percent of your compensation
for the year (up to $150,000 of compensation, as adjusted for inflation). No
other contributions may be made to a SIMPLE IRA.
3. Employee elective contributions and employer contributions (i.e., matching
contributions and nonelective contributions) to your SIMPLE IRA are excluded
from your gross income.
75
<PAGE> 80
4. To the extent an individual with a SIMPLE IRA is no longer participating in a
SIMPLE plan (e.g., the individual has terminated employment), and two years has
passed since the individual first participated in the plan, the individual may
treat the SIMPLE IRA as an IRA.
G. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS
1. Earnings of your IRA annuity contract are not taxed until they are
distributed to you.
2. In general, taxable distributions are included in your gross income in the
year you receive them.
3. Distributions under your IRA are non-taxable to the extent they represent a
return of non-deductible contributions (if any). The non-taxable percentage of a
distribution is determined by dividing your total undistributed, non-deductible
IRA contributions by the value of all your IRAs (including SEPs and rollovers).
4. You cannot choose the special five-year or ten-year averaging that may apply
to lump sum distributions from qualified employer plans.
H. REQUIRED DISTRIBUTIONS
You must start receiving minimum distributions required under the Contract and
Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum
distribution for a particular year must be received by December 31 of that year.
However, you may delay the required minimum distribution for the year you reach
age 70 1/2 until April 1 of the following year (i.e., the required beginning
date).
Annuity payments which begin by April 1 of the year following your 70 1/2 year
satisfy the minimum distribution requirement if they provide for non-increasing
payments over the life or the lives of you and your spouse, provided that, if
installments are guaranteed, the guaranty period does not exceed the lesser of
20 years or the applicable life expectancy.
The applicable life expectancy is your remaining life expectancy or the
remaining joint life and last survivor expectancy of you and your designated
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." To
obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS
toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your
area as shown in your income tax return instructions.
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.
If the actual distribution from your Contract is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. TAX ON EXCESS CONTRIBUTIONS
1. You must pay a 6% excise tax each year on excess contributions that remain in
your Contract. Generally, an excess contribution is the amount contributed to
your Contract that is more than you can contribute. The excess is taxed for the
year of the excess contribution and for each year after that until you correct
it.
2. You will not have to pay the 6% excise tax if you withdraw the excess amount
by the date your tax return is due including extensions for the year of the
contribution. You do not have to include in your gross income an excess
contribution that you withdraw from your Contract before your tax return is due
if the income earned on the excess was also withdrawn and no deduction was
allowed for the excess contribution. You must include in your gross income the
income earned on the excess contribution.
3. If an excess contribution is a result of a rollover and the excess occurred
because information required to be supplied by the payor of the distribution was
incorrect, you may withdraw the excess contribution. You will have to amend your
tax return for the year in which the excess occurred to correct the reporting of
the rollover amounts in that year. Do not include, in the year you withdraw it,
the excess contribution that was the result of the incorrect information.
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<PAGE> 81
J. TAX ON PREMATURE DISTRIBUTIONS
There is an additional tax on premature distributions from your IRA equal to 10%
of the amount of the premature distribution that you must include in your gross
income. For premature distributions from a SIMPLE IRA made within the first 2
years you participate in a SIMPLE plan, the additional tax is equal to 25% of
the amount of the premature distribution that must be included in gross income.
Premature distributions are generally amounts you withdraw before you are age
59 1/2. However, the tax on premature distributions does not apply:
1. To amounts that are rolled over tax free.
2. To a series of substantially equal periodic payments made (not less
frequently than annually) over your life or life expectancy, or the joint life
or life expectancy of you and your beneficiary.
3. If you are permanently disabled. You are considered disabled if you cannot do
any substantial gainful activity because of your physical or mental condition. A
physician must determine that the condition has lasted or can be expected to
last continuously for 12 months or more or that the condition can be expected to
lead to death.
4. To distributions made on or after your death.
K. PROHIBITED TRANSACTIONS
If you or your beneficiary engage in a prohibited transaction described in
section 4975(c) of the Code with respect to the Contract, the Contract will lose
its classification as an IRA or SIMPLE IRA, whichever is applicable, and you
must include in your gross income, for the taxable year during which you or your
beneficiary engage in the prohibited transaction, the fair market value of the
Contract.
L. IRA EXCISE TAX REPORTING
Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA excise taxes, you do not need Form
5329. Further information can be obtained from any district office of the
Internal Revenue Service.
M. BORROWING
If you borrow money against your Contract or use it as security for a loan, the
Contract will lose its classification as an IRA or SIMPLE IRA, whichever is
applicable, and you must include in gross income the fair market value of the
IRA contract as of the first day of your tax year. In addition, the portion
borrowed or used as security for a loan will be treated as a distribution
subject to the tax on premature distributions described above. (Note: This
Contract does not allow borrowings against it, nor may it be assigned or pledged
as collateral for a loan.)
N. FINANCIAL DISCLOSURE
1. If contributions to the Contract are made by other than rollover
contributions and direct transfers, the following information based on the
charts shown on the next pages, which assumes you were to make a level
contribution to the fixed account at the beginning of each year of $1,000 must
be completed prior to your signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 60
- ------------------------------------------------------------------------------------------------------
2 65
- ------------------------------------------------------------------------------------------------------
3 70
- ------------------------------------------------------------------------------------------------------
4
- ------------------------------------------------------------------------------------------------------
5
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
77
<PAGE> 82
2. If contributions to the Contract are made by rollover contributions and/or
direct transfers, the following information, based on the charts shown on the
next page, and all of which assumes you make one contribution to the fixed
account of $1,000 at the beginning of this year, must be completed prior to your
signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- ------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
1 60
- ------------------------------------------------------------------------------------------------------
2 65
- ------------------------------------------------------------------------------------------------------
3 70
- ------------------------------------------------------------------------------------------------------
4
- ------------------------------------------------------------------------------------------------------
5
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
O. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.40% per annum. If you elected the Guaranteed Minimum Income
Benefit option, an additional charge of .30% of the Guaranteed Death Benefit
base will be assessed against the Separate Account, Fixed Account and Guarantee
Periods on a pro-rata basis.
2. An annual records maintenance charge of $30.00 will be assessed at the end of
each Contract Year against the Separate Account value, Fixed Account and
Guarantee Periods.
3. Withdrawal (early annuitization) charges will be assessed based on the years
elapsed since the purchase payments (in a given contract year) were received by
KILICO; under 1 year, 7%; over 1 to 2 years, 6%; over 2 to 3 years, 5%; over 3
to 4 years, 5%; over 4 to 5 years, 4%; over 5 to 6 years, 3%; over 6 to 7 years,
2%; over 7 years and thereafter, 0%.
4. The method used to compute and allocate the annual earnings is contained in
the Prospectus under the heading "Accumulation Unit Value."
5. The growth in value of your contract is neither guaranteed nor projected but
is based on the investment experience of the Separate Account.
78
<PAGE> 83
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)
<TABLE>
<CAPTION>
End of Termination End of Termination End of Termination End of Termination
Year Values* Year Values* Year Values* Year Values*
- -----------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
1 $ 937.00 14 $16,798.32 27 $40,421.63 40 $ 75,113.26
2 1,913.00 15 18,310.91 28 42,642.92 41 78,375.30
3 2,928.90 16 19,868.88 29 44,930.85 42 81,735.20
4 3,976.63 17 21,473.59 30 47,287.42 43 85,195.89
5 5,066.14 18 23,126.44 31 49,714.68 44 88,760.41
6 6,198.41 19 24,828.87 32 52,214.76 45 92,431.86
7 7,374.46 20 26,582.37 33 54,789.84 46 96,213.46
8 8,604.34 21 28,388.49 34 57,442.18 47 100,108.50
9 9,871.11 22 30,248.78 35 60,174.08 48 104,120.40
10 11,175.88 23 32,164.88 36 62,987.94 49 108,252.65
11 12,519.80 24 34,138.47 37 65,886.22 50 112,508.87
12 13,904.03 25 36,171.26 38 68,871.45
13 15,329.79 26 38,265.04 39 71,946.23
</TABLE>
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
<TABLE>
<CAPTION>
End of Termination End of Termination End of Termination End of Termination
Year Values* Year Values* Year Values* Year Values*
- -----------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
1 $ 937 14 $1,000 27 $1,000 40 $1,000
2 946 15 1,000 28 1,000 41 1,000
3 955 16 1,000 29 1,000 42 1,000
4 955 17 1,000 30 1,000 43 1,000
5 964 18 1,000 31 1,000 44 1,000
6 973 19 1,000 32 1,000 45 1,000
7 982 20 1,000 33 1,000 46 1,000
8 1,000 21 1,000 34 1,000 47 1,000
9 1,000 22 1,000 35 1,000 48 1,000
10 1,000 23 1,000 36 1,000 49 1,000
11 1,000 24 1,000 37 1,000 50 1,000
12 1,000 25 1,000 38 1,000
13 1,000 26 1,000 39 1,000
</TABLE>
* Includes applicable withdrawal charges.
79
<PAGE> 84
STATEMENT OF ADDITIONAL INFORMATION
------------------------, 1997
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated . The Prospectus may be obtained
from Kemper Investors Life Insurance Company by writing or calling the address
or telephone number listed above.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services to the Separate Account............................ B-1
Performance Information of Subaccounts...................... B-1
State Regulation............................................ B-9
Experts..................................................... B-9
Financial Statements........................................ B-10
</TABLE>
<PAGE> 85
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Fund by
each of the Subaccounts. All expenses incurred in the operations of the Separate
Account, except the charge for mortality and expense risk and administrative
expenses, and records maintenance charge (as described in the Prospectus) are
borne by KILICO.
The independent auditors for the Separate Account are KPMG Peat Marwick LLP,
Chicago, Illinois, for the periods through December 31, 1996. The firm performed
the annual audit of the financial statements of the Separate Account and KILICO
for the periods through December 31, 1996.
The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Contracts are distributed
through the principal underwriter for the Separate Account, Investors Brokerage
Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into
selling group agreements with affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments.
PERFORMANCE INFORMATION OF SUBACCOUNTS
As described in the prospectus, a Subaccount's historical performance may be
shown in the form of "average annual total return" and "total return"
calculations in the case of all Subaccounts; "yield" information may be provided
in the case of the Kemper High Yield Subaccount; and "yield" and "effective
yield" information may be provided in the case of the Kemper Money Market
Subaccount. These various measures of performance are described below.
A Subaccount's average annual total return quotation is computed in accordance
with a standard method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Subaccount for a specific
period is found by first taking a hypothetical $1,000 investment in each of the
Subaccount's units on the first day of the period at the maximum offering price,
which is the Accumulation Unit value per unit ("initial investment") and
computing the ending redeemable value ("redeemable value") of that investment at
the end of the period. The redeemable value reflects the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period as
well as all other recurring charges and fees applicable under the Contract to
all Contract Owner accounts. Premium taxes are not included in the term charges.
The redeemable value is then divided by the initial investment and this quotient
is taken to the Nth root (N represents the number of years in the period) and 1
is subtracted from the result, which is then expressed as a percentage. Average
annual total return quotations for various periods are set forth in the table
below.
No standard formula has been prescribed for calculating total return
performance. Total return performance for a specific period is calculated by
first taking an investment (assumed to be $10,000 below) in each Subaccount's
units on the first day of the period at the maximum offering price, which is the
Accumulation Unit Value per unit ("initial investment") and computing the ending
value ("ending value") of that investment at the end of the period. The ending
value does not include the effect of the applicable Withdrawal Charge that may
be imposed at the end of the period, and thus may be higher than if such charge
were deducted. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. An assumed
investment of $10,000 was chosen because that approximates the size of a typical
account. The account size used affects the performance figure because the
Records Maintenance Charge is a fixed per account charge. Total return
quotations for various periods are set forth in the table below.
The yield for the Kemper High Yield Subaccount is computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
The yield for the Kemper High Yield Subaccount, based upon the one month period
ended September 30, 1997, was 5.33%. The yield quotation is computed by dividing
the net investment income per unit earned during the specified one month or
30-day period by the accumulation
B-1
<PAGE> 86
unit values on the last day of the period, according to the following formula
that assumes a semi-annual reinvestment of income:
<TABLE>
<CAPTION>
<S> <C> <C>
a - b
-------
YIELD = 2[( +1)(6) - 1
cd
</TABLE>
a = net dividends and interest earned during the period by the Fund attributable
to the Subaccount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
withdrawal charges or premium taxes.
The Kemper Money Market Subaccount's yield is computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit Value during
the period is divided by the Accumulation Unit Value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Account's portfolio are not included in the calculation. The
Kemper Money Market Subaccount's yield for the seven-day period ended September
30, 1997 was 3.70% and average portfolio maturity was 21 days.
The Kemper Money Market Subaccount's effective yield is determined by taking the
base period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period return
+1) (365) / (7) - 1. The Kemper Money Market Subaccount's effective yield for
the seven day period ended September 30, 1997 was 3.77%.
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first seven years after purchase may be subject
to a Withdrawal Charge that ranges from 7% the first year to 0% after seven
years. Yield, effective yield and total return do not reflect the effect of the
Withdrawal Charge or premium taxes that may be imposed upon the redemption of
units. Average annual total return reflects the effect of the applicable
Withdrawal Charge (but not premium tax) that may be imposed at the end of the
period in question.
Performance of the Subaccounts will vary from time to time, and these results
are not necessarily representative of future results. The total return
performance of each Subaccount is calculated for a specified period of time by
assuming an initial Purchase Payment of $10,000 fully allocated to each Separate
Account and the deduction of all expenses and fees, including a prorated portion
of the $30 annual Records Maintenance Charge. No withdrawals are assumed. The
percentage increases are determined by subtracting the initial Purchase Payment
from the ending value and dividing the remainder by the beginning value.
Comparative information for certain Subaccounts with respect to the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Consumer Price
Index, the CDA Certificate of Deposit Index, the Lehman Brothers Government and
Corporate Bond Index, the Salomon Brothers High Grade Corporate Bond Index and
the Merrill Lynch Government/Corporate Master Index is also included.
Comparative information may be shown for the Kemper International Subaccount
with respect to the CDA Mutual Fund International Index and the Morgan Stanley
Capital International Europe Australia Far East Index. The Kemper Total Return,
Kemper Growth and Kemper Value+Growth Subaccounts are compared to, and the
Kemper International Subaccount may be compared to, the Dow Jones Industrial
Average and the Standard & Poor's 500 Stock Index because these indices are
generally considered representative of the U. S. stock market in general. The
Consumer Price Index is
B-2
<PAGE> 87
generally considered to be a measure of inflation and thus the performance of
the Kemper Money Market, Kemper Total Return, Kemper High Yield, Kemper Growth
and Kemper Value+Growth Subaccounts, the Janus Subaccounts, the Lexington
Subaccounts and the Fidelity Subaccounts is compared to, and the Kemper
International Subaccount may be compared to, that index. The Kemper High Yield
Subaccount is compared to the Lehman Brothers Government and Corporate Bond
Index, the Salomon Brothers High Grade Corporate Bond Index and the Merrill
Lynch Government/Corporate Master Index because such indices are generally
considered to represent the performance of intermediate and long term bonds
during various market cycles. The Kemper Money Market Subaccount is also
compared to the CDA Certificate of Deposit Index because certificates of deposit
represent an alternative current income producing product. The Kemper
International Subaccount may be compared to the CDA Mutual Fund--International
Index because the index is a weighted performance average of other mutual funds
that invest primarily in securities of foreign issuers. The Kemper International
Subaccount also may be compared to the Morgan Stanley Capital International
Europe Australia Far East Index because the index is an unmanaged index that is
considered to be generally representative of major non-United States stock
markets. The Janus Growth, Janus Worldwide Growth and Janus Balanced Subaccounts
may also be compared to the Standard & Poor's Midcap Index, the Lehman Brothers
Government/Corporate 1-3 Year Bond Index, the Lehman Brothers Long
Government/Corporate Bond Index, the Russell 2000 Index, and the NASDAQ
Composite Index. In addition, the Janus Worldwide Growth Subaccount's
performance may also be compared to the Morgan Stanley International World
Index. Please note the differences and similarities between the investments
which a Subaccount may purchase and the investments measured by the indexes
which are described below. In particular, it should be noted that certificates
of deposit may offer fixed or variable yields and principal is guaranteed and
may be insured. The units of the Subaccounts are not insured. Also, the value of
the Subaccounts will fluctuate.
B-3
<PAGE> 88
TABLES OF HISTORICAL HYPOTHETICAL PERFORMANCE INFORMATION
The following tables reflect historical hypothetical performance information
based on the performance of the underlying Funds from the inception date of each
Fund. The Contracts were not offered during these periods but the performance
information reflects the investment performance of the underlying Funds for the
periods shown and the fees and charges under the Contracts. In the future,
KILICO will provide performance information based on the inception date of the
Contracts. An assumed Subaccount value of $25,000 was used to reflect the
Records Maintenance Charge. Actual performance of the underlying Funds might
have been altered by the additional investments under the Contracts. In
addition, the past performance of the Funds is no indication of their future
performance.
<TABLE>
<CAPTION>
VALUES OF INITIAL
$10,000 INVESTMENT
IN SUBACCOUNTS--AS COMPARED TO
OF DECEMBER 31, 1996 -----------------------------------------
-------------------------- DOW JONES STANDARD CONSUMER
ENDING PERCENTAGE INDUSTRIAL & POOR'S PRICE EAFE
TOTAL RETURN TABLE VALUE INCREASE AVERAGE(1) 500(2) INDEX(3) (13)
- ------------------ ------ ---------- ---------- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
KEMPER GROWTH SUBACCOUNT
Life of Fund(4)................................... $50,897 408.97% 411.74% 348.69% 57.47% 591.59%
Ten years......................................... 33,926 239.26 240.11 205.88 43.68 131.08
Five years........................................ 17,227 72.27 103.49 77.60 15.11 50.25
One year.......................................... 11,987 19.87 26.01 20.26 3.31 6.36
KEMPER TOTAL RETURN SUBACCOUNT
Life of Fund(5)................................... $52,250 422.50% 698.69% 577.46% 68.11% 781.60%
Ten years......................................... 26,908 169.08 240.11 205.88 43.68 131.08
Five years........................................ 14,179 41.79 103.49 77.60 15.11 50.25
One year.......................................... 11,478 14.78 26.01 20.26 3.31 6.36
KEMPER INTERNATIONAL SUBACCOUNT
Life of Fund(13).................................. $15,619 56.19% 101.50% 77.52% 15.11% 50.25%
One year.......................................... 11,421 14.21 26.01 20.26 3.31 6.36
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
VALUES OF INITIAL --------------------------------------------------------------
$10,000 INVESTMENT SALOMON
IN SUBACCOUNTS--AS BROS. LEHMAN MERRILL
OF DECEMBER 31, 1996 CDA HIGH GRADE BROS. LYNCH
-------------------------- CONSUMER CERT. CORP. GOVT./CORP. GOVT./CORP.
ENDING PERCENTAGE PRICE OF DEPOSIT BOND BOND MASTER
VALUE INCREASE INDEX(3) INDEX(6) INDEX(7) INDEX(8) INDEX(9)
------ ---------- -------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET SUBACCOUNT
Life of Fund(10).................. $21,845 118.45% 68.11% N/A* 570.60% 399.28% 398.53%
Ten years......................... 15,353 53.53 43.68 N/A* 147.34 123.56 123.68
Five years........................ 11,462 14.62 15.11 22.57% 50.52 41.43 41.74
One year.......................... 10,356 3.56 3.31 4.98 1.39 2.90 2.91
KEMPER HIGH YIELD SUBACCOUNT
Life of Fund(11).................. $54,785 447.85% 68.11% N/A* 570.60% 399.28% 398.53%
Ten years......................... 25,173 151.73 43.68 N/A* 147.34 123.56 123.68
Five years........................ 17,289 72.89 15.11 22.57% 50.52 41.43 41.74
One year.......................... 11,236 12.36 3.31 4.98 1.39 2.90 2.91
KEMPER VALUE+GROWTH SUBACCOUNT
Life of Fund...................... $11,355 13.55%
</TABLE>
B-4
<PAGE> 89
<TABLE>
<CAPTION>
VALUES OF
INITIAL $10,000
INVESTMENT IN
SUBACCOUNTS-- COMPARED TO
AS OF ----------------------------------------------------------------------------
DECEMBER 31, MORGAN LEHMAN LEHMAN
1996 STANLEY STANDARD BROS. LONG BROS.
-------------------- INTERNAT. & POOR'S GOVT./CORP. GOVT./CORP. RUSSELL
ENDING PERCENTAGE WORLD MIDCAP BOND 1-3 YR. BOND 2000 NASDAQ
TOTAL RETURN VALUE INCREASE INDEX(15) INDEX(16) INDEX(17) INDEX(18) INDEX(19) COMPOS.(20)
TABLE ------ ---------- --------- --------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JANUS GROWTH
Life of Fund(14).......... $15,665 56.65% 17.69% 17.95% 9.68% 8.27% 15.37% 22.83%
One year.................. 11,681 16.81
JANUS WORLDWIDE GROWTH
Life of Fund(14).......... $18,984 89.84% 17.69% 17.95% 9.68% 8.27% 15.37% 22.83%
One year.................. 12,724 27.24
JANUS BALANCED
Life of Fund(14).......... $14,971 49.71% 17.69% 17.95% 9.68% 8.27% 15.37% 22.83%
One year.................. 11,456 14.56
LEXINGTON NATURAL RESOURCES
Life of Fund(14).......... $14,896 48.96% 17.69% 17.95% 9.68% 8.27% 15.37% 22.83%
Five years................ 14,592 45.92
One year.................. 12,470 24.70
WARBURG PINCUS--POST VENTURE
CAPITAL
Life of Fund(21).......... $ 9,726 (2.74)%
WARBURG PINCUS--SMALL
COMPANY TRUST
Life of Fund(22).......... $13,955 39.55%
One year.................. 11,232 12.32%
WARBURG
PINCUS--INTERNATIONAL
EQUITY
Life of Fund(22).......... $11,242 12.42%
One year.................. 10,624 6.29
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------
AVERAGE ANNUAL STANDARD
TOTAL RETURN DOW JONES & POOR'S CONSUMER
AVERAGE ANNUAL TOTAL (BASED ON $1,000 INDUSTRIAL 500 STOCK PRICE EAFE
RETURN TABLE INVESTMENT) AVERAGE(1) INDEX(2) INDEX(3) (12)
-------------------- ---------------- ---------- --------- -------- ----
<S> <C> <C> <C> <C> <C>
KEMPER GROWTH SUBACCOUNT
Life of Fund(4)........................................... 12.40% 13.31% 12.18% 3.54% 15.96%
Ten years................................................. 11.98 13.02 11.83 3.69 8.74
Five years................................................ 9.91 15.26 12.17 2.85 8.48
One year.................................................. 13.34 26.01 20.26 3.31 6.36
KEMPER TOTAL RETURN SUBACCOUNT
Life of Fund(5)........................................... 11.07% 15.04% 13.77% 3.57% 15.81%
Ten years................................................. 9.41 13.02 11.83 3.69 8.74
Five years................................................ 5.70 15.26 12.17 2.85 8.48
One year.................................................. 8.50 26.01 20.26 3.31 6.36
KEMPER INTERNATIONAL SUBACCOUNT
Life of Fund(13).......................................... 7.79% 15.02% 12.20% 2.86% 8.51%
One year.................................................. 7.97 26.01 20.26 3.31 6.36
KEMPER VALUE+GROWTH SUBACCOUNT
Life of Fund(23).......................................... 11.41%
</TABLE>
B-5
<PAGE> 90
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------
LEHMAN
AVERAGE ANNUAL SALOMON BROS. BROS. MERRILL LYNCH
TOTAL RETURN CONSUMER HIGH GRADE GOVT./CORP. GOVT./CORP.
AVERAGE ANNUAL TOTAL (BASED ON $1,000 PRICE CORP. BOND BOND MASTER
RETURN TABLE INVESTMENT) INDEX(3) INDEX(7) INDEX(8) INDEX(9)
-------------------- ---------------- -------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
KEMPER HIGH YIELD SUBACCOUNT
Life of Fund(11)...................... 11.42 3.57% 13.70% 11.46% 11.44%
Ten years............................. 8.68 3.69 9.48 8.38 8.38
Five years............................ 9.99 2.85 8.52 7.18 7.22
One year.............................. 6.21 3.31 1.39 2.90 2.90
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------------
LEHMAN
MORGAN LEHMAN BROS.
AVERAGE ANNUAL STANLEY STANDARD BROS. LONG GOVT./CORP.
TOTAL RETURN INTERNAT. & POOR'S GOVT./CORP. 1-3 YR. RUSSELL
AVERAGE ANNUAL TOTAL (BASED ON $1,000 WORLD MIDCAP BOND BOND 2000 NASDAQ
RETURN TABLE INVESTMENT) INDEX(15) INDEX(16) INDEX(17) INDEX(18) INDEX(19) COMPOS.(20)
-------------------- ---------------- --------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUS GROWTH SUBACCOUNT
Life of Fund(14).............. 12.35% 13.43% 13.62% 7.41% 6.34% 11.70% 17.24%
One year...................... 10.43
JANUS WORLDWIDE GROWTH
SUBACCOUNT
Life of Fund(14).............. 19.12% 13.43% 13.62% 7.41% 6.34% 11.70% 17.24%
One year...................... 20.33
JANUS BALANCED SUBACCOUNT
Life of Fund(14).............. 10.81% 13.43% 13.62% 7.41% 6.34% 11.70% 17.24%
One year...................... 8.30
LEXINGTON NATURAL RESOURCES
SUBACCOUNT
Life of Fund(14).............. 6.44% 13.43% 13.62% 7.41% 6.34% 11.70% 17.24%
Five years.................... 6.31
One year...................... 17.92
WARBURG PINCUS -- POST VENTURE
CAPITAL SUBACCOUNT
Life of Fund(21).............. (27.66)%
WARBURG PINCUS -- SMALL COMPANY
GROWTH SUBACCOUNT
Life of Fund(22).............. 20.07%
One year...................... 6.17
WARBURG PINCUS -- INTERNATIONAL
EQUITY SUBACCOUNT+
Life of Fund(22).............. 3.97%
One year...................... 0.45
</TABLE>
<TABLE>
<CAPTION>
YIELD INFORMATION
-----------------
<S> <C>
KEMPER HIGH YIELD SUBACCOUNT
30 day period ended 9/30/97............................... 5.33%
KEMPER MONEY MARKET SUBACCOUNT
7 day period ended 9/30/97................................ 3.77%
</TABLE>
* N/A Not Available
Information for the indices used for comparisons have been provided by the Funds
and has not been independently verified.
(1) The Dow Jones Industrial Average is an unmanaged unweighted average of
thirty blue chip industrial corporations listed on the New York Stock Exchange.
Assumes reinvestment of dividends.
(2) The Standard & Poor's 500 Stock Index is an unmanaged weighted average of
500 stocks, over 95% of which are listed on the New York Stock Exchange. Assumes
reinvestment of dividends.
B-6
<PAGE> 91
(3) The Consumer Price Index, published by the U.S. Bureau of Labor Statistics,
is a statistical measure of change, over time, in the prices of goods and
services in major expenditure groups.
(4) From December 9, 1983 to December 31, 1996.
(5) From March 5, 1982 to December 31, 1996.
(6) The CDA Certificate of Deposit Index is provided by CDA Investment
Technologies, Inc., Silver Spring, Maryland, and is based upon a statistical
sampling of the yield of 30-day certificates of deposit of major commercial
banks. Yield is based upon a monthly compounding of interest.
(7) The Salomon Brothers High Grade Corporate Bond Index is on a total return
basis with all dividends reinvested and is comprised of high grade long-term
industrial and utility bonds rated in the top two rating categories.
(8) The Lehman Brothers Government/Corporate Bond Index is on a total return
basis and is comprised of all publicly issued, non-convertible, domestic debt of
the U.S. Government or any agency thereof, quasi-Federal corporation, or
corporate debt guaranteed by the U.S. Government and all publicly issued,
fixed-rate, non-convertible, domestic debt of the three major corporate
classifications: industrial, utility, and financial. Only notes and bonds with a
minimum outstanding principal amount of $1,000,000 and a minimum of one year are
included. Bonds included must have a rating of at least Baa by Moody's Investors
Service, BBB by Standard & Poor's Corporation or in the case of bank bonds not
rated by either Moody's or Standard & Poor's, BBB by Fitch Investors Service.
(9) The Merrill Lynch Government/Corporate Master Index is based upon the total
return with all dividends reinvested of 4,000 corporate and 300 government bonds
issued with an intermediate average maturity and an average quality rating of Aa
(Moody's Investors Service, Inc.) /AA (Standard & Poor's Corporation).
(10) From March 5, 1982 to December 31, 1996.
(11) From March 5, 1982 to December 31, 1996.
(12) EAFE is the Morgan Stanley Capital International Europe, Australia, Far
East index. This index is an unmanaged index that is considered to be generally
representative of major non-United States stock markets.
(13) From January 6, 1992 to December 31, 1996.
(14) From September 15, 1995 to December 31, 1996.
(15) The Morgan Stanley International World Index is an arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Italy, Japan, Netherlands, New Zealand, Norway,
Singapore/Malaysia, South Africa Gold, Spain, Switzerland, United Kingdom, and
the United States. The Index is calculated on a total return basis, which
includes reinvestment of gross dividends before deduction of withholding taxes.
The index covers about 60% of the issues listed on the exchanges of the
countries included.
(16) The Standard & Poor's Midcap 400 Index is a capitalization-weighted index
that measures the performance of the mid-range sector of the U.S. stock market
where the median market capitalization is approximately $700 million. The index
was developed with a base level of 100 as of December 31, 1990.
(17) The Lehman Brothers Long Government/Corporate Bond Index is composed of all
bonds covered by the Lehman Brothers Government/Corporate Bond Index with
maturities of 10 years or greater. Total return comprises price
appreciation/depreciation and income as a percentage of the original investment.
Indexes are balanced monthly by market capitalization.
(18) The Lehman Brothers Government/Corporate 1-3 Year Bond Index is composed of
all bonds covered by the Lehman Brothers Government/Corporate Bond Index with
maturities between one and three years.
(19) The Russell 2000 Index is comprised of the smallest 2000 companies in the
Russell 3000 Index, representing approximately 11% of the Russell 3000 total
market capitalization. The index was developed with a base value of 135.00 as of
December 31, 1986.
(20) The NASDAQ Composite Index is a broad-based capitalization-weighted index
of all NASDAQ stocks. The index was developed with a base level of 100 as of
February 5, 1971.
(21) From September 30, 1996 to December 31, 1996.
(22) From June 30, 1995 to December 31, 1996.
(23) From May 1, 1996 to December 31, 1996.
B-7
<PAGE> 92
The following tables illustrate an assumed $10,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from the inception date of each Fund to December 31, 1996. The Contracts
were not offered during these periods. In the future, KILICO will provide
performance information based on the inception date of the Contracts.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C> <C>
1982 .............................. $12,349
1983 .............................. 14,345
1984 .............................. 13,463
1985 .............................. 17,085
1986 .............................. 19,418
1987 .............................. 19,285
1988 .............................. 21,323
1989 .............................. 26,105
1990 .............................. 27,058
1991 .............................. 36,849
1992 .............................. 36,965
1993 .............................. 40,898
1994 .............................. 36,334
1995 .............................. 45,524
1996 .............................. 52,250
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C> <C>
1982 ............................... $12,371
1983 ............................... 14,016
1984 ............................... 15,579
1985 ............................... 18,723
1986 ............................... 21,764
1987 ............................... 22,746
1988 ............................... 26,015
1989 ............................... 25,340
1990 ............................... 21,130
1991 ............................... 31,688
1992 ............................... 36,828
1993 ............................... 43,613
1994 ............................... 42,088
1995 ............................... 48,758
1996 ............................... 54,785
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C> <C>
1992 ............................... $ 9,796
1993 ............................... 12,844
1994 ............................... 12,209
1995 ............................... 13,676
1996 ............................... 15,619
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C> <C>
1983 ............................... $10,291
1984 ............................... 11,258
1985 ............................... 13,911
1986 ............................... 15,002
1987 ............................... 15,058
1988 ............................... 14,920
1989 ............................... 18,893
1990 ............................... 18,755
1991 ............................... 29,545
1992 ............................... 30,192
1993 ............................... 34,152
1994 ............................... 32,003
1995 ............................... 42,595
1996 ............................... 50,897
</TABLE>
<TABLE>
<CAPTION>
KEMPER MONEY MARKET SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 ............................... $10,764
1983 ............................... 11,601
1984 ............................... 12,666
1985 ............................... 13,521
1986 ............................... 14,229
1987 ............................... 14,968
1988 ............................... 15,874
1989 ............................... 17,094
1990 ............................... 18,241
1991 ............................... 19,058
1992 ............................... 19,445
1993 ............................... 19,731
1994 ............................... 20,240
1995 ............................... 21,094
1996 ............................... 21,845
</TABLE>
<TABLE>
<CAPTION>
KEMPER VALUE+GROWTH SUBACCOUNT
4/8 TOTAL
12/31 VALUE
- ----- -----
<S> <C> <C>
1996 ................................ $11,355
</TABLE>
B-8
<PAGE> 93
<TABLE>
<CAPTION>
JANUS GROWTH
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1993 ................................ 10,307
1994 ................................ 10,446
1995 ................................ 13,411
1996 ................................ 15,665
<CAPTION>
JANUS WORLDWIDE GROWTH
YEAR
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1993 ................................ 11,861
1994 ................................ 11,877
1995 ................................ 14,920
1996 ................................ 18,984
<CAPTION>
WARBURG PINCUS POST VENTURE CAPITAL
YEAR
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1996 ................................ 9,726
<CAPTION>
WARBURG PINCUS INTERNATIONAL EQUITY
YEAR
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1995 ................................ 10,576
1996 ................................ 11,242
JANUS BALANCED
YEAR
ENDED TOTAL
12/31 VALUE
- ---- -----
1993 ................................ 10,676
1994 ................................ 10,618
1995 ................................ 13,068
1996 ................................ 14,971
LEXINGTON NATURAL RESOURCES
YEAR
ENDED TOTAL
12/31 VALUE
- ---- -----
1991 ................................ 10,208
1992 ................................ 10,391
1993 ................................ 11,365
1994 ................................ 10,605
1995 ................................ 11,945
1996 ................................ 14,896
WARBURG PINCUS SMALL COMPANY GROWTH
YEAR
ENDED TOTAL
12/31 VALUE
- ---- -----
1995 ................................ 12,424
1996 ................................ 13,955
</TABLE>
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED
ANNUITY CONVENTIONAL
AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- CONTRIBUTIONS
TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------
<S> <C> <C> <C>
10 Years.......................................... $107,946 $ 86,448 $ 81,693
20 Years.......................................... 233,048 165,137 133,476
30 Years.......................................... 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts. Income on
Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10% tax
penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following annuity charges and
expenses: 1.25% mortality and expense risk; .10% administration charges; 7%
maximum deferred withdrawal charge; and $30 annual records maintenance charge.
The tax-deferred accumulation would be reduced if these charges were reflected.
No implication is intended by the use of these assumptions that the return shown
is guaranteed in any way or that the return shown represents an average or
expected rate of return over the period of the Contracts. [IMPORTANT--THIS IS
NOT AN ILLUSTRATION OF YIELD OR RETURN].
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on
B-9
<PAGE> 94
how you receive your funds), they are subject to income tax. At the time of
receipt, if the person receiving the monies is retired, not working or has
additional tax exemptions, these monies may be taxed at a lesser rate.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
EXPERTS
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1996 and the related statements of
operations for the year then ended, and the statements of changes in contract
owners' equity for the years ended December 31, 1996 and 1995 have been included
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
This Statement of Additional Information contains financial statements for the
Separate Account which reflect assets attributable to other variable annuity
contracts offered by KILICO through the Separate Account. As of the date of this
Statement of Additional Information, no assets attributable to the Contracts are
reflected as the Contracts were not offered prior to such date. In addition, the
financial statements for the Separate Account reflect Subaccounts that are not
available under the Contracts.
B-10
<PAGE> 95
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying statements of assets and liabilities and
contract owners' equity of the Money Market Subaccount, Money Market Subaccount
#2, Total Return Account, High Yield Subaccount, Growth Subaccount, Government
Securities Subaccount, International Subaccount, Small Cap Growth Subaccount,
Investment Grade Bond Subaccount, Value Subaccount, Small Cap Value Subaccount,
Value+ Growth Subaccount, Horizon 20+ Subaccount, Horizon 10+ Subaccount, and
Horizon 5 Subaccount (investment options within the Investors Fund Series),
Short-Term Bond Subaccount, Growth Subaccount, Aggressive Growth Subaccount,
Worldwide Growth Subaccount, and Balanced Subaccount (investment options within
the Janus Aspen Series) Natural Resources Subaccount, Emerging Markets
Subaccount (investment options within the Lexington Funds), Equity Income
Subaccount, Growth Subaccount, Asset Manager Subaccount, Index 500 Subaccount,
Contrafund Subaccount (investment options within the Fidelity VIP Funds) of
KILICO Variable Annuity Separate Account (the Account) as of December 31, 1996
and the related statements of operations for the year then ended, and the
statements of changes in contract owners' equity for each of the years in the
two-year period then ended. These financial statements are the responsibility of
the Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments owned at December 31, 1996 by correspondence with
transfer agents. An audit also includes assessing the accounting principles used
and significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the subaccounts of KILICO
Variable Annuity Separate Account at December 31, 1996 and the results of their
operations, and changes in their contract owners' equity for the periods stated
in the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
March 26, 1997
B-11
<PAGE> 96
------------------
THIS PAGE INTENTIONALLY
LEFT BLANK
------------------
B-12
<PAGE> 97
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL HIGH GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio
funds, at current values......... $59,117 8,476 693,657 286,846 484,754 79,836
Dividends and other receivables.... 296 19 19 2 2 --
------- ----- ------- ------- ------- ------
Total assets................ 59,413 8,495 693,676 286,848 484,756 79,836
------- ----- ------- ------- ------- ------
LIABILITIES AND CONTRACT OWNERS'
EQUITY
Liabilities:
Mortality and expense risk and
administrative charges......... 65 -- 2,187 304 520 87
Other............................ -- -- 78 47 42 62
------- ----- ------- ------- ------- ------
Total liabilities........... 65 -- 2,265 351 562 149
------- ----- ------- ------- ------- ------
Contract owners' equity............ $59,348 8,495 691,411 286,497 484,194 79,687
======= ===== ======= ======= ======= ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess (deficiency) of proceeds
from units sold over payments for
units redeemed................... (7,586) 7,692 273,270 105,550 234,859 51,794
Accumulated net investment income
(loss)........................... 66,934 803 203,402 161,848 97,528 25,750
Accumulated net realized gain
(loss) on sales of investments... -- -- 66,834 891 47,242 1,157
Unrealized appreciation of
investments...................... -- -- 147,905 18,208 104,565 986
------- ----- ------- ------- ------- ------
Contract owners' equity............ $59,348 8,495 691,411 286,497 484,194 79,687
======= ===== ======= ======= ======= ======
</TABLE>
See accompanying notes to financial statements.
B-13
<PAGE> 98
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------------------------------
SMALL CAP INVESTMENT SMALL CAP VALUE+ HORIZON HORIZON
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
163,108 68,928 1,975 20,977 12,986 10,003 3,532 5,688 2,482
2 -- -- 4 -- 2 1 1 --
------- ------ ----- ------ ------ ------ ----- ----- -----
163,110 68,928 1,975 20,981 12,986 10,005 3,533 5,689 2,482
------- ------ ----- ------ ------ ------ ----- ----- -----
178 72 2 20 13 10 3 5 2
24 6 100 102 102 100 100 100 100
------- ------ ----- ------ ------ ------ ----- ----- -----
202 78 102 122 115 110 103 105 102
------- ------ ----- ------ ------ ------ ----- ----- -----
162,908 68,850 1,873 20,859 12,871 9,895 3,430 5,584 2,380
======= ====== ===== ====== ====== ====== ===== ===== =====
123,259 52,058 1,852 19,213 12,229 9,229 3,184 5,238 2,268
1,147 27 (11) (77) (44) (63) (28) (30) (14)
8,369 2,894 2 12 (51) (1) 16 9 1
30,133 13,871 30 1,711 737 730 258 367 125
------- ------ ----- ------ ------ ------ ----- ----- -----
162,908 68,850 1,873 20,859 12,871 9,895 3,430 5,584 2,380
======= ====== ===== ====== ====== ====== ===== ===== =====
</TABLE>
B-14
<PAGE> 99
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
--------------------------------------------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE
BOND GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio funds, at
current values................................. $745 17,676 19,252 31,880 6,235
Dividends and other receivables.................. -- 1 -- 1 --
---- ------ ------ ------ ------
Total assets.............................. 745 17,677 19,252 31,881 6,235
---- ------ ------ ------ ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and administrative
charges...................................... 1 19 19 33 6
Other.......................................... -- -- 1 -- --
---- ------ ------ ------ ------
Total liabilities......................... 1 19 20 33 6
---- ------ ------ ------ ------
Contract owners' equity.......................... $744 17,658 19,232 31,848 6,229
==== ====== ====== ====== ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of proceeds from units sold over payments
for units redeemed............................. 724 16,145 19,029 28,936 5,588
Accumulated net investment income (loss)......... 26 239 (45) 107 78
Accumulated net realized gain (loss) on sales of
investments.................................... (4) 74 408 64 89
Unrealized appreciation (depreciation) of
investments.................................... (2) 1,200 (160) 2,741 474
---- ------ ------ ------ ------
Contract owners' equity.......................... $744 17,658 19,232 31,848 6,229
==== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
B-15
<PAGE> 100
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- --------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
4,955 5,273 6,271 4,080 1,004 5,725 8,819
-- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
4,955 5,273 6,271 4,080 1,004 5,725 8,819
----- ----- ----- ----- ----- ----- -----
5 5 7 4 1 6 10
-- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
5 5 7 4 1 6 10
----- ----- ----- ----- ----- ----- -----
4,950 5,268 6,264 4,076 1,003 5,719 8,809
===== ===== ===== ===== ===== ===== =====
4,320 5,379 5,886 3,976 935 5,345 8,129
(22) (55) (33) (21) (7) (42) (43)
60 71 13 (1) 12 24 15
592 (127) 398 122 63 392 708
----- ----- ----- ----- ----- ----- -----
4,950 5,268 6,264 4,076 1,003 5,719 8,809
===== ===== ===== ===== ===== ===== =====
</TABLE>
B-16
<PAGE> 101
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions........................ $3,384 243 43,040 24,635 63,740 6,220
Expenses:
Mortality and expense risk and
administrative charges............. 891 -- 9,244 3,534 6,193 1,238
------ --- ------ ------ ------ ------
Net investment income (loss)........... 2,493 243 33,796 21,101 57,547 4,982
------ --- ------ ------ ------ ------
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments........................ -- -- 17,341 4,321 11,516 117
Change in unrealized appreciation
(depreciation) of investments...... -- -- 42,597 5,924 10,026 (4,343)
------ --- ------ ------ ------ ------
Net realized and unrealized gain (loss)
on investments....................... -- -- 59,938 10,245 21,542 (4,226)
------ --- ------ ------ ------ ------
Net increase in contract owners' equity
resulting from operations............ $2,493 243 93,734 31,346 79,089 756
====== === ====== ====== ====== ======
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-17
<PAGE> 102
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------------------------------
SMALL CAP INVESTMENT SMALL CAP
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE VALUE+GROWTH HORIZON 20+
SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
3,133 1,209 -- -- -- -- --
2,191 731 11 77 44 63 28
------ ------ --- ----- --- --- ---
942 478 (11) (77) (44) (63) (28)
------ ------ --- ----- --- --- ---
5,409 2,710 2 12 (51) (1) 16
14,729 8,276 30 1,711 737 730 258
------ ------ --- ----- --- --- ---
20,138 10,986 32 1,723 686 729 274
------ ------ --- ----- --- --- ---
21,080 11,464 21 1,646 642 666 246
====== ====== === ===== === === ===
<CAPTION>
INVESTORS FUND SERIES
-----------------------------
HORIZON 10+ HORIZON 5
SUBACCOUNT(A) SUBACCOUNT(A)
------------- -------------
<S> <C>
-- --
30 14
--- ---
(30) (14)
--- ---
9 1
367 125
--- ---
376 126
--- ---
346 112
=== ===
</TABLE>
B-18
<PAGE> 103
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
--------------------------------------------------------------
SHORT-
TERM AGGRESSIVE
BOND GROWTH GROWTH WORLDWIDE BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions........................ $30 352 104 311 124
Expenses:
Mortality and expense risk and
administrative charges............. 7 152 155 205 57
--- ----- ---- ----- ---
Net investment income (loss)........... 23 200 (51) 106 67
--- ----- ---- ----- ---
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments........................ (4) 74 408 64 89
Change in unrealized appreciation
(depreciation) of investments...... -- 1,182 (267) 2,686 415
--- ----- ---- ----- ---
Net realized and unrealized gain (loss)
on investments....................... (4) 1,256 141 2,750 504
--- ----- ---- ----- ---
Net increase (decrease) in contract
owners' equity resulting from
operations........................... $19 1,456 90 2,856 571
=== ===== ==== ===== ===
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-19
<PAGE> 104
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- -----------------------------------------------------------------------------
NATURAL EMERGING
RESOURCES MARKETS EQUITY INCOME GROWTH ASSET MANAGER INDEX 500 CONTRA
SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
16 -- -- -- -- -- --
39 61 33 21 7 42 43
--- ---- --- --- --- --- ---
(23) (61) (33) (21) (7) (42) (43)
--- ---- --- --- --- --- ---
60 71 13 (1) 12 24 15
570 (138) 398 122 63 392 708
--- ---- --- --- --- --- ---
630 (67) 411 121 75 416 723
--- ---- --- --- --- --- ---
607 (128) 378 100 68 374 680
=== ==== === === === === ===
</TABLE>
B-20
<PAGE> 105
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)..................... $ 2,493 243 33,796 21,101 57,547 4,982
Net realized gain (loss) on sales of
investments.................................... -- -- 17,341 4,321 11,516 117
Change in unrealized appreciation (depreciation)
of investments................................. -- -- 42,597 5,924 10,026 (4,343)
-------- ------ ------- ------- ------- -------
Net increase in contract owners' equity
resulting from operations.................... 2,493 243 93,734 31,346 79,089 756
-------- ------ ------- ------- ------- -------
Account unit transactions:
Proceeds from units sold......................... 22,801 12,928 47,161 36,482 43,192 7,926
Net transfers (to) from affiliate and
subaccounts.................................... (7,498) (6,807) (27,829) (7,862) (9,293) (9,264)
Payments for units redeemed...................... (16,282) (184) (78,322) (28,503) (41,011) (10,724)
-------- ------ ------- ------- ------- -------
Net increase (decrease) in contract owners'
equity from account unit transactions........ (979) 5,937 (58,990) 117 (7,112) (12,062)
-------- ------ ------- ------- ------- -------
Total increase (decrease) in contract owners'
equity........................................... 1,514 6,180 34,744 31,463 71,977 (11,306)
Beginning of period.............................. 57,834 2,315 656,667 255,034 412,217 90,993
-------- ------ ------- ------- ------- -------
End of period.................................... $ 59,348 8,495 691,411 286,497 484,194 79,687
======== ====== ======= ======= ======= =======
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-21
<PAGE> 106
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------------------------------
SMALL CAP INVESTMENT SMALL CAP VALUE +
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE GROWTH HORIZON 20+
SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
942 478 (11) (77) (44) (63) (28)
5,409 2,710 2 12 (51) (1) 16
14,729 8,276 30 1,711 737 730 258
------- ------ ----- ------ ------ ----- -----
21,080 11,464 21 1,646 642 666 246
------- ------ ----- ------ ------ ----- -----
20,272 13,879 1,262 9,908 6,111 6,223 2,580
819 11,423 632 9,522 6,244 3,214 620
(13,606) (3,253) (42) (217) (126) (208) (16)
------- ------ ----- ------ ------ ----- -----
7,485 22,049 1,852 19,213 12,229 9,229 3,184
------- ------ ----- ------ ------ ----- -----
28,565 33,513 1,873 20,859 12,871 9,895 3,430
134,343 35,337 -- -- -- -- --
------- ------ ----- ------ ------ ----- -----
162,908 68,850 1,873 20,859 12,871 9,895 3,430
======= ====== ===== ====== ====== ===== =====
<CAPTION>
INVESTORS FUND SERIES
-----------------------------
HORIZON 10+ HORIZON 5
SUBACCOUNT(A) SUBACCOUNT(A)
------------- -------------
<S> <C>
(30) (14)
9 1
367 125
----- -----
346 112
----- -----
4,108 1,453
1,206 887
(76) (72)
----- -----
5,238 2,268
----- -----
5,584 2,380
-- --
----- -----
5,584 2,380
===== =====
</TABLE>
B-22
<PAGE> 107
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
-----------------------------------------------------------------
SHORT-
TERM AGGRESSIVE WORLDWIDE
BOND GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)............................. $ 23 200 (51) 106 67
Net realized gain (loss) on sales of investments......... (4) 74 408 64 89
Change in unrealized appreciation (depreciation) of
investments............................................ -- 1,182 (267) 2,686 415
---- ------ ------ ------ -----
Net increase (decrease) in contract owners' equity
resulting from operations............................ 19 1,456 90 2,856 571
---- ------ ------ ------ -----
Account unit transactions:
Proceeds from units sold................................. 127 3,853 4,122 6,384 1,760
Net transfers (to) from affiliate and subaccounts........ 489 10,206 13,087 21,474 2,401
Payments for units redeemed.............................. (48) (445) (335) (477) (400)
---- ------ ------ ------ -----
Net increase in contract owners' equity from account
unit transactions.................................... 568 13,614 16,874 27,381 3,761
---- ------ ------ ------ -----
Total increase in contract owners' equity.................. 587 15,070 16,964 30,237 4,332
Beginning of period...................................... 157 2,588 2,268 1,611 1,897
---- ------ ------ ------ -----
End of period............................................ $744 17,658 19,232 31,848 6,229
==== ====== ====== ====== =====
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-23
<PAGE> 108
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- -----------------------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRA
SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(23) (61) (33) (21) (7) (42) (43)
60 71 13 (1) 12 24 15
570 (138) 398 122 63 392 708
----- ----- ----- ----- ----- ----- -----
607 (128) 378 100 68 374 680
----- ----- ----- ----- ----- ----- -----
593 1,057 1,035 998 61 763 1,565
3,294 3,734 5,040 3,000 1,055 4,601 6,767
(292) (191) (189) (22) (181) (19) (203)
----- ----- ----- ----- ----- ----- -----
3,595 4,600 5,886 3,976 935 5,345 8,129
----- ----- ----- ----- ----- ----- -----
4,202 4,472 6,264 4,076 1,003 5,719 8,809
748 796 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
4,950 5,268 6,264 4,076 1,003 5,719 8,809
===== ===== ===== ===== ===== ===== =====
</TABLE>
B-24
<PAGE> 109
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment
income (loss)... $ 2,985 140 9,834 18,691 20,654 4,658
Net realized gain
(loss) on sales
of
investments..... -- -- 5,320 1,290 5,966 (1)
Change in
unrealized
appreciation of
investments..... -- -- 119,468 15,252 67,323 10,500
-------- ------ -------- -------- ------- -------
Net increase
in contract
owners'
equity
resulting
from
operations... 2,985 140 134,622 35,233 93,943 15,157
-------- ------ -------- -------- ------- -------
Account unit
transactions:
Proceeds from
units sold...... 7,440 1,994 47,745 21,167 35,473 5,546
Net transfers (to)
from affiliate
and
subaccounts..... (14,703) (3,412) (21,697) 13,859 1,693 (6,225)
Payments for units
redeemed........ (16,838) (92) (87,868) (32,713) (39,162) (14,994)
-------- ------ -------- -------- ------- -------
Net increase
(decrease)
in contract
owners'
equity from
account unit
transactions... (24,101) (1,510) (61,820) 2,313 (1,996) (15,673)
-------- ------ -------- -------- ------- -------
Total increase
(decrease) in
contract owners'
equity............ (21,116) (1,370) 72,802 37,546 91,947 (516)
Beginning of
period.......... 78,950 3,685 583,865 217,488 320,270 91,509
-------- ------ -------- -------- ------- -------
End of period..... $ 57,834 2,315 656,667 255,034 412,217 90,993
======== ====== ======== ======== ======= =======
</TABLE>
See accompanying notes to financial statements.
B-25
<PAGE> 110
<TABLE>
<CAPTION>
INVESTORS-FUND-SERIES
---------------------------------------------------------------------------------------------------------------------
SMALL CAP INVESTMENT SMALL CAP VALUE + HORIZON HORIZON
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,112 (290) -- -- -- -- -- -- --
605 261 -- -- -- -- -- -- --
11,955 5,307 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
13,672 5,278 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
17,837 6,412 -- -- -- -- -- -- --
(6,157) 12,876 -- -- -- -- -- -- --
(13,593) (2,032) -- -- -- -- -- -- --
(1,913) 17,256 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
11,759 22,534 -- -- -- -- -- -- --
122,584 12,803 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
134,343 35,337 -- -- -- -- -- -- --
======= ====== == == == == == == ==
</TABLE>
B-26
<PAGE> 111
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
--------------------------------------------------------------
SHORT-
TERM AGGRESSIVE WORLDWIDE
BOND GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income..................................... $ 3 39 6 1 11
Net realized gain (loss) on sales of investments.......... -- -- -- -- --
Change in unrealized appreciation (depreciation) of
investments............................................. (2) 18 107 55 59
---- ----- ----- ----- -----
Net increase in contract owners' equity resulting from
operations.......................................... 1 57 113 56 70
---- ----- ----- ----- -----
Account unit transactions:
Proceeds from units sold.................................. 1 304 198 186 182
Net transfers (to) from affiliate and subaccounts......... 155 2,234 1,957 1375 1650
Payments for units redeemed............................... -- (7) -- (6) (5)
---- ----- ----- ----- -----
Net increase in contract owners' equity from account
unit transactions................................... 156 2,531 2,155 1,555 1,827
---- ----- ----- ----- -----
Total increase in contract owners' equity................... 157 2,588 2,268 1,611 1,897
Beginning of period....................................... -- -- -- -- --
---- ----- ----- ----- -----
End of period............................................. $157 2,588 2,268 1,611 1,897
==== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
B-27
<PAGE> 112
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- --------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 6 -- -- -- -- --
-- -- -- -- -- -- --
22 11 -- -- -- -- --
--- --- -- -- -- -- --
23 17 -- -- -- -- --
--- --- -- -- -- -- --
57 23 -- -- -- -- --
680 756 -- -- -- -- --
(12) -- -- -- -- -- --
--- --- -- -- -- -- --
725 779 -- -- -- -- --
--- --- -- -- -- -- --
748 796 -- -- -- -- --
-- -- -- -- -- -- --
--- --- -- -- -- -- --
748 796 -- -- -- -- --
=== === == == == == ==
</TABLE>
B-28
<PAGE> 113
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
KILICO Variable Annuity Separate Account (the "Separate Account") is a unit
investment trust registered under the Investment Company Act of 1940, as
amended, established by Kemper Investors Life Insurance Company ("KILICO").
KILICO is a wholly-owned subsidiary of Kemper Corporation which was acquired by
an investor group led by Zurich Insurance Company ("Zurich") on January 4, 1996.
The Separate Account is used to fund contracts or certificates (collectively
referred to as "contracts") for ADVANTAGE III periodic and flexible payment
variable annuity contracts and PASSPORT individual and group variable and market
value adjusted deferred annuity contracts. The Separate Account is divided into
Subaccounts. For the ADVANTAGE III contracts, up to 26 Subaccounts may be
available to Contract Owners depending upon their respective Contracts. Each
Subaccount invests exclusively in a corresponding portfolio of one of the
underlying investment funds; the Investors Fund Series, the Janus Aspen Series,
the Lexington Funds, and the Fidelity VIP Funds. Fourteen Subaccounts are
available to Passport Contract Owners and each Subaccount invests exclusively in
a corresponding Portfolio of the Investors Fund Series, an open-end diversified
management investment company.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent amounts at the date of the financial statements. As a
result, actual results reported as income and expenses could differ from the
estimates reported in the accompanying financial statements.
SECURITY VALUATION
The investments are stated at current value which is based on the closing bid
price, net asset value, at December 31, 1996.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Dividends and capital gains distributions are recorded as
income on the ex-dividend date. Realized gains and losses from security
transactions are reported on an identified cost basis.
ACCUMULATION UNIT VALUATION
On each day the New York Stock Exchange (the "Exchange") is open for trading,
the accumulation unit value is determined as of the earlier of 3:00 p.m.
(Chicago time) or the close of the Exchange by dividing the total value of each
Subaccount's investments and other assets, less liabilities, by the number of
accumulation units outstanding in the respective Subaccount.
FEDERAL INCOME TAXES
The operations of the Separate Account are included in the Federal income tax
return of KILICO. Under existing Federal income tax law, investment income and
realized capital gains and losses of the Separate Account increase liabilities
under the contract and are, therefore, not taxed. Thus the Separate Account may
realize net investment income and capital gains and losses without Federal
income tax consequences.
B-29
<PAGE> 114
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
INVESTMENTS
INVESTORS FUND SERIES:
Money Market Portfolio (Money Market and Money Market #2
Subaccounts).............................................. 67,593 $ 67,593
Total Return Portfolio...................................... 246,380 545,752
High Yield Portfolio........................................ 223,976 268,638
Growth Portfolio............................................ 143,796 380,189
Government Securities Portfolio............................. 66,125 78,850
International Portfolio..................................... 104,269 132,975
Small Cap Growth Portfolio.................................. 41,110 55,057
Investment Grade Bond Portfolio............................. 1,907 1,945
Value Portfolio............................................. 17,874 19,266
Small Cap Value Portfolio................................... 12,750 12,249
Value+Growth Portfolio...................................... 8,729 9,273
Horizon 20+ Portfolio....................................... 3,063 3,274
Horizon 10+ Portfolio....................................... 5,107 5,321
Horizon 5 Portfolio......................................... 2,265 2,357
JANUS ASPEN SERIES FUND:
Short-Term Bond Portfolio................................... 75 747
Growth Portfolio............................................ 1,140 16,476
Aggressive Growth Portfolio................................. 1,056 19,412
Worldwide Growth Portfolio.................................. 1,640 29,139
Balanced Portfolio.......................................... 422 5,761
LEXINGTON FUNDS:
Natural Resources Portfolio................................. 347 4,363
Emerging Markets Portfolio.................................. 523 5,400
FIDELITY VIP FUNDS:
Equity Income Portfolio..................................... 298 5,873
Growth Portfolio............................................ 131 3,958
Asset Manager Portfolio..................................... 59 941
Index 500 Portfolio......................................... 64 5,333
Contrafund Portfolio........................................ 533 8,111
----------
TOTAL INVESTMENTS................................... $1,688,253
==========
</TABLE>
The underlying investments of the Fund's portfolios are summarized below.
INVESTORS FUND SERIES
MONEY MARKET PORTFOLIO: This Portfolio invests primarily in short-term
obligations of major banks and corporations. The Money Market Subaccount
represents the ADVANTAGE III Money Market Subaccount and the PASSPORT Money
Market Subaccount #1. Money Market Subaccount #2 represents funds allocated by
the owner of a contract to the dollar cost averaging program. Under the dollar
cost averaging program, an owner may predesignate a portion of the Subaccount
value to be automatically transferred on a monthly basis to one or more of the
other Subaccounts. This option is only available to PASSPORT individual and
group variable and market value adjusted deferred annuity contracts.
TOTAL RETURN PORTFOLIO: This Portfolio's investments will normally consist of
fixed-income and equity securities. Fixed-income securities will include bonds
and other debt securities and preferred stocks. Equity investments normally will
consist of common stocks and securities convertible into or exchangeable for
common stocks, however, the Portfolio may also make private placement
investments (which are normally restricted securities).
B-30
<PAGE> 115
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
HIGH YIELD PORTFOLIO: This Portfolio invests in fixed-income securities, a
substantial portion of which are high yielding fixed-income securities. These
securities ordinarily will be in the lower rating categories of recognized
rating agencies or will be non-rated, and generally will involve more risk than
securities in the higher rating categories.
GROWTH PORTFOLIO: This Portfolio's investments normally will consist of common
stocks and securities convertible into or exchangeable for common stocks,
however, it may also make private placement investments (which are normally
restricted securities).
GOVERNMENT SECURITIES PORTFOLIO: This Portfolio invests primarily in U.S.
Government securities. The Portfolio will also invest in fixed-income securities
other than U.S. Government securities and will engage in options and financial
futures transactions.
INTERNATIONAL PORTFOLIO: This Portfolio's investments will normally consist of
equity securities of non-United States issuers, however, it may also invest in
convertible and debt securities of non-United States issuers and foreign
currencies.
SMALL CAP GROWTH PORTFOLIO: This Portfolio's investments will consist primarily
of common stocks and securities convertible into or exchangeable for common
stocks and to a limited degree in preferred stocks and debt securities. At least
65% of the Portfolio's total assets will be invested in equity securities of
companies having a market capitalization of $1 billion or less at the time of
initial investment.
INVESTMENT GRADE BOND PORTFOLIO: This Portfolio seeks high current income by
investing primarily in a diversified portfolio of investment grade debt
securities.
VALUE PORTFOLIO: This Portfolio seeks to achieve a high rate of total return.
SMALL CAP VALUE PORTFOLIO: This Portfolio seeks long-term capital appreciation.
VALUE+GROWTH PORTFOLIO: This Portfolio seeks growth of capital through
professional management of a portfolio of growth and value stocks.
HORIZON 20+ PORTFOLIO: This Portfolio is designed for investors with
approximately a 20+ year investment horizon and seeks growth of capital, with
income as a secondary objective.
HORIZON 10+ PORTFOLIO: This Portfolio is designed for investors with
approximately a 10+ year investment horizon and seeks a balance between growth
of capital and income, consistent with moderate risk.
HORIZON 5 PORTFOLIO: This Portfolio is designed for investors with approximately
a 5 year investment horizon, and seeks income consistent with a preservation of
capital, with growth of capital as a secondary objective.
JANUS ASPEN SERIES
SHORT-TERM BOND PORTFOLIO: This Portfolio seeks a high level of current income
while minimizing interest rate risk by investing in shorter term fixed-income
securities. Its average-weighted maturity is normally less than three years.
GROWTH PORTFOLIO: This Portfolio seeks long-term growth of capital by investing
primarily in common stocks with an emphasis on companies with larger market
capitalizations.
AGGRESSIVE GROWTH PORTFOLIO: This Portfolio is a nondiversified portfolio that
seeks long-term growth of capital by investing primarily in common stocks. The
common stocks held by the Portfolio will normally have an average market
capitalization between $1 billion and $5 billion.
WORLDWIDE GROWTH PORTFOLIO: This Portfolio seeks long-term growth of capital by
investing primarily in common stocks of foreign and domestic companies.
B-31
<PAGE> 116
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
BALANCED PORTFOLIO: This Portfolio seeks long-term growth of capital balanced by
current income. The Portfolio normally invests 40%-60% of its assets in equity
securities selected for their growth potential and 40%-60% in fixed-income
securities.
LEXINGTON FUNDS
LEXINGTON NATURAL RESOURCES PORTFOLIO: This Portfolio seeks long-term growth of
capital through investment primarily in common stocks of companies that own or
develop natural resources and other basic commodities, or supply goods and
services to such companies. Current income will not be a factor. Total return
will consist of capital appreciation.
LEXINGTON EMERGING MARKETS PORTFOLIO: This Portfolio seeks long-term growth of
capital primarily through investment in equity securities of companies domiciled
in, or doing business in, emerging countries and emerging markets.
FIDELITY VIP FUNDS
EQUITY-INCOME PORTFOLIO: This Portfolio seeks reasonable income by investing
primarily in income-producing equity securities.
GROWTH PORTFOLIO: This Portfolio seeks to achieve capital appreciation.
ASSET MANAGER PORTFOLIO: This Portfolio seeks to obtain high total return with
reduced risk over the long-term by allocating its assets among stocks, bonds and
short-term instruments.
INDEX 500 PORTFOLIO: This Portfolio seeks investment results that correspond to
the total return of common stocks publicly traded in the United States, as
represented by the S&P 500.
CONTRAFUND PORTFOLIO: This Portfolio seeks long-term capital appreciation.
(3) TRANSACTIONS WITH AFFILIATES
KILICO assumes mortality risks associated with the annuity contracts and incurs
all expenses involved in administering the contracts. In return, KILICO assesses
that portion of each Subaccount representing assets under the ADVANTAGE III
flexible payment contracts with a daily charge for mortality and expense risk
and administrative costs which amounts to an aggregate of one percent (1.00%)
per annum. KILICO also assesses that portion of each Subaccount representing
assets under the ADVANTAGE III periodic payment contracts with a daily asset
charge for mortality and expense risk and administrative costs which amounts to
an aggregate of one and three-tenths percent (1.30%) per annum. KILICO assesses
that portion of each Subaccount representing assets under PASSPORT individual
and group variable and market value adjusted deferred annuity contracts with a
daily asset charge for mortality and expense risk and administrative costs which
amounts to an aggregate of one and one-quarter percent (1.25%) per annum. The
PASSPORT DCA Money Market Subaccount #2, available for participation in the
dollar cost averaging program, has no daily asset charge deduction.
KILICO also assesses against each ADVANTAGE III contract participating in one or
more of the Subaccounts at any time during the year a records maintenance
charge. For contracts purchased prior to June 1, 1993, the charge is $25 and is
assessed on December 31st of each calendar year. For contracts purchased June 1,
1993, and subsequent, the charge is $36 and is assessed ratably every quarter of
each calendar year, except in those states which have yet to approve these
contract changes. The charge is assessed whether or not any purchase payments
have been made during the year. KILICO also assesses against each PASSPORT
contract participating in one or more of the Subaccounts a records maintenance
charge of $30 at the end of each contract year.
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Money Market, Total Return, High Yield, and Equity
Subaccounts whose direct and indirect operating expenses exceed eighty
hundredths of one percent (.80%) of average daily net assets. In determining
reimbursement of direct and indirect operating expenses, for each Subaccount,
charges for mortality and expense risks and
B-32
<PAGE> 117
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)
administrative expenses, and records maintenance charges are excluded and, for
each Portfolio, charges for taxes, extraordinary expenses, and brokerage and
transaction costs are excluded. During the year ended December 31, 1996, no such
payment was made.
Proceeds payable on the redemption of units are reduced by the amount of any
applicable contingent deferred sales charge due to KILICO. During the year ended
December 31, 1996, KILICO received contingent deferred sales charges of
$1,726,400.
Zurich Kemper Investments, Inc. ("ZKI") (formerly named Kemper Financial
Services, Inc.), an affiliated company, is the investment manager of the
Investors Fund Series portfolios. In connection with the acquisition of Kemper
Corporation on January 4, 1996, Zurich also acquired 100% of ZKI.
Janus Capital Corporation is the investment manager of the Janus Aspen Series
Fund Portfolios, Lexington Management Corporation is the investment manager for
the Lexington Fund Portfolios and Fidelity Investments is the investment manager
for the Fidelity VIP Funds.
(4) NET TRANSFERS (TO) FROM AFFILIATED DIVISIONS AND SUBACCOUNTS
Net transfers (to) from affiliated divisions or accounts include transfers of
all or part of the contract owner's interest to or from another Subaccount or to
the general account of KILICO.
(5) CONTRACT OWNERS' EQUITY
The contract owners' equity is affected by the investment results of each
Portfolio and contract charges. The accompanying financial statements include
only contract owners' payments pertaining to the variable portions of their
contracts and exclude any payments for the market value adjusted or fixed
portions, the latter being included in the general account of KILICO. Contract
owners may elect to annuitize the contract under one of several annuity options,
as specified in the prospectus.
B-33
<PAGE> 118
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Contract owners' equity at December 31, 1996, is as follows (in thousands,
except unit value; differences are due to rounding):
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
ADVANTAGE III SUBACCOUNT
INVESTORS FUND SERIES
MONEY MARKET
Flexible Payment, Qualified............................ 770 $ 2.297 $ 1,768
Flexible Payment, Nonqualified......................... 4,762 2.297 10,939
Periodic Payment, Qualified............................ 10,827 2.199 23,808
Periodic Payment, Nonqualified......................... 3,948 2.199 8,680
----------
45,195
----------
TOTAL RETURN
Flexible Payment, Qualified............................ 990 5.473 5,420
Flexible Payment, Nonqualified......................... 4,838 5.068 24,518
Periodic Payment, Qualified............................ 89,982 5.239 471,457
Periodic Payment, Nonqualified......................... 17,433 4.882 85,105
----------
586,500
----------
HIGH YIELD
Flexible Payment, Qualified............................ 422 5.738 2,422
Flexible Payment, Nonqualified......................... 2,440 5.494 13,405
Periodic Payment, Qualified............................ 24,077 5.493 132,251
Periodic Payment, Nonqualified......................... 10,028 5.351 53,659
----------
201,737
----------
GROWTH
Flexible Payment, Qualified............................ 260 5.303 1,380
Flexible Payment, Nonqualified......................... 1,396 5.285 7,379
Periodic Payment, Qualified............................ 58,672 5.102 299,371
Periodic Payment, Nonqualified......................... 14,340 5.095 73,063
----------
381,193
----------
GOVERNMENT SECURITIES
Flexible Payment, Qualified............................ 165 1.599 264
Flexible Payment, Nonqualified......................... 1,187 1.599 1,898
Periodic Payment, Qualified............................ 18,485 1.566 28,943
Periodic Payment, Nonqualified......................... 13,804 1.566 21,613
----------
52,718
----------
INTERNATIONAL
Flexible Payment, Qualified............................ 429 1.590 683
Flexible Payment, Nonqualified......................... 1,190 1.590 1,892
Periodic Payment, Qualified............................ 62,425 1.567 97,809
Periodic Payment, Nonqualified......................... 12,177 1.567 19,079
----------
119,463
----------
SMALL CAP GROWTH
Flexible Payment, Qualified............................ 132 1.686 222
Flexible Payment, Nonqualified......................... 711 1.686 1,198
Periodic Payment, Qualified............................ 25,931 1.673 43,372
Periodic Payment, Nonqualified......................... 4,091 1.673 6,842
----------
51,634
----------
</TABLE>
B-34
<PAGE> 119
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------ --------
<S> <C> <C> <C>
INVESTMENT GRADE BOND
Flexible Payment, Qualified............................... -- $ -- $ --
Flexible Payment, Nonqualified............................ 68 1.029 70
Periodic Payment, Qualified............................... 326 1.027 335
Periodic Payment, Nonqualified............................ 50 1.027 51
------
456
------
VALUE
Flexible Payment, Qualified............................... 8 1.166 11
Flexible Payment, Nonqualified............................ 238 1.166 271
Periodic Payment, Qualified............................... 4,864 1.164 5,659
Periodic Payment, Nonqualified............................ 1,625 1.164 1,890
------
7,831
------
SMALL CAP VALUE
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ 7 1.012 10
Periodic Payment, Qualified............................... 3,784 1.010 3,820
Periodic Payment, Nonqualified............................ 840 1.010 848
------
4,678
------
VALUE+GROWTH
Flexible Payment, Qualified............................... 12 1.138 14
Flexible Payment, Nonqualified............................ 33 1.138 38
Periodic Payment, Qualified............................... 986 1.136 1,121
Periodic Payment, Nonqualified............................ 454 1.136 516
------
1,689
------
HORIZON 20+
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 406 1.144 464
Periodic Payment, Nonqualified............................ 7 1.144 8
------
472
------
HORIZON 10+
Flexible Payment, Qualified............................... 10 1.106 12
Flexible Payment, Nonqualified............................ 20 1.106 23
Periodic Payment, Qualified............................... 634 1.104 700
Periodic Payment, Nonqualified............................ 229 1.104 253
------
988
------
HORIZON 5
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ 45 1.089 49
Periodic Payment, Qualified............................... 243 1.086 264
Periodic Payment, Nonqualified............................ 84 1.086 91
------
404
------
</TABLE>
B-35
<PAGE> 120
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- --------
<S> <C> <C> <C>
JANUS ASPEN SERIES FUND
SHORT-TERM BOND
Flexible Payment, Qualified............................... -- $ -- $ --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 63 10.460 660
Periodic Payment, Nonqualified............................ 8 10.460 84
-------
744
-------
GROWTH
Flexible Payment, Qualified............................... 9 16.021 145
Flexible Payment, Nonqualified............................ 22 16.021 353
Periodic Payment, Qualified............................... 976 15.960 15,579
Periodic Payment, Nonqualified............................ 99 15.960 1,581
-------
17,658
-------
AGGRESSIVE GROWTH
Flexible Payment, Qualified............................... 1 18.309 15
Flexible Payment, Nonqualified............................ 2 18.309 31
Periodic Payment, Qualified............................... 937 18.238 17,089
Periodic Payment, Nonqualified............................ 115 18.238 2,097
-------
19,232
-------
WORLDWIDE GROWTH
Flexible Payment, Qualified............................... 3 19.565 54
Flexible Payment, Nonqualified............................ 33 19.565 637
Periodic Payment, Qualified............................... 1,413 19.490 27,537
Periodic Payment, Nonqualified............................ 186 19.490 3,620
-------
31,848
-------
BALANCED
Flexible Payment, Qualified............................... 3 15.059 40
Flexible Payment, Nonqualified............................ 10 15.059 148
Periodic Payment, Qualified............................... 360 15.001 5,406
Periodic Payment, Nonqualified............................ 42 15.001 635
-------
6,229
-------
LEXINGTON FUNDS
NATURAL RESOURCES
Flexible Payment, Qualified............................... 7 14.211 103
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 243 14.154 3,435
Periodic Payment, Nonqualified............................ 100 14.154 1,412
-------
4,950
-------
EMERGING MARKETS
Flexible Payment, Qualified............................... 1 10.048 12
Flexible Payment, Nonqualified............................ 2 10.048 19
Periodic Payment, Qualified............................... 443 10.009 4,432
Periodic Payment, Nonqualified............................ 80 10.009 805
-------
5,268
-------
</TABLE>
B-36
<PAGE> 121
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
FIDELITY VIP FUNDS
EQUITY INCOME
Flexible Payment, Qualified............................. 1 $20.891 $ 24
Flexible Payment, Nonqualified.......................... 1 20.891 22
Periodic Payment, Qualified............................. 263 20.849 5,477
Periodic Payment, Nonqualified.......................... 36 20.849 741
----------
6,264
----------
GROWTH
Flexible Payment, Qualified............................. -- -- --
Flexible Payment, Nonqualified.......................... -- -- --
Periodic Payment, Qualified............................. 116 30.872 3,569
Periodic Payment, Nonqualified.......................... 16 30.872 507
----------
4,076
----------
ASSET MANAGER
Flexible Payment, Qualified............................. -- 16.818 9
Flexible Payment, Nonqualified.......................... -- -- --
Periodic Payment, Qualified............................. 55 16.784 915
Periodic Payment, Nonqualified.......................... 5 16.784 79
----------
1,003
----------
INDEX 500
Flexible Payment, Qualified............................. -- -- --
Flexible Payment, Nonqualified.......................... 1 88.539 110
Periodic Payment, Qualified............................. 53 88.364 4,695
Periodic Payment, Nonqualified.......................... 10 88.364 914
----------
5,719
----------
CONTRAFUND
Flexible Payment, Qualified............................. -- -- --
Flexible Payment, Nonqualified.......................... 2 16.450 30
Periodic Payment, Qualified............................. 488 16.418 8,009
Periodic Payment, Nonqualified.......................... 47 16.418 770
----------
8,809
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY............... $1,566,758
==========
</TABLE>
B-37
<PAGE> 122
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
PASSPORT SUBACCOUNT
INVESTORS FUND SERIES
MONEY MARKET #1
Qualified.............................................. 4,139 $ 1.153 $ 4,774
Nonqualified........................................... 8,132 1.153 9,379
----------
Total............................................... 14,153
----------
MONEY MARKET #2
Qualified.............................................. 2,263 1.227 2,777
Nonqualified........................................... 4,660 1.227 5,718
----------
Total............................................... 8,495
----------
TOTAL RETURN
Qualified.............................................. 18,236 1.423 25,942
Nonqualified........................................... 55,511 1.423 78,969
----------
Total............................................... 104,911
----------
HIGH YIELD
Qualified.............................................. 11,427 1.708 19,517
Nonqualified........................................... 38,199 1.708 65,243
----------
Total............................................... 84,760
----------
GROWTH
Qualified.............................................. 17,120 1.724 29,519
Nonqualified........................................... 42,617 1.724 73,482
----------
Total............................................... 103,001
----------
GOVERNMENT SECURITIES
Qualified.............................................. 4,714 1.263 5,953
Nonqualified........................................... 16,641 1.263 21,016
----------
Total............................................... 26,969
----------
INTERNATIONAL
Qualified.............................................. 7,403 1.571 11,628
Nonqualified........................................... 20,257 1.571 31,817
----------
Total............................................... 43,445
----------
SMALL CAP GROWTH
Qualified.............................................. 2,967 1.675 4,969
Nonqualified........................................... 7,313 1.675 12,247
----------
Total............................................... 17,216
----------
</TABLE>
B-38
<PAGE> 123
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
INVESTMENT GRADE BOND
Qualified.............................................. 474 $ 1.027 $ 486
Nonqualified........................................... 907 1.027 931
----------
Total............................................... 1,417
----------
VALUE
Qualified.............................................. 2,964 1.164 3,450
Nonqualified........................................... 8,229 1.164 9,578
----------
Total............................................... 13,028
----------
SMALL CAP VALUE
Qualified.............................................. 1,862 1.010 1,879
Nonqualified........................................... 6,251 1.010 6,314
----------
Total............................................... 8,193
----------
VALUE+GROWTH
Qualified.............................................. 1,392 1.137 1,582
Nonqualified........................................... 5,828 1.137 6,624
----------
Total............................................... 8,206
----------
HORIZON 20+
Qualified.............................................. 825 1.144 943
Nonqualified........................................... 1,761 1.144 2,015
----------
Total............................................... 2,958
----------
HORIZON 10+
Qualified.............................................. 868 1.105 958
Nonqualified........................................... 3,294 1.105 3,638
----------
Total............................................... 4,596
----------
HORIZON 5
Qualified.............................................. 227 1.087 247
Nonqualified........................................... 1,591 1.087 1,729
----------
Total............................................... 1,976
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY................... $ 443,324
==========
</TABLE>
B-39
<PAGE> 124
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
------------------------------------
QUALIFIED NON-QUALIFIED
PLANS PLANS
STATE --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
Kansas...................................................... -- 2.00%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Contract Value.
B-40
<PAGE> 125
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of issuance and distribution of the Contracts, other than any
underwriting discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Registration Fees........ $15,151.52
Printing and Engraving...................................... $50,000.00
Accounting Fees and Expenses................................ $15,000.00
Legal Fees and Expenses..................................... $15,000.00
----------
Total Expenses............................... $95,151.52
==========
</TABLE>
- ---------------
* Expenses are estimated and are for period ending May 1, 1998 for continuous
offering of interest pursuant to Rule 415 but are not deducted from proceeds.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI, Section 1. of the Bylaws of Kemper Investors Life Insurance Company
provides for indemnification of Directors and Officers as follows:
SECTION 1. The company shall indemnify any person against all expenses
(including attorneys fees), judgments, fines, amounts paid in settlement
and other costs actually and reasonably incurred by him in connection with
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by
or in the right of the company) in which he is a party or is threatened to
be made a party by reason of his being or having been a director, officer,
employee or agent of the company, or serving or having served, at the
request of the company, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
or by reason of his holding a fiduciary position in connection with the
management or administration of retirement, pension, profit sharing or
other benefit plans including, but not limited to, any fiduciary liability
under the Employee Retirement Income Security Act of 1974 and any amendment
thereof, if he acted in good faith and in a manner he reasonably believed
to be in and not opposed to the best interests of the company, and with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that he did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, Registrant has sold, in reliance on Rule 506 of
Regulation D under the Securities Act of 1933, as amended, unregistered Group
Variable Life Insurance Private Placement Policies to banks to fund nonqualified
deferred compensation plans for senior management. There was no predeterminated
aggregate offering price as purchase amounts are premium payments under life
insurance policies which are based on the lives insured and insurance
underwriting. The offering was made directly by Registrant and not through a
principal underwriter. No commissions were paid for the sale of the Policies.
Registrant has also sold unregistered Individual Variable Life Insurance Private
Placement Policies to certain high net worth "qualified purchasers", as that
term is defined under Section 3(c)(7) of the Securities Act of 1933. There was
no predeterminated aggregate offering price as purchase amounts are premium
payments under life insurance policies which are based on the lives insured and
insurance underwriting. Investors Brokerage Services, Inc., an affiliate of
Registrant, serves as principle underwriter of these securities offerings.
Commissions up to 3.0% of premium may be paid to registered broker-dealers for
distributing these Policies.
II-1
<PAGE> 126
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
(1)1 Distribution Agreement
(1)3(a) Articles of Incorporation
(1)3(b) Bylaws
(3)4(a) Form of Group Variable, Fixed and Market Value Adjusted
Annuity Contract
(3)4(b) Form of Certificate to Group Variable, Fixed and Market
Value Adjusted Annuity Contract.
(3)4(c) Form of Individual Variable, Fixed and Market Value Adjusted
Annuity Contract.
(3)4(d) Form of Application
() 5 Opinion and Consent of Counsel regarding legality
23(a) Consent of KPMG Peat Marwick LLP, Independent Auditors
23(b) Consent of Counsel (See Exhibit 5)
(2)28 Schedule V: Valuation and qualifying accounts
</TABLE>
- ---------------
(1) Incorporated herein by reference to the Registration Statement on Form S-1
(File No. 333-02491) filed on or about April 12, 1996.
(2) Incorporated herein by reference to the Exhibits filed with Amendment No. 1
to the Registration Statement on Form S-1 for KILICO Variable Annuity
Separate Account (File No. 333-02491) filed on or about April 25, 1996.
(3) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 (File No. 333-22375) filed concurrently
herewith.
(B) FINANCIAL STATEMENTS (TO BE FILED BY AMENDMENT)
Report of Independent Auditors
KILICO and Subsidiaries Consolidated Balance Sheets, as of December 31,
1996 and 1995
KILICO and Subsidiaries Consolidated Statements of Operations, years ended
December 31, 1996, 1995 and 1994
KILICO and Subsidiaries Consolidated Statements of Stockholder's Equity,
years ended December 31, 1996, 1995 and 1994
KILICO and Subsidiaries Consolidated Statements of Cash Flows, years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Schedule V: Valuation and qualifying accounts
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii)
To reflect in the Prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
II-2
<PAGE> 127
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the determining of any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liabilities under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 128
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Long Grove and State of
Illinois on the 30th day of October, 1997.
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Registrant)
BY: /s/ JOHN B. SCOTT
----------------------------------------------------
John B. Scott, Chief Executive Officer and President
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following directors and principal
officers of Kemper Investors Life Insurance Company in the capacities indicated
on the 30th day of October, 1997.
<TABLE>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN B. SCOTT Chief Executive Officer, President and Director
- ----------------------------------------------------- (Principal Executive Officer)
John B. Scott
/s/ W.H. BOLINDER Chairman of the Board and Director
- -----------------------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial Officer
- ----------------------------------------------------- (Principal Financial Officer and Principal
Frederick L. Blackmon Accounting Officer)
/s/ LOREN J. ALTER Director
- -----------------------------------------------------
Loren J. Alter
/s/ DAVID A. BOWERS Director
- -----------------------------------------------------
David A. Bowers
/s/ DANIEL L. DOCTOROFF Director
- -----------------------------------------------------
Daniel L. Doctoroff
/s/ MARKUS ROHRBASSER Director
- -----------------------------------------------------
Markus Rohrbasser
/s/ PAUL H. WARREN Director
- -----------------------------------------------------
Paul H. Warren
</TABLE>
II-4
<PAGE> 129
EXHIBIT LIST
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGES*
- ------- DESCRIPTION ------------
<S> <C> <C>
5 Opinion and Consent of Counsel Regarding Legality
23(a) Consent of KPMG Peat Marwick LLP, Independent Auditors
</TABLE>
- ---------------
* In manually signed original only.
<PAGE> 1
[KEMPER INVESTORS LIFE INSURANCE COMPANY LETTERHEAD]
EXHIBIT 5
October 30,1997
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049-0001
Re: Kemper Investors Life Insurance Company
Registration Statement on Form S-1
(File No. 333-22389)
Dear Sirs:
This opinion is furnished in connection with the filing of a Registration
Statement on Form S-1 ("Registration Statement") by Kemper Investors Life
Insurance Company ("KILICO") for Individual and Group Variable, Fixed and Market
Value Adjusted Deferred Annuity Contracts ("Contracts"). The Registration
Statement covers a proposed maximum aggregate offering price of $50,000,000.
The Contracts are designed to provide annuity benefits and are to be offered in
the manner described in the Prospectus which is included in the Registration
Statement.
The Contracts will be sold only in jurisdictions authorizing such sales.
I have examined all such corporate records of KILICO and such other documents
and laws as I consider appropriate as a basis for this opinion. On the basis
of such examination, it is my opinion that:
1. KILICO is a corporation duly organized and validly existing under
the laws of the State of Illinois.
2. When issued and sold as described above, the Contracts will be
duly authorized and will constitute validly issued and binding
obligations of KILICO in accordance with their terms.
I hereby consent to the use of this opinion as an exhibit to the
Registration Statement.
Yours truly,
/s/ Frank J. Julian
Frank J. Julian
Associate General Counsel
FJJ/ler
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Kemper Investors Life Insurance Company
We consent to the use of our reports included herein on Kemper Investors Life
Insurance Company (KILICO) and on the financial statements of the subaccounts
of KILICO Variable Annuity Separate Account and to the references to our firm
under the headings "Experts" in the prospectus and the Statement of Additional
Information and "Services to the Separate Account" in the Statement of
Additional Information. Our report on KILICO's financial statements dated March
21, 1997, contains an explanatory paragraph that states as a result of the
acquisition of its parent, Kemper Corporation, the consolidated financial
information for the periods after the acquisition is presented on a different
cost basis than that for the periods before the acquisition and, therefore, is
not comparable.
Chicago, Illinois
November 3, 1997
