<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1998
REGISTRATION NO. 333-02491
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
AMENDMENT NO. 3 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 (Primary Standard Industrial
number, Classification Code Number)
including area code, of registrant's principal
executive offices)
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:
Kurt W. Bernlohr, Esq. Joan E. Boros, Esq.
Kemper Investors Life Insurance Company Jorden Burt Boros
1 Kemper Drive Cicchetti Berenson & Johnson
Long Grove, Illinois 60049 1025 Thomas Jefferson Street, N.W.
Suite 400E
Washington, D.C. 20007
</TABLE>
------------------
Approximate date of commencement of proposed sale to the public: as soon as
practicable, after this Amendment 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]
------------------
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus contained
herein also relates to Registration Statements No. 33-33547, No. 33-43462 and
No. 33-46881.
================================================================================
<PAGE> 2
KEMPER INVESTORS LIFE INSURANCE COMPANY
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B)
<TABLE>
<CAPTION>
FORM S-1
ITEM NO. FORM S-1 CAPTION CAPTION IN PROSPECTUS
- -------- ---------------- ---------------------
<C> <S> <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 Fund--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 and Certificates
9. Description of Securities to be
Registered................................. Summary; The Certificates; The Accumulation
Period; Certificate Charges and Expenses.
10. Interests of Named Experts and Counsel..... Experts; Legal Matters.
11. Information with Respect to the
Registrant................................. Federal Tax Matters; Business; Management's
Discussion and Analysis of Financial
Condition and Results of Operations; Legal
Proceedings; Financial Statements of Kemper
Investors Life Insurance Company and
Subsidiaries.
12. Disclosure of Commission Position of
Indemnification For Securities Act
Liabilities................................ Part II, Item 17.
</TABLE>
<PAGE> 3
PROSPECTUS--MAY 1, 1998
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
KEMPER PASSPORT
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
The types of Individual and Group Variable and Market Value Adjusted Deferred
Annuity Contracts ("Contract" or "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 401, 403, 408, 408A or 457 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 "Certificate."
Purchase payments for the Certificates may be allocated to one or more of the
investment options under which Certificate values accumulate on either a
variable basis or fixed basis subject to a market value adjustment. These
options consist of the seventeen Subaccounts of the Separate Account and the
Market Value Adjustment Option ("MVA Option"). The Subaccounts invest in the
portfolios of the Investors Fund Series (formerly Kemper Investors Fund) (the
"Fund"). The Subaccounts available under the Certificates currently invest in
the following Portfolios: Kemper Money Market, Kemper Total Return, Kemper High
Yield, Kemper Growth (formerly "Equity"), Kemper Government Securities, Kemper
International, Kemper Small Cap Growth (formerly "Small Capitalization Equity"),
Kemper Investment Grade Bond, Kemper Contrarian Value (formerly "Value"), Kemper
Small Cap Value, Kemper Value+Growth, Kemper Horizon 20+, Kemper Horizon 10+,
Kemper Horizon 5 (collectively Kemper Horizon 20+, Kemper Horizon 10+ and Kemper
Horizon 5 are referred to herein as Horizon), Kemper Blue Chip and Kemper Global
Income. Scudder Kemper Investments, Inc. ("SKI"), an affiliate of KILICO, serves
as investment manager for each of the Portfolios. Zurich Investment Management
Limited ("ZIML"), an affiliate of SKI, serves as a sub-adviser for the Kemper
International and Kemper Global Income Portfolios. Subaccounts and Portfolios
may be added in the future. Certificate values allocated to any of the
Subaccounts will vary to reflect the investment performance of the corresponding
Portfolio. The accompanying Prospectus for the Fund describes the investment
objectives and the attendant risks of the Portfolios of the Fund. Certificate
values allocated to 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 May 1, 1998 has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. A Statement of Additional Information is
available upon request from Kemper Investors Life Insurance Company by writing
or calling the address or telephone number listed above. A table of contents for
the Statement of Additional Information is on page 69 of this Prospectus.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS
FOR THE INVESTORS FUND SERIES. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR
FUTURE REFERENCE.
THIS PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) CAN BE FOUND IN THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
TABLE OF CONTENTS
================================================================================
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 3
SUMMARY OF EXPENSES......................................... 5
CONDENSED FINANCIAL INFORMATION............................. 7
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUND... 8
THE CERTIFICATES............................................ 13
THE ACCUMULATION PERIOD..................................... 14
CERTIFICATE CHARGES AND EXPENSES............................ 21
THE ANNUITY PERIOD.......................................... 24
FEDERAL TAX MATTERS......................................... 28
DISTRIBUTION OF CONTRACTS AND CERTIFICATES.................. 36
VOTING RIGHTS............................................... 36
REPORTS TO OWNERS AND INQUIRIES............................. 37
DOLLAR COST AVERAGING....................................... 37
SYSTEMATIC WITHDRAWAL PLAN.................................. 38
EXPERTS..................................................... 39
LEGAL MATTERS............................................... 39
SPECIAL CONSIDERATIONS...................................... 39
AVAILABLE INFORMATION....................................... 39
BUSINESS.................................................... 40
PROPERTIES.................................................. 47
LEGAL PROCEEDINGS........................................... 47
SELECTED FINANCIAL DATA..................................... 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 49
DIRECTORS AND EXECUTIVE OFFICERS OF KILICO.................. 64
EXECUTIVE COMPENSATION...................................... 67
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 69
FINANCIAL STATEMENTS........................................ 69
CHANGE OF ACCOUNTANTS....................................... 69
FINANCIAL STATEMENTS OF KEMPER INVESTORS LIFE INSURANCE
COMPANY AND SUBSIDIARIES.................................. 72
APPENDIX A ILLUSTRATION OF A MARKET VALUE ADJUSTMENT........ 97
APPENDIX B KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED
FIXED AND VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA
DISCLOSURE STATEMENT...................................... 100
</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 Certificate
and the Annuity Date.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ALLOCATION OPTION--The seventeen Subaccounts and the MVA Option available
under the Certificate for allocation of Purchase Payments, or transfers of
Certificate Value 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
Certificate upon the death of the Annuitant or the Owner prior to the
Annuity Period.
CERTIFICATE--An individual certificate of participation issued by KILICO to
each Owner in a group as evidence of his or her rights and benefits under
the Contract or an individual contract issued by KILICO to an Owner.
CERTIFICATE VALUE--The sum of the values of the Owner's Accumulated
Guarantee Period Value and Separate Account Value during the Accumulation
Period.
CERTIFICATE YEAR--Period between anniversaries of the Date of Issue of a
Certificate.
CONTRACT--The Variable and Market Value Adjusted Deferred Annuity Contracts
offered on an individual or group basis by this Prospectus.
DATE OF ISSUE--The date on which the first Certificate Year commences.
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--Investors Fund Series (formerly Kemper Investors Fund), an open-end
management investment company consisting of sixteen portfolios in which the
Separate Account invests.
GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
legally segregated 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 (1) to ten (10) years, as elected by the Owner.
1
<PAGE> 6
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 Certificate.
NON-QUALIFIED PLAN CERTIFICATE--A Certificate issued in connection with a
retirement plan which does not receive favorable tax treatment under
Section 401, 403, 408, 408A or 457 of the Internal Revenue Code.
OWNER--The person designated in the Certificate as having the privileges of
ownership defined in the Certificate.
PURCHASE PAYMENTS--Amounts paid to KILICO by or on behalf of the Owner.
QUALIFIED PLAN CERTIFICATE--A Certificate issued in connection with a
retirement plan which receives favorable tax treatment under Section 401,
403, 408, 408A or 457 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 VALUE--The sum of the Owner's Subaccount values.
SKI--Scudder Kemper Investments, Inc., (formerly named Zurich Kemper
Investments, Inc.), whose Home Office is at 222 South Riverside Plaza,
Chicago, Illinois 60606.
SUBACCOUNTS--The seventeen subdivisions of the Separate Account, the assets
of which consist solely of shares of the corresponding portfolio of the
Fund.
SUBACCOUNT VALUE--The value of the Owner's interest in each Subaccount.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required.
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
Certificate has an interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Certificate Value in the first six Certificate Years
after a Purchase Payment is made or against certain annuitizations of
Certificate Value in the first six Certificate Years after a Purchase
Payment is made.
ZIML--Zurich Investment Management Limited, whose Home Office is 1 Fleet
Place, London, U.K. EC4M7RQ.
2
<PAGE> 7
SUMMARY
The following summary should be read in conjunction with the detailed
information appearing elsewhere in this Prospectus. Any significant variations
from the information appearing in the Prospectus which may be required due to
differing state law requirements are contained in supplements to this Prospectus
or in amendments to the Certificates, as appropriate.
The Certificates 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 Certificate has
been purchased. The Prospectus offers Certificates designed for use in
connection with both Non-Qualified Plans and Qualified Plans. KILICO makes
several underlying investment options, including seventeen Subaccounts and up to
ten durations of Guarantee Periods, available for the Owner to pursue his or her
investment objectives.
The minimum initial Purchase Payment for each Certificate is $2,000. Subsequent
Purchase Payments of at least $500 each will be accepted at any time while the
Certificate is in force. (See "The Accumulation Period" page 14.)
KILICO provides for variable accumulations and benefits under the Certificate by
crediting purchase payments to one or more Subaccounts of the Separate Account
as selected by the Owner. The Subaccounts invest in one of the sixteen
corresponding Portfolios (the "Portfolios") of the Investors Fund Series
(formerly Kemper Investors Fund) (the "Fund"), a series mutual fund. (See "The
Fund," page 10.) Scudder Kemper Investments, Inc. ("SKI"), an affiliate of
KILICO, serves as investment manager for each of the Portfolios. Zurich
Investment Management Limited ("ZIML"), an affiliate of SKI, serves as a sub-
adviser for the Kemper International and Kemper Global Income Portfolios. The
Certificate Value allocated to the Separate Account will vary with the
investment performance of the Portfolios selected by the Owner.
KILICO also provides for fixed accumulations under the Certificates 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 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 Certificates
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 before and after the end of the Guarantee
Period. The interests under the Certificate 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 8.)
Transfers between and among Subaccounts and Guarantee Periods during the
Accumulation Period are permitted subject to certain limitations. A transfer
from a Guarantee Period is subject to a Market Value Adjustment unless effected
within 15 days before or 15 days after the existing Guarantee Period ends.
Transfers between the Subaccounts are permitted during the Annuity Period after
the first year of annuitization subject to certain limitations. (See "Transfer
During Accumulation Period" and "Transfer During Annuity Period," pages 17 and
26.)
3
<PAGE> 8
An Owner may withdraw up to 15% of the Certificate Value in any Certificate Year
without assessment of a Withdrawal Charge. If the Owner withdraws an amount in
excess of 15% of the Certificate Value in any Certificate Year, the amount
withdrawn in excess of 15% is subject to a Withdrawal Charge.
The Withdrawal Charge is assessed on withdrawals attributable to Purchase
Payments and all related accumulations during the first six Certificate Years
after the Purchase Payments are made. The Withdrawal Charge starts at 6% in the
Certificate Year in which the Purchase Payment is made (the first "Contribution
Year") and remains at 6% in the second Contribution Year; reduces to 5% in the
third and fourth Contribution Years; reduces to 4% in the fifth and sixth
Contribution Years and reduces to 0% thereafter. However, in no event shall the
aggregate Withdrawal Charges assessed against a Certificate exceed 9% of the
aggregate Purchase Payments made under the Certificate. Withdrawals will have
tax consequences, which may include the amount of the withdrawal being subject
to income tax and in some circumstances an additional 10% penalty tax.
Withdrawals are permitted from Certificates issued in connection with Section
403(b) Qualified Plans only under limited circumstances. (See "Federal Tax
Matters," page 28)
A Market Value Adjustment also applies to any withdrawal (except during the
"free look" period), transfer, purchase of an annuity option and to death
benefit payments made more than 15 days before or 15 days after the end of a
Guarantee Period in the MVA Option. The Market Value Adjustment is applied to
the amount being withdrawn before deduction of any applicable Withdrawal
Charges. (See "The Certificates," page 13.)
KILICO deducts a charge for mortality and expense risks and administrative costs
at an annual rate of 1.25% of the daily net assets of the Separate Account. At
the end of each Certificate Year, on surrender of a Certificate, and on
surrender upon annuitization, KILICO deducts a records maintenance charge
("Record Maintenance Charge") of $30 from the Owner's account. The Records
Maintenance Charge will not be deducted during the Annuity Period. The Records
Maintenance Charge will also be waived for Certificates with a Certificate Value
exceeding $50,000 on the date of assessment. KILICO also deducts state premium
taxes from the Owner's account when paid by KILICO or upon annuitization. (See
"Certificate Charges and Expenses," page 21.) In addition, SKI is paid a
management fee based upon the average daily net assets of the Portfolios for
which it serves as investment manager. (See "The Fund," page 10 and the Fund
prospectus.)
The Certificates may be purchased in connection with retirement plans which
qualify either under Section 401 or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code") or as individual retirement annuities established under
Section 408 of the Code, including Roth IRAs established under Section 408A of
the Code. The Certificates are also available in connection with state and
municipal deferred compensation plans and other entities qualified under Section
457 of the Code and under other deferred compensation arrangements, and are also
offered under other retirement plans which may not qualify for similar tax
advantages. (See "Taxation of Annuities in General," page 29.)
An Owner has the right within the "free look" period (generally ten days,
subject to state variation) after receiving the Certificate to cancel the
Certificate by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Certificate will be cancelled and a refund will be made. The amount of the
refund will depend on the state in which the Certificate is issued; however, it
will be an amount at least equal to the Separate Account Value plus amounts
allocated to the Guarantee Periods which will not be subject to the Market Value
Adjustment. (See "The Certificates," page 13.) In addition, a different "free
look" period applies in some circumstances to Certificates issued as individual
retirement annuities under Section 408 of the Code or as Roth IRAs under Section
408A of the Code.
4
<PAGE> 9
SUMMARY OF EXPENSES
CERTIFICATE OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments)..................................... None
Contingent Deferred Sales Load (as a percentage of amount surrendered)*
Certificate Year of Withdrawal
First year....................................... 6%
Second year...................................... 6%
Third year....................................... 5%
Fourth year...................................... 5%
Fifth year....................................... 4%
Sixth year....................................... 4%
Seventh year and following....................... 0%
Surrender Fees (in addition to Withdrawal Charge)**........................................................ None
Exchange Fee............................................................................................... None
ANNUAL CONTRACT FEE (Records Maintenance Charge)***........................................................ $30
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily
account value)
<S> <C>
Mortality and Expense Risk.... 1.10%
Administration................ .15%
Account Fees and Expenses..... 0%
Total Separate Account
Annual Expenses............. 1.25%
</TABLE>
<TABLE>
<CAPTION>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets for the period ended December 31, 1997) Kemper
KEMPER KEMPER KEMPER KEMPER INVESTMENT
MONEY TOTAL KEMPER KEMPER GOVERNMENT KEMPER SMALL CAP GRADE
MARKET+ RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH BOND
------- ------ ---------- ------ ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees... .50% .55% .60% .60% .55% .75% .65% .60%
Other
Expenses... .05 .05 .05 .05 .09 .16 .06 .20
--- --- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses... .55% .60% .65% .65% .64% .91% .71% .80%
=== === === === === === === ===
</TABLE>
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER
CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER BLUE GLOBAL
VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5 CHIP# INCOME#
---------- --------- ------ ----------- ----------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees... .75% .75% .75% .60% .60% .60% .65% .75%
Other
Expenses... .05 .09 .09 .33 .23 .37 .30 .30
--- --- --- --- --- --- --- ----
Total
Portfolio
Annual
Expenses... .80% .84% .84% .93% .83% .97% .95% 1.05%
=== === === === === === === ====
</TABLE>
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 time period:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets:
Kemper Money Market #1+ $81 $113 $147 $216
Kemper Total Return 81 114 149 222
Kemper High Yield 82 116 152 227
Kemper Growth 82 116 152 227
Kemper Government Securities 81 116 151 226
Kemper International 84 123 164 255
Kemper Small Cap Growth 82 118 155 234
Kemper Investment Grade Bond 83 120 159 243
Kemper Contrarian Value 83 120 159 243
Kemper Small Cap Value 83 121 161 247
Kemper Value+Growth 83 121 161 247
Kemper Horizon 20+ 84 124 165 257
Kemper Horizon 10+ 83 121 161 246
Kemper Horizon 5 85 125 167 261
Kemper Blue Chip# 85 125 -- --
Kemper Global Income# 85 127 -- --
If you do not surrender your contract:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets:
Kemper Money Market #1+ $19 $ 58 $100 $216
Kemper Total Return 19 60 103 222
Kemper High Yield 20 61 105 227
Kemper Growth 20 61 105 227
Kemper Government Securities 20 61 105 226
Kemper International 22 69 119 255
Kemper Small Cap Growth 20 63 108 234
Kemper Investment Grade Bond 21 66 113 243
Kemper Contrarian Value 21 66 113 243
Kemper Small Cap Value 22 67 115 247
Kemper Value+Growth 22 67 115 247
Kemper Horizon 20+ 23 70 120 257
Kemper Horizon 10+ 22 67 115 246
Kemper Horizon 5 23 71 122 261
Kemper Blue Chip# 23 70 -- --
Kemper Global Income# 24 73 -- --
</TABLE>
5
<PAGE> 10
The purpose of the preceding table is to assist Owners in understanding the
various costs and expenses that a Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund but not the MVA Option. See "Certificate Charges and Expenses" and "The MVA
Option" for more information regarding the various costs and expenses. 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. 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 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.
* A Certificate Owner may withdraw up to 15% of the Separate Account Value
plus Market Adjusted Value in any Certificate Year without assessment of any
charge. Under certain circumstances the contingent deferred sales load may
be reduced or waived, including when certain annuity options are selected.
** Surrenders and other withdrawals from the MVA Option are subject to a Market
Value Adjustment unless made within 15 days before or 15 days after the end
of a Guarantee Period. The Market Value Adjustment may increase or reduce
the Guarantee Period Value.
*** Under certain circumstances the annual Records Maintenance Charge may be
reduced or waived. The annual Records Maintenance Charge will be waived for
Certificates with a Certificate Value exceeding $50,000 on the date of
assessment.
+ Kemper Money Market Subaccount #2 is not shown because it is available only
for dollar cost averaging that will deplete an Owner's Subaccount Value
entirely at least by the end of the third Certificate Year.
# The Kemper Blue Chip and Kemper Global Income Portfolios commenced operations
on May 1, 1997. "Other Expenses" are estimates.
6
<PAGE> 11
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The following condensed financial information is derived from the financial
statements of the Separate Account. The data should be read in conjunction
with the financial statements, related notes and other financial information
included in the Statement of Additional Information.
Selected data for accumulation units outstanding as of the year ended December
31st for each period:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD* ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Kemper Money Market Subaccount #1 1.153 1.112 1.065 1.037 1.021 1.000
Kemper Money Market Subaccount #2 1.227 1.168 1.105 1.063 1.034 1.000
Kemper Total Return Subaccount 1.423 1.234 .991 1.109 1.002 1.000
Kemper High Yield Subaccount 1.708 1.515 1.308 1.354 1.143 1.000
Kemper Growth Subaccount 1.724 1.436 1.093 1.153 1.018 1.000
Kemper Government Securities Subaccount 1.263 1.247 1.061 1.104 1.050 1.000
Kemper International Subaccount 1.571 1.365 1.225 1.287 .981 1.000
Kemper Small Cap Growth Subaccount** 1.675 1.324 1.031
Kemper Investment Grade Bond Subaccount*** 1.027
Kemper Contrarian Value Subaccount*** 1.164
Kemper Small Cap Value Subaccount*** 1.010
Kemper Value+Growth Subaccount*** 1.137
Kemper Horizon 20+ Subaccount*** 1.144
Kemper Horizon 10+ Subaccount*** 1.105
Kemper Horizon 5 Subaccount*** 1.087
Kemper Blue Chip Subaccount****
Kemper Global Income Subaccount****
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
ACCUMULATION UNIT VALUE AT END OF PERIOD ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Kemper Money Market Subaccount #1 1.199 1.153 1.112 1.065 1.037 1.021
Kemper Money Market Subaccount #2 1.292 1.227 1.168 1.105 1.063 1.034
Kemper Total Return Subaccount 1.685 1.423 1.234 .991 1.109 1.002
Kemper High Yield Subaccount 1.883 1.708 1.515 1.308 1.354 1.143
Kemper Growth Subaccount 2.066 1.724 1.436 1.093 1.153 1.018
Kemper Government Securities Subaccount 1.359 1.263 1.247 1.061 1.104 1.050
Kemper International Subaccount 1.698 1.571 1.365 1.225 1.287 .981
Kemper Small Cap Growth Subaccount** 2.220 1.675 1.324 1.031
Kemper Investment Grade Bond Subaccount*** 1.106 1.027
Kemper Contrarian Value Subaccount*** 1.499 1.164
Kemper Small Cap Value Subaccount*** 1.215 1.010
Kemper Value+Growth Subaccount*** 1.408 1.137
Kemper Horizon 20+ Subaccount*** 1.361 1.144
Kemper Horizon 10+ Subaccount*** 1.274 1.105
Kemper Horizon 5 Subaccount*** 1.210 1.087
Kemper Blue Chip Subaccount**** 1.106
Kemper Global Income Subaccount**** 1.020
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF 1997 1996 1995 1994 1993 1992
PERIOD (000'S OMITTED) ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Kemper Money Market Subaccount #1 20,687 12,271 8,710 14,423 5,757 3,037
Kemper Money Market Subaccount #2 4,951 6,923 1,981 3,333 3,033 6,561
Kemper Total Return Subaccount 72,701 73,747 65,648 68,207 51,444 27,355
Kemper High Yield Subaccount 53,550 49,626 37,502 28,545 22,109 6,519
Kemper Growth Subaccount 53,984 59,737 55,059 55,308 37,678 19,693
Kemper Government Securities Subaccount 19,445 21,355 21,288 24,760 28,414 16,647
Kemper International Subaccount 28,090 27,660 20,930 21,035 12,503 4,699
Kemper Small Cap Growth Subaccount** 11,754 10,280 5,316 2,637
Kemper Investment Grade Bond Subaccount*** 3,586 1,381
Kemper Contrarian Value Subaccount*** 23,349 11,193
Kemper Small Cap Value Subaccount*** 15,213 8,113
Kemper Value+Growth Subaccount*** 13,973 7,220
Kemper Horizon 20+ Subaccount*** 3,498 2,586
Kemper Horizon 10+ Subaccount*** 5,297 4,162
Kemper Horizon 5 Subaccount*** 2,899 1,818
Kemper Blue Chip Subaccount**** 1,879
Kemper Global Income Subaccount**** 319
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of Offering on January 6, 1992.
** Commencement of Offering on May 2, 1994 at initial accumulation unit value
of 1.000.
*** Commencement of Offering on May 1, 1996 at initial accumulation unit value
of 1.000.
**** Commencement of Offering on May 1, 1997 at initial accumulation unit value
of 1.000.
7
<PAGE> 12
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUND
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. Kemper Corporation is a
wholly-owned subsidiary of Zurich Holding Company of America ("ZHCA"), which is
a wholly-owned subsidiary of Zurich Insurance Company ("Zurich").
THE MVA OPTION
An Owner may allocate amounts in the MVA Option to one or more Guarantee Periods
with durations of one (1) to ten (10) years during the Accumulation Period.
KILICO may, at its discretion, offer additional Guarantee Periods or limit, for
new Certificates, 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 MVA 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 Scudder Kemper
Investments, Inc. ("SKI") an affiliate of KILICO and a wholly owned subsidiary
of ZKI Holding Corporation. ZKI Holding Corp. is a more than 90% owned
subsidiary of ZHCA, 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 Certificates 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
8
<PAGE> 13
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, 1997 included approximately
87.4 percent in U.S. Treasuries, investment grade corporate, foreign and
municipal bonds, and commercial paper, .3 percent in below investment grade
(high risk) bonds, 4.9 percent in mortgage loans and other real estate-related
investments and 7.4 percent in all other investments. (See "Management's
Discussion and Analysis--INVESTMENTS.")
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, 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 multi-subaccount 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 and Certificates 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 during both the Accumulation Period and Annuity Period and
certain other variable annuity contracts. The obligations to Owners and
beneficiaries arising under the Contracts and Certificates are general corporate
obligations of KILICO.
The Separate Account is divided into Subaccounts, including the seventeen
Subaccounts currently offered under the Certificates. Each Subaccount invests
exclusively in shares of one of the corresponding Portfolios of the Fund.
Additional Subaccounts may be added in the future. Not all Subaccounts may be
available in all jurisdictions or under all Certificates.
The Separate Account will purchase and redeem shares from the Fund at net asset
value. KILICO will redeem Fund shares as necessary to provide benefits, to
deduct charges under the Certificates and to transfer assets from one Subaccount
to another as requested by Owners. All dividends and capital gains distributions
received by the Separate Account from a Portfolio of the Fund will be reinvested
in such Portfolio at net asset value and retained as assets of the corresponding
Subaccount.
9
<PAGE> 14
The Separate Account's financial statements appear in the Statement of
Additional Information.
THE FUND
The Separate Account invests in shares of the Investors Fund Series (formerly
Kemper Investors Fund), a series type mutual fund registered with the Commission
as an open-end, management investment company. Registration of the Fund does not
involve supervision of its management, investment practices or policies by the
Commission. The Fund is designed to provide an investment vehicle for variable
annuity contracts and variable life insurance. Shares of the Fund are sold only
to insurance company separate accounts. In addition to selling shares to
variable annuity and variable life separate accounts of KILICO and its
affiliates (currently, the Separate Account and KILICO Variable Separate
Account), shares of the Fund may be sold to variable life insurance and variable
annuity 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 both variable life insurance separate accounts
and variable annuity separate accounts, to invest simultaneously in the Fund.
Currently, neither KILICO nor the Fund foresees any such disadvantages to either
variable life insurance or variable annuity owners. Management of the Fund 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 the Fund's response to any of those events or conflicts
insufficiently protects the Owners, it will take appropriate action on its own.
The Fund currently consists of the following Portfolios available under the
Certificates: Kemper Money Market, Kemper Total Return, Kemper High Yield,
Kemper Growth, Kemper Government Securities, Kemper International, Kemper Small
Cap Growth, Kemper Investment Grade Bond, Kemper Contrarian Value, Kemper Small
Cap Value, Kemper Value+Growth, Kemper Horizon 20+, Kemper Horizon 10+, Kemper
Horizon 5, Kemper Blue Chip and Kemper Global Income. 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.
Each Portfolio is diversified except the Kemper Global Income Portfolio.
The sixteen Portfolios of the Fund available under the Certificates are
summarized below:
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.
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 GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
10
<PAGE> 15
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.
KEMPER CONTRARIAN VALUE PORTFOLIO seeks to achieve a high rate of total return
from a portfolio primarily of value stocks of larger companies.
KEMPER SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
KEMPER VALUE+GROWTH PORTFOLIO seeks growth of capital through professional
management of a portfolio of growth and value stocks.
KEMPER HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
KEMPER HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
KEMPER BLUE CHIP PORTFOLIO seeks growth of capital and of income.
KEMPER GLOBAL INCOME PORTFOLIO seeks to provide high current income consistent
with prudent total return asset management.
There is no assurance that any of the Portfolios of the Fund will achieve its
objective as stated in the Fund's prospectus. More detailed information,
including a description of risks involved in investing in each of the
Portfolios, may be found in the prospectus for the Fund, which must accompany or
precede this Prospectus, and the Fund's Statement of Additional Information
available upon request from Kemper Investors Life Insurance Company, 1 Kemper
Drive, Long Grove, Illinois 60049 or Scudder Kemper Investments, Inc., 222 South
Riverside Plaza, Chicago, Illinois 60606. Read the prospectus carefully before
investing.
Responsibility for overall management of the Fund rests with the Board of
Trustees and officers of the Fund. Scudder Kemper Investments, Inc. ("SKI"), an
affiliate of KILICO, serves as investment manager for each of the Portfolios.
Zurich Investment Management Limited ("ZIML"), an affiliate of SKI, serves as
sub-adviser for the Kemper International and Kemper Global Income Portfolios.
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 Fund and to substitute shares of
another portfolio of the Fund 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 an Owner's interest in a Subaccount of the Separate Account
without notice to the 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
11
<PAGE> 16
policies, or from permitting a conversion between series or classes of policies
on the basis of requests made by Owners.
KILICO also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new portfolio of the Fund, 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 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 Owners
of any such changes.
If deemed by KILICO to be in the best interests of persons having voting rights
under the Certificate, 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 Certificate 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
standardized "average annual total return" and nonstandardized "total return."
The Kemper High Yield Subaccount, Kemper Government Securities Subaccount,
Kemper Investment Grade Bond Subaccount and Kemper Global Income Subaccount may
also advertise 'yield'. The Kemper Money Market Subaccount #1 and Kemper Money
Market Subaccount #2 (collectively, the Kemper Money Market Subaccounts) 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.
Standardized average annual total return and nonstandardized 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. Standardized average
annual total return and nonstandardized total return will be quoted for periods
of at least one year, three years, five years and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in the
Subaccount (life of Subaccount) for standardized average annual total return or
a period covering the time the underlying Portfolio has been in existence (life
of Portfolio) for nonstandardized total return. This information will be current
for a period ending with the most recent calendar quarter for standardized
average annual total return and the most recent calendar month for
nonstandardized total return. Standardized 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.
Nonstandardized total return may include annualized and nonannualized
(cumulative) figures. Nonannualized figures 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 Subaccounts) 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 Subaccounts is calculated similarly but includes the
effect of assumed compounding calculated under rules prescribed by the
Securities and Exchange Commission. The Kemper Money Market Subaccounts'
effective yield will be slightly higher than its yield due to this compounding
effect.
12
<PAGE> 17
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 six years after purchase may be
subject to a Withdrawal Charge that ranges from 6% the first year to 0% after
six 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. Standardized
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.
The Subaccounts may be compared to relevant indices and performance data from
independent sources. 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, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE,
BROKER WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
Additional information concerning a Subaccount's performance and these indices
and independent sources is provided in the Statement of Additional Information.
THE CERTIFICATES
The Prospectus offers Certificates for use in connection with both Qualified
Plans and Non-Qualified Plans. The minimum initial Purchase Payment for a
Certificate is $2,000. Subsequent Purchase Payments of at least $500 will be
accepted at any time while the Certificate is in force. The prior approval of
KILICO is required before it will accept a Purchase Payment in excess of
$1,000,000. The maximum amount of Purchase Payments may also be limited by the
provisions of the retirement plan pursuant to which the Certificate has been
purchased.
KILICO may at any time amend the Contract and Certificate in accordance with
changes in the law, including applicable tax laws, regulations or rulings, and
for other purposes.
An Owner is allowed a "free look" period (generally ten days, subject to state
variation) after receiving the Certificate, to review it and decide whether or
not to keep it. If the Owner decides to return the Certificate, it may be
cancelled by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Certificate will be cancelled and a refund will be made. The amount of the
refund will depend on the state in which the Certificate is issued; however, it
will generally be an amount at least equal to the Separate Account Value plus
amounts allocated to the Guarantee Periods on the date of receipt by KILICO,
without any deduction for withdrawal charges or Records Maintenance Charges. In
some states applicable law requires that the amount of the Purchase Payment be
returned. In addition, a different "free look" period applies in some
circumstances to Certificates issued as individual retirement annuities under
Section 408 of the Code or as Roth IRAs under Section 408A of the Code.
During the Accumulation Period, the Owner may assign the Certificate 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
"Taxation of Partial and Full Withdrawals.")
13
<PAGE> 18
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 original Beneficiary may be named in the application for the Certificate. If
a Beneficiary is not named, or if no named Beneficiary survives the Annuitant,
the Beneficiary shall be the Owner's estate upon the death of the Owner, or the
Annuitant's estate upon the death of the Annuitant who is not the Owner.
A change of Beneficiary designation under a Qualified Plan Certificate may be
prohibited by the provisions of the applicable plan. Generally, an interest in a
Qualified Plan Certificate may not be assigned.
THE ACCUMULATION PERIOD
A. APPLICATION OF PURCHASE PAYMENTS.
An eligible member of a group or an individual to which a Certificate has been
issued may participate by submitting to KILICO for approval a completed
enrollment application form along with the required initial Purchase Payment.
KILICO issues a Certificate upon acceptance of the application and receipt of
the Purchase Payment. Purchase Payments are confirmed to an Owner in writing.
Purchase Payments are allocated to the Subaccount(s) or Guarantee Period(s) as
selected by the Owner, subject to a minimum of $1,000 in each Subaccount and
Guarantee Period.
KILICO will issue a Certificate 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 in the application by
submitting an unsigned application and cause the initial Purchase Payment to be
paid to KILICO. If the information is in good order, KILICO will issue the
Certificate with a copy of the completed application. The Certificate will be
delivered to the owner with a letter requesting the Owner to sign and return to
KILICO a copy of the application in confirmation of the correctness of the
information on the application.
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 will
begin earning interest one day after receipt in proper form. However, with
respect to initial Purchase Payments allocated to either Subaccount(s) or
Guarantee Period(s), the amount will be credited only after an affirmative
determination by KILICO to issue the Certificate, but no later than the second
day following receipt of the Purchase Payment. Wired funds received before 3:00
p.m. Chicago time will be credited that day. Wired funds received after 3:00
p.m. Chicago time will be credited the next business day. 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 and the amount of Guarantee Period Value will be reduced upon
assessment of the Records Maintenance Charge.
14
<PAGE> 19
If KILICO has not been provided with information sufficient to establish a
Certificate 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
Certificate 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.
B. 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;
(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 Certificate for the number of days
in the valuation period.
C. GUARANTEE PERIODS OF THE MVA OPTION.
An Owner may select, on the application form, one or more Guarantee Periods with
durations of one (1) to ten (10) 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.
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<PAGE> 20
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
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 4.0% Effective Annual Rate
<TABLE>
<CAPTION>
YEAR
INTEREST CREDITED
DURING YEAR
CUMULATIVE
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 CERTIFICATE. 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 15 days before or 15 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 15
days before or 15 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 Certificate 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.
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<PAGE> 21
D. 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 Certificates.
(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.
E. CERTIFICATE VALUE.
Separate Account 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 interest in each Subaccount in which the
Certificate is participating. That amount, when added to the Owner's Accumulated
Guarantee Period Value in the MVA Option, equals the Certificate Value.
F. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, an Owner may transfer all or part of Certificate
Value to one or more Subaccounts or Guarantee Periods subject to the following
provisions: (i) an Owner is limited to allocating Certificate Value to a maximum
of 16 allocation options (all Guarantee Periods are considered one allocation
option) including 40 Guarantee Periods under the MVA Option; (ii) once all or
part of the Owner's Certificate Value has been transferred to or from a
Subaccount or Guarantee Period another transfer may not be made within the next
fifteen day period; (iii) the amount being transferred must be at least $1,000,
unless the total Certificate Value attributable to a Subaccount or Guarantee
Period is being transferred; and (iv) the Certificate Value remaining in a
Subaccount or Guarantee Period must be at least $1,000. 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 15 days
before or 15 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. Before telephone transfer
instructions will be honored by KILICO, a telephone transfer authorization must
be completed by the Owner. A transfer request generally is effective on the day
the request is received by KILICO. Transfers involving a Subaccount will be
based upon the Accumulation Unit values next determined following receipt of
valid, complete transfer instructions by KILICO. Under current
17
<PAGE> 22
law, there is no tax liability to the Owner upon transfer. 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 Certificate
Owner would bear the risk of loss in the event of a fraudulent telephone
transfer.
G. WITHDRAWAL DURING ACCUMULATION PERIOD.
The Owner may redeem all or a portion of the Certificate Value less the Record
Maintenance Charge and previous withdrawals, plus or minus any applicable Market
Value Adjustment, and less any contingent deferred sales charge ("Withdrawal
Charge"). Withdrawals will have tax consequences, which may include the amount
of the withdrawal being subject to income tax and in some circumstances an
additional 10% penalty tax. (See "Federal Tax Matters.") A withdrawal of the
entire Certificate Value is called a surrender.
ALL WITHDRAWALS OF ANY GUARANTEE PERIOD VALUE, EXCEPT THOSE EFFECTED DURING THE
"FREE LOOK" PERIOD AND THOSE EFFECTED WITHIN 15 DAYS BEFORE OR 15 DAYS AFTER THE
END OF THE APPLICABLE GUARANTEE PERIOD, WILL BE SUBJECT TO THE MARKET VALUE
ADJUSTMENT.
An Owner may withdraw up to 15% of the Certificate Value in any Certificate Year
without assessment of a Withdrawal Charge. If the Owner withdraws an amount in
excess of 15% of the Certificate Value in any Certificate Year, the amount
withdrawn in excess of 15% is subject to a contingent deferred sales charge
("Withdrawal Charge").
The Withdrawal Charge is assessed on withdrawals attributable to Purchase
Payments and all related accumulations during the first six Certificate Years
after the Purchase Payments are made. The Withdrawal Charge starts at 6% in the
Certificate Year in which the Purchase Payment is made (the first "Contribution
Year") and remains at 6% in the second Contribution Year; reduces to 5% in the
third and fourth Contribution Years; reduces to 4% in the fifth and sixth
Contribution Years and reduces to 0% thereafter. However, in no event shall the
aggregate Withdrawal Charges assessed against a Certificate exceed 9% of the
aggregate Purchase Payments made under the Certificate. Please note that adverse
tax consequences may occur with respect to certain withdrawals. (See "Tax
Treatment of Withdrawals and Assignments.")
In the case of a Certificate invested other than solely in one Subaccount or
Guarantee Period, an Owner requesting a partial withdrawal must specify what
portion of the Certificate Value is to be redeemed. If an Owner does not specify
what portion of the Certificate Value is to be redeemed, KILICO will redeem
Certificate Value from all Subaccounts and Guarantee Periods in which the Owner
has an interest. The number of Accumulation Units redeemed from each Subaccount
and the amount redeemed from each Guarantee Period will be in approximately the
proportion which the Owner's interest in each Subaccount and in each Guarantee
Period bears to the total Certificate Value.
The Owner may request a partial withdrawal subject to the following conditions:
(1) The amount requested must be at least $1,000 (before application of the
Market Value Adjustment) or the Owner's entire interest in the Subaccount
or Guarantee Period from which the withdrawal is requested.
(2) The Owner's remaining interest in the Subaccount or Guarantee Period
from which the withdrawal is requested, if not zero, must be at least
$1,000 after the withdrawal is completed and the minimum Certificate Value
must be $2,500.
18
<PAGE> 23
(3) A Purchase Payment must be made more than 30 days before a partial
withdrawal of such Purchase Payment is permitted except for purchases made
by wire which may be withdrawn immediately.
KILICO, upon request, will inform the Owner of the amounts that would be payable
in the event of a full surrender or partial withdrawal.
Election to withdraw shall be made in writing to KILICO at its home office at 1
Kemper Drive, Long Grove, Illinois 60049. 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. A withdrawal 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 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 of amounts withdrawn from the Subaccounts 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 Subaccounts 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 Owners. For withdrawal requests from the MVA Option, KILICO may
defer any payment for the period permitted by the law of the appropriate state
of jurisdiction, but in no event for more than six (6) months after the written
request is received by KILICO. During the period of deferral, interest at the
current Guaranteed Interest Rate for the same Guarantee Period as declared by
KILICO will continue to be credited.
Withdrawals are permitted from Certificates issued in connection with Section
403(b) Qualified Plans only under limited circumstances. (See "Federal Tax
Matters.")
H. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or any annuitization of Guarantee Period Value other
than if effected during the "free look" period or within 15 days before or 15
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 will also apply to the death benefit payable
upon the death of the Owner or the Annuitant. (See "Death Benefit".)
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.
19
<PAGE> 24
The Market Value Adjustment (MVA) is determined by the application of the
following formula:
(1 + I) t/365
MVA = GPV X [ [-------------------] -1 ]
(1 + J + .005)
Where I is the Guaranteed Interest Rate being credited to the Guarantee
Period Value (GPV) 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.
The .005 Market Value Adjustment factor can be changed in the future, at the
discretion of KILICO on newly issued Certificates.
For an illustration showing an upward and a downward adjustment, see Appendix A.
I. DEATH BENEFIT.
A death benefit shall be paid prior to the annuity date in the event of: (1) the
death of the Owner who is also the Annuitant; (2) the death of either the
Annuitant or the Owner when the Annuitant is not the Owner; (3) the death of a
joint Owner; or (4) the death of the surviving joint Annuitant when joint
Annuitants are named and they are not the Owners.
If there is a joint Owner (permitted only under a Non-Qualified Plan
Certificate), the Owner's death will occasion payment of the death benefit
unless the joint Owner is the Owner's spouse, and the spouse has been named
beneficiary. In that case, the surviving spouse becomes the new Owner.
If a death benefit becomes payable by reason of the death of an Owner, it must
be fully paid out within five (5) years of the Owner's death, unless it is
payable to the named beneficiary over his or her life or life expectancy,
beginning no more than one (1) year after the Owner's death. The death benefit
proceeds applied to the annuity must be $4,000 or more. If a death benefit
becomes payable by reason of the death of an Owner, and the beneficiary is the
Owner's surviving spouse, the surviving spouse may become the new Owner under
the Certificate.
If the death benefit becomes payable by reason of the death of the Annuitant or
joint Annuitant, it will be paid in the manner selected by the named
beneficiary, including a lump sum withdrawal or Annuity Option, provided, in the
case of an annuity option, that the death benefit proceeds are $4,000 or more.
The death benefit payable under the Certificate depends upon issue age of the
Owner except in the case of a Certificate issued where the Owner differs from
the Annuitant, the death benefit issue age will be based on the age of the Owner
or Annuitant, whichever is older.
For a Certificate issued to an Owner prior to attaining age 66, the death
benefit payable during the first six Certificate Years will be Market Adjusted
Value plus Separate Account Value as of the date KILICO receives due proof of
death and return of the Certificate, or the sum of all Purchase Payments (minus
withdrawals and withdrawal charges) accumulated at 5% annually per Certificate
Year, whichever is greater. The death benefit payable at the end of the sixth
Certificate Year is the greater of Market Adjusted Value plus Separate
20
<PAGE> 25
Account Value as of the date KILICO receives due proof of death and return of
the Certificate, or the sum of all Purchase Payments (minus withdrawals and
withdrawal charges) accumulated at 5% annually per Certificate Year ("Minimum
Death Benefit Value"). From the seventh Certificate Year to the twelfth
Certificate Year, the death benefit payable during the Accumulation Period is
the Market Adjusted Value plus Separate Account Value as of the date KILICO
receives due proof of death and return of the Certificate, or Minimum Death
Benefit Value at the end of year six plus subsequent Purchase Payments minus
withdrawals and withdrawal charges, whichever is greater. Every six years after
the end of the twelfth Certificate Year the Minimum Death Benefit Value plus
subsequent Purchase Payments minus withdrawals and withdrawal charges is
compared to Market Adjusted Value plus Separate Account Value and whichever is
greater determines the new Current Minimum Death Benefit Value for the next six
Certificate Years.
For a Certificate issued to an Owner age 66 and over, the death benefit payable
during the Accumulation Period for the first six Certificate Years is Market
Adjusted Value plus Separate Account Value, or the sum of all Purchase Payments
(minus withdrawals and withdrawal charges), whichever is greater. At the end of
the sixth Certificate Year, the Minimum Death Benefit Payable will be set for
the remainder of the Accumulation Period at the greater of Market Adjusted Value
plus Separate Account Value, or the sum of all Purchase Payments (minus
withdrawals and withdrawal charges). For the remainder of the Accumulation
Period, the beneficiary will receive the greater of Market Adjusted Value plus
Separate Account Value or the Minimum Death Benefit Value plus subsequent
Purchase Payments minus withdrawals and withdrawal charges.
The death benefit is payable upon the receipt by KILICO at its Home Office of
due proof of death and return of the Certificate, election of the method of
payment, and sufficient information about the beneficiary to make payment. The
beneficiary may receive a lump sum benefit, defer receipt of the benefit for up
to five (5) years or select an available Annuity Option if the proceeds are
$4,000 or more.
CERTIFICATE CHARGES AND EXPENSES
Charges and deductions under the Certificates are made against the Separate
Account for KILICO's assumption of mortality and expense risk and administrative
expenses. In addition, a deduction is made from the Owner's account for a
Records Maintenance Charge of $30 at the end of each Certificate Year, on
surrender of a Certificate and on surrender upon annuitization. Investment
management fees and other expenses of the Fund are indirectly borne by the
Owner. These fees and other expenses are described in the Fund's Prospectus and
Statement of Additional Information. KILICO will deduct state premium taxes from
Certificate Value when paid by KILICO. Additionally, where applicable, a
Withdrawal Charge may be assessed by KILICO in the event of early withdrawal or
early annuitization.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
During both the Accumulation Period and the Annuity Period, KILICO assesses that
portion of each Subaccount representing Certificate Value with a daily asset
charge for mortality and expense risks and administrative costs, which amounts
to an aggregate of one and one-quarter percent (1.25%) per annum (consisting of
approximately .80% for mortality risks, approximately .30% for expense risks and
approximately .15% for administrative costs). The administrative charge is
intended to cover the average anticipated administrative expenses to be incurred
over the period the Certificates 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 each Certificate as described below. The Records Maintenance
Charge is not assessed during the Annuity Period.
21
<PAGE> 26
These charges may be decreased by KILICO without notice. The Records Maintenance
Charge and the daily asset charge for mortality and expense risks are guaranteed
not to increase. The daily asset charge for administrative costs may be
increased provided that the increase will apply only to Certificates issued
after the effective date of such increase.
1. MORTALITY RISK.
Variable Annuity payments reflect the investment performance 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 Owner or of the Annuitant prior to the
Annuity Date, KILICO will return to the Beneficiary the guaranteed and
increasing death benefit described above. 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 Certificate and relieves the Annuitant from
the risk of outliving the amounts accumulated for retirement.
2. EXPENSE RISK.
KILICO also assumes the risk that all actual expenses involved in administering
the Certificates including Certificate 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.
3. ADMINISTRATIVE COSTS.
The daily asset charge for administrative costs is imposed to reimburse KILICO
for the expenses it incurs for administering the Certificates, which include,
among other things, responding to Owner inquiries, recordkeeping, processing
changes in Purchase Payment allocations, regulatory compliance reports and
providing reports to Owners.
B. RECORDS MAINTENANCE CHARGE.
KILICO will assess a Records Maintenance Charge of $30 during the Accumulation
Period against each Owner's account at the end of each Certificate Year, on
surrender of a Certificate and on surrender upon annuitization. This charge is
to reimburse KILICO for expenses incurred in establishing and maintaining the
records relating to an Owner's account. The imposition of the Records
Maintenance Charge will constitute a reduction in Separate Account Value or in
Guarantee Period Value. Under certain circumstances, the Records Maintenance
Charge may be waived or reduced by KILICO to reflect differences in costs or
services, provided that it does not unfairly discriminate against any person.
The Records Maintenance Charge will be waived for Certificates with a
Certificate Value exceeding $50,000 on the date of assessment.
At any time the Records Maintenance Charge is assessed, an equal portion of the
applicable charge will be assessed against each Subaccount in which the
Certificate is participating and a number of Accumulation Units sufficient to
equal the proper portion of the charge will be redeemed from each Subaccount to
meet the assessment. If the Owner has no Certificate Value allocated to the
Separate Account, the Records Maintenance Charge is deducted from the Guarantee
Period closest to maturity and shortest in original duration.
22
<PAGE> 27
C. WITHDRAWAL CHARGE.
No sales charge is deducted from any Purchase Payment. However, a contingent
deferred sales charge ("Withdrawal Charge") may be assessed on withdrawals
attributable to Purchase Payments and all related accumulations during the first
six Certificate Years after the Purchase Payments are made. The Withdrawal
Charge will be used to cover expenses relating to the sale of the Certificates,
including commissions paid to sales personnel, the costs of preparation of sales
literature and other promotional costs and other acquisition expenses. During
the first six Certificate Years after a Purchase Payment is made, a Withdrawal
Charge applies even if the withdrawal occurs at the end of a Guarantee Period.
An Owner may withdraw up to 15% of the Certificate Value in any Certificate Year
without assessment of a Withdrawal Charge. If the Owner withdraws an amount in
excess of 15% of the Certificate Value in any Certificate Year, the amount
withdrawn in excess of 15% is subject to a Withdrawal Charge.
The Withdrawal Charge is assessed on withdrawals attributable to Purchase
Payments and all related accumulations during the first six Certificate Years
after the Purchase Payments are made. The Withdrawal Charge starts at 6% in the
Certificate Year in which the Purchase Payment is made (the first "Contribution
Year") and remains at 6% in the second Contribution Year; reduces to 5% in the
third and fourth Contribution Years; reduces to 4% in the fifth and sixth
Contribution Years and reduces to 0% thereafter. However, in no event shall the
aggregate Withdrawal Charges assessed against a Certificate exceed 9% of the
aggregate Purchase Payments made under the Certificate. Withdrawals will have
tax consequences, which may include the amount of the withdrawal being subject
to income tax and in some circumstances an additional 10% penalty tax. (See
"Federal Tax Matters.")
The Withdrawal Charge is computed as a percentage of the total amount withdrawn,
after application of any Market Value Adjustment. When a partial withdrawal is
requested, the recipient will receive a check in the amount requested. To the
extent that any Withdrawal Charge is applicable, the Certificate Value will be
reduced by the amount of the Withdrawal Charge in addition to the actual dollar
amount sent to the Owner. In no event shall the aggregate Withdrawal Charges
assessed against a Certificate exceed 9% of the aggregate Purchase Payments made
under the Certificate. (For additional details, see "Withdrawal During
Accumulation Period.") Withdrawals may be subject to certain adverse tax
consequences. (See "Taxation of Partial and Full Withdrawals.")
Subject to state approval, a nursing care or hospitalization waiver endorsement
will be issued under the Certificate. The endorsement provides that subject to
certain exceptions 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; or
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.
Restrictions and provisions related to the nursing care or hospitalization
waiver are more fully described in the endorsement.
The Withdrawal Charges are intended to compensate KILICO for expenses in
connection with distribution of the Certificates. 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.
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<PAGE> 28
The Withdrawal Charge will also apply upon annuitization to Purchase Payments
made within six Certificate Years of annuitization and all related accumulations
unless 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.
The Withdrawal Charge may be reduced or eliminated to particular classes of
Owners, but only to the extent KILICO applies such variations in Withdrawal
Charges uniformly to the class and informs existing and prospective Owners of
such variations. Units of a Subaccount sold to officers, directors and employees
of KILICO and the Fund, the Fund's investment adviser, 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.
D. FUND INVESTMENT MANAGEMENT FEE AND OTHER EXPENSES.
The net asset value of each of the Portfolios of the Fund reflects investment
management fees and certain general operating expenses already deducted from the
assets of the Portfolios. These fees and expenses are indirectly borne by the
Owners. Investment management fees and other expenses are set forth on page 5.
Further detail about fees and expenses of the Portfolios is provided in the
prospectus for the Fund and in the Fund's Statement 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. KILICO will deduct state premium taxes from
the Certificate Value when paid by KILICO. Where applicable, the dollar amount
of state premium taxes previously paid or payable upon annuitization by KILICO
will be charged against the Certificate Value if not previously assessed, when
and if the Certificate is annuitized. See "Appendix B--State Premium Tax Chart"
in the Statement of Additional Information.
THE ANNUITY PERIOD
Certificates may be annuitized under one of several Annuity Options, which are
available either on a fixed or variable basis. Annuity payments will begin on
the Annuity Date under the Annuity Option selected by the Owner.
1. ANNUITY PAYMENTS.
Annuity payments will be determined on the basis of (i) the annuity table
specified in the Certificate, (ii) the Annuity Option selected, and (iii) 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. Upon annuitization, a
Withdrawal Charge will apply to Purchase Payments made within six Certificate
Years of annuitization and all related accumulations. 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.
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2. ANNUITY OPTIONS.
The Owner may elect to have annuity payments made under any one of the Annuity
Options specified in the Certificate and described below. However, all available
options are not described below. For example, additional options are available
under contracts issued prior to June 1, 1993 and other options may be made
available by KILICO. The Owner may decide at any time (subject to the provisions
of any applicable retirement plan) to commence annuity payments. A change of
Annuity Option is permitted if made before the date annuity payments are to
commence. For a Non-Qualified Plan Certificate, 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. For a Qualified Plan Certificate, if no
other Annuity Option is elected, monthly annuity payments will be made in the
form of a qualified joint and survivor annuity with a monthly income at
two-thirds of the full amount payable during the lifetime of the surviving
payee. Generally, annuity payments will be made in monthly installments.
However, if the net proceeds available to apply under an Annuity Option are less
than $4,000, KILICO shall have the right to pay the annuity in one lump sum. In
addition, if the first payment provided would be less than $50, 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 $50.
The amount of periodic annuity payments will depend upon (a) the type of annuity
option selected; (b) the age 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 the older the payee,
the shorter the life expectancy and the larger the payments. Finally, if the
Owner participates in a Subaccount with higher investment performance, it is
likely the Owner will receive a higher periodic payment.
For Non-Qualified Plan Certificates, 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 a
commuted value of the remaining payments. 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. Payees under Option
1 by written notice to KILICO may cancel all or part of the remaining variable
annuity payments due and receive that part of the remaining value of the
Certificate less any applicable Withdrawal Charge.
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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 a commuted value of the remaining payments.
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.
3. ALLOCATION OF ANNUITY.
The Owner may elect to have payments made on a fixed or variable basis, or a
combination of both. An Owner should exercise the transfer privilege during the
Accumulation Period for the purposes of such allocation. Any Guarantee Period
Value will be annuitized on a fixed basis. Any Separate Account 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
Certificate interest in a Subaccount(s) to another Subaccount or to the General
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 Certificate'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 General 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
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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 4% per annum which is assumed in the annuity tables contained in the
Certificate.
The net investment factor for each Subaccount for any 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;
(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 Certificate for the number of days
in the valuation period.
6. FIRST PERIODIC PAYMENT.
At the time annuity payments begin, the value of the Owner's Certificate
interest is determined by multiplying the applicable Accumulation Unit values at
the end of the Valuation Period immediately preceding the date the first annuity
payment is due by the respective number of Accumulation Units credited to the
Owner's Certificate 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 shall be 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.
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 Certificate Value less deduction for premium taxes and Withdrawal
Charge, if applicable.
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A 4% assumed investment rate is built into the annuity tables contained in the
Certificates. If the actual net investment rate exceeds 4%, payments will
increase at a rate equal to the amount of such excess. Conversely, if the actual
rate is less than 4%, annuity payments will decrease.
7. SUBSEQUENT PERIODIC PAYMENTS.
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
Certificate Value net of any applicable premium tax allocated to provide a Fixed
Annuity. Fixed Annuity payments will not change regardless of investment,
mortality or expense experience.
9. DEATH BENEFIT.
If the payee dies after the Annuity Date, the death proceeds, if any, will
depend upon the form of annuity payment in effect at the time of death. (See
"Annuity Options.")
FEDERAL TAX MATTERS
A. INTRODUCTION
The following discussion of the federal income tax treatment of the Certificate
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 the 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 Certificate. In addition, KILICO MAKES NO GUARANTEE REGARDING
ANY TAX TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CERTIFICATE OR OF ANY
TRANSACTION INVOLVING A CERTIFICATE.
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
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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 Certificate Value of a Non-Qualified Plan Certificate is generally not
taxable to the Owner or Annuitant until received, either in the form of annuity
payments, as contemplated by the Certificate, or in some other form of
distribution. However, certain requirements must be satisfied in order for this
general rule to apply, including: (1) the Certificate 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 Certificate must provide for appropriate amortization, through annuity
payments, of the Certificate'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
income tax purposes. The investment income on Certificates 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,
Certificates will generally be treated as held by a natural person if the
nominal owner is a trust or other entity which holds the Certificate 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 Certificate 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) Certificates acquired by an estate of a decedent by reason
of the death of the decedent, (2) certain Qualified Plan Certificates, (3)
certain Certificates purchased by employers upon the termination of certain
qualified plans, (4) certain Certificates used in connection with structured
settlement agreements, and (5) Certificates 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 Certificate and substantially equal periodic payments are
made, not less frequently than annually, during the annuity period.
DIVERSIFICATION REQUIREMENTS. For a Certificate 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 Certificate would not be treated as an annuity
contract for federal income tax purposes and the Certificate Owner would
generally be taxable currently on the excess of the Certificate 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
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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 Certificate 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 Certificate has the choice of many more investment
options to which to allocate Purchase Payments and Certificate 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 Certificate as necessary to attempt to prevent the Owner from
being considered the owner of the assets of the Separate Account.
DELAYED ANNUITY DATES. If the Certificate'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 Certificate would not be treated as an annuity
for federal income tax purposes. In that event, the income and gains under the
Certificate could be currently includible in the Owner's income.
The remainder of this discussion assumes that the Certificate will be treated as
an annuity Certificate 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 Plan Certificate,
amounts received are includible in income to the extent the Certificate 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 Certificate 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 Certificates) less any amounts
previously received from the Certificate which were not included in income.
Other than in the case of certain Qualified Plan Certificates, 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 Certificates.)
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 his or her interest in a Certificate 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
Certificate Value and the "investment in the contract" at the time of transfer.
In such case, the transferee's investment in the Certificate will be increased
to reflect the increase in the transferor's income.
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The Certificate provides a death benefit that in certain circumstances may
exceed the greater of the Purchase Payments and the Certificate 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 Certificate.
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). A simplified method of determining the taxable
portion of annuity payments applies to certain Qualified Plan Certificates other
than IRAs.
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 Certificate 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 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 Certificate 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 Certificate purchased with a single premium when
the annuity starting date (as defined in the tax law) is no later than a year
from
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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 Certificates, is discussed below.)
6. AGGREGATION OF CERTIFICATES
In certain circumstances, the amount of an Annuity Payment or a withdrawal from
a Non-Qualified Plan Certificate that is includible in income may be determined
by combining some or all of the Non-Qualified Plan Certificates owned by an
individual. For example, if a person purchases a Certificate 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.
7. LOSS OF INTEREST DEDUCTION WHERE CERTIFICATES ARE HELD BY OR FOR THE BENEFIT
OF CERTAIN NON-NATURAL PERSONS
In the case of Certificates issued after June 8, 1997 to a non-natural taxpayer
(such as a corporation or a trust), or held for the benefit of such an entity,
otherwise deductible interest may no longer be deductible by the entity,
regardless of whether the interest relates to debt used to purchase or carry the
Certificate. However, this interest deduction disallowance does not affect
Certificates where the income on such Certificates is treated as ordinary income
that is received or accrued by the Owner during the taxable year. Entities that
are considering purchasing the Certificate, or entities that will be
Beneficiaries under a Certificate, should consult a tax advisor.
D. QUALIFIED PLANS
The Certificates are also designed for use in connection with retirement plans
which receive favorable treatment under sections 401, 403, 408, 408A or 457 of
the Code ("Qualified Plans"). Such Certificates are referred to as "Qualified
Plan Certificates." Numerous special tax rules apply to the participants in
Qualified Plans and to Qualified Plan Certificates. Therefore, no attempt is
made in this Prospectus to provide more than general information about use of
the Certificate 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 Certificates,
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 Certificate 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 Certificate and the form in which the
distributions must be paid. For example, failure to comply with
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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.
There is also a 10% penalty tax on the taxable amount of any payment from
certain Qualified Plan Certificates (but not section 457 plan Certificates).
(The amount of the penalty tax is 25% of the taxable amount of any payment
received from a "SIMPLE retirement account" during the 2 year period beginning
on the date the individual first participated in any qualified salary reduction
arrangement (as defined in the tax law) maintained by the individual's
employer.) There are exceptions to this penalty tax which vary depending on the
type of Qualified Plan. In the case of an IRA, including a "SIMPLE 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 Certificates (although, in the case of plans qualified under sections 401
and 403, exception "c" above for substantially equal periodic payments applies
only if the Owner has separated from service).
When issued in connection with a Qualified Plan, a Certificate 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 Certificate. In addition, KILICO shall not be bound by terms and conditions
of Qualified Plans to the extent such terms and conditions contradict the
Certificate, 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 Certificate.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an "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,
subject to the direct rollover and mandatory withholding requirements (described
below), distributions from certain other types of Qualified Plans may be "rolled
over" on a tax-deferred basis into an IRA. The Certificate may not, however, be
used in connection with an "Education IRA" under Section 530 of the Code.
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.
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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.
SIMPLE IRAS. Section 408(p) of the Code permits certain small employers to
establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their
employees. Under SIMPLE IRAs, certain deductible contributions are made by both
employees and employers. SIMPLE IRAs are subject to various requirements,
including limits on the amounts that may be contributed, the persons who may be
eligible, and the time when distributions may commence. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the proper
characterization of the Certificate's death benefit for purposes of the tax
rules governing IRAs (which would include SIMPLE IRAs). Employers and employees
intending to use the Certificate in connection with such plans should seek
competent advice.
ROTH IRAS. Recently enacted Section 408A of the Code permits eligible
individuals to contribute to a type of IRA known as a "Roth IRA." Roth IRAs
differ from other IRAs in several respects. Among the differences is that,
although contributions to a Roth IRA are never deductible, "qualified
distributions" from a Roth IRA will be excludable from income. The eligibility
and mandatory distribution requirements for Roth IRAs also differ from non-Roth
IRAs. Furthermore, a rollover may be made to a Roth IRA only if it is a
"qualified rollover contribution." A "qualified rollover contribution" is a
rollover contribution to a Roth IRA from another Roth IRA or from a non-Roth
IRA, but only if such rollover contribution meets the rollover requirements for
IRAs under section 408(d)(3) of the Code. In the case of a qualified rollover
contribution or a transfer from a non-Roth IRA to a Roth IRA, any portion of the
amount rolled over which would be includible in gross income were it not part of
a qualified rollover contribution or a nontaxable transfer will be includible in
gross income. However, the 10 percent penalty tax on premature distributions
generally will not apply to such amounts.
All or part of amounts in a non-Roth IRA may be converted into a Roth IRA. Such
a conversion can be made without taking an actual distribution from the IRA. For
example, an individual may make a conversion by notifying the IRA issuer or
trustee, whichever is applicable. The conversion of an IRA to a Roth IRA is a
special type of qualified rollover distribution. Hence, the IRA participant must
be eligible to make a qualified rollover distribution in order to convert an IRA
to a Roth IRA. A conversion typically will result in the inclusion of some or
all of the IRA value in gross income, as described above. Persons with adjusted
gross incomes in excess of $100,000 or who are married and file a separate
return are not eligible to make a qualified rollover contribution or a transfer
in a taxable year from a non-Roth IRA to a Roth IRA.
Any "qualified distribution" from a Roth IRA is excludible from gross income. A
"qualified distribution" is a payment or distribution which satisfies two
requirements. First, the payment or distribution must be (a) made after the
Owner attains age 59 1/2, (b) made after the Owner's death, (c) attributable to
the Owner being disabled, or (d) a qualified first-time homebuyer distribution
within the meaning of section 72(t)(2)(F) of the Code. Second, the payment or
distribution must be made in a taxable year that is at least five years after
(a) the first taxable year for which a contribution was made to any Roth IRA
established for the Owner, or (b) in the case of a payment or distribution
properly allocable to a qualified rollover contribution from a non-Roth IRA (or
income allocable thereto), the taxable year in which the rollover contribution
was made. A distribution from a Roth IRA which is not a qualified distribution
is generally taxed in the same manner as a distribution from non-Roth IRAs.
Distribution from a Roth IRA need not commence at age 70 1/2.
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<PAGE> 39
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT-SHARING
PLANS. Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of tax-favored retirement plans for employees. The
Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly
referred to as "H.R. 10" or "Keogh", permits self-employed individuals also to
establish such tax-favored retirement plans for themselves and their employees.
Such retirement plans may permit the purchase of the Certificates in order to
provide benefits under the plans. 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 such death benefit could be characterized
as an incidental death benefit. There are limitations on the amount of
incidental benefits that may be provided under pension and profit sharing plans.
In addition, the provision of such benefits may result in current taxable income
to participants. Employers intending to use the Certificate in connection with
such plans should seek competent advice.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in section 501(c)(3) of the Code to have
their employers purchase annuity Certificates for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity Certificates are commonly referred to as
"tax-sheltered annuities". Purchasers of the Certificates for such purposes
should seek competent advice as to eligibility, limitations on permissible
amounts of purchase payments and other tax consequences associated with the
Certificates. In particular, purchasers should consider that 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 such death
benefit could be characterized as an incidental death benefit. If the death
benefit were so characterized, this could result in currently taxable income to
purchasers. In addition, there are limitations on the amount of incidental
benefits that may be provided under a tax-sheltered annuity. Even if the death
benefit under the Certificate were characterized as an incidental death benefit,
it is unlikely to violate those limits unless the Certificate Owner also
purchases a life insurance contract as part of his or her tax-sheltered annuity
plan.
Tax-sheltered annuity Certificates must contain restrictions on withdrawals of
(i) contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988, (ii) earnings on those contributions, and
(iii) earnings after December 31, 1988 on amounts attributable to salary
reduction contributions held as of December 31, 1988. These amounts can be paid
only if the employee has reached age 59 1/2, separated from service, died, or
becomes disabled (within the meaning of the tax law), or in the case of hardship
(within the meaning of the tax law). Amounts permitted to be distributed in the
event of hardship are limited to actual contributions; earnings thereon cannot
be distributed on account of hardship. Amounts subject to the withdrawal
restrictions applicable to section 403(b)(7) custodial accounts may be subject
to more stringent restrictions. (These limitations on withdrawals do not apply
to the extent KILICO is directed to transfer some or all of the Certificate
Value to the issuer of another tax-sheltered annuity or into a section 403(b)(7)
custodial account.)
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Section 457 of the Code permits employees of state and local
governments and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants in
an eligible deferred compensation plan. Generally, a Certificate purchased by a
state or local government or a tax-exempt organization will not be treated as an
annuity contract for federal income tax purposes. Those who intend to use the
Certificates in connection with such plans should seek competent advice.
35
<PAGE> 40
2. DIRECT ROLLOVERS
If the Certificate is used in connection with a retirement plan that is
qualified under sections 401(a), 403(a), or 403(b) of the Code, any "eligible
rollover distribution" from the Certificate will be subject to "direct rollover"
and mandatory withholding requirements. An eligible rollover distribution
generally is any taxable distribution from such a qualified retirement plan,
excluding certain amounts such as (i) minimum distributions required under
section 401(a)(9) of the Code, and (ii) certain distributions for life, life
expectancy, or for 10 years or more which are part of a "series of substantially
equal periodic payments."
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Certificate,
discussed below, the Owner cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply if,
instead of receiving the eligible rollover distribution, the distributee elects
to have it directly transferred to certain Qualified Plans. Prior to receiving
an eligible rollover distribution, a notice will be provided explaining
generally the direct rollover and mandatory withholding requirements and how to
avoid the 20% withholding by electing a direct rollover.
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 Certificate 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 and conversions of, or rollovers from,
non-Roth IRAs to Roth IRAs) is 10%. As discussed above, the withholding rate
applicable to eligible rollover distributions is 20%.
DISTRIBUTION OF CONTRACTS AND CERTIFICATES
The Contracts and Certificates are sold by licensed insurance agents, where the
Contracts and Certificates 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 generally pays a maximum commission of 6% on sales based on
Purchase Payments. KILICO reserves the right to pay additional commissions based
on the value in an Owner's account. 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 and
Certificates. 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 and Certificates
or other contracts issued by KILICO. The Contracts and Certificates are
distributed through the principal underwriter for the Separate Account, which is
Investors Brokerage Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO.
VOTING RIGHTS
Proxy materials in connection with any shareholder meeting of the Fund will be
delivered to each Owner or Annuitant with Subaccount interests invested in the
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 Fund shares held in each Subaccount in accordance with
instructions received from
36
<PAGE> 41
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 Owners vote. As a
trust, the Fund is not required and does not intend to hold annual shareholders'
meetings. It 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.
Owners and Annuitants of all Certificates participating in each Subaccount shall
have voting rights with respect to the Portfolio invested in by that Subaccount,
based upon each Owner's proportionate interest in that Subaccount as measured by
units. The person having such voting rights will be the Owner before surrender,
the Annuity Date or the death of the Annuitant, and thereafter, the payee
entitled to receive Variable Annuity payments under the Certificate. During the
Annuity Period, voting rights attributable to a Certificate will generally
decrease as Annuity Units attributable to an Annuitant decrease.
REPORTS TO OWNERS AND INQUIRIES
Immediately after each Certificate anniversary, Owners will be sent statements
for their own Certificate showing the number and value of Accumulation Units
credited to each Subaccount and the Guarantee Period Value for each Guarantee
Period. It will also show the interest rate(s) that KILICO is crediting upon
amounts then held in each Guarantee Period. In addition, Owners transferring
amounts among the Subaccounts and Guarantee Periods or making additional
payments will receive written confirmation of such transactions. Upon request,
any Owner will be sent a current statement in a form similar to that of the
annual statement described above. Each Owner will also be sent an annual and a
semi-annual report for the Fund and a list of the securities held in each
Portfolio of the Fund, as required by the 1940 Act. In addition, KILICO will
calculate for an 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.
An Owner may direct inquiries to the individual who sold him or her the
Certificate 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
KILICO offers two different dollar cost averaging programs whereby an Owner may
predesignate a portion of Subaccount Value under a Certificate to be
automatically transferred on a monthly basis to one or more of the other
Subaccounts during the Accumulation Period. The first dollar cost averaging
program is available only for initial Purchase Payments and an Owner must enroll
in the program at the time the Certificate is issued. An Owner may allocate all
or a portion of the initial Purchase Payment to Kemper Money Market Subaccount
#2, which is the only Subaccount with no deduction for the 1.25% daily
asset-based charge for mortality and expense risks and administrative costs. The
Owner must transfer all of the Subaccount Value out of Kemper Money Market
Subaccount #2 to one or more of the other Subaccounts within three years from
the initial Purchase Payment. If an Owner terminates dollar cost averaging or
does not deplete all Certificate Value in Kemper Money Market Subaccount #2
within three years, KILICO will automatically transfer any remaining Subaccount
Value in Kemper Money Market Subaccount #2 to Kemper Money Market Subaccount #1.
The other dollar cost averaging program is available for Purchase Payments and
for Certificate Value transferred into Kemper Money Market Subaccount #1 or
Kemper Government Securities Subaccount. An
37
<PAGE> 42
Owner may predesignate a portion of Subaccount Value to be automatically
transferred on a monthly basis to one or more of the other Subaccounts. An 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").
Under each program, transfers will be made in the amounts designated by the
Owner and must be at least $500 per Subaccount. The total Certificate Value in
the applicable Subaccount 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 Certificate 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 value of the Accumulation Units
attributable to the applicable Subaccount is insufficient to complete the next
transfer, (iii) the Owner requests termination in writing and such writing is
received by KILICO at its home office at least two (2) business days prior to
the next Transfer Date in order to cancel the transfer scheduled to take effect
on such date, or (iv) the Certificate is surrendered or annuitized.
An Owner may initiate, reinstate or change Dollar Cost Averaging from Kemper
Money Market Subaccount #1 or Kemper Government Securities Subaccount or change
existing Dollar Cost Averaging terms for Kemper Money Market Subaccount #2 by
properly completing the new enrollment form and returning it to KILICO at its
home office at least five (5) business days prior to the next Transfer Date such
transfer is to be made.
When utilizing Dollar Cost Averaging an Owner must be invested in Kemper Money
Market Subaccount #1, Kemper Money Market Subaccount #2, or Kemper Government
Securities Subaccount and may be invested in any other Subaccounts at any given
time. 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
Owners to pre-authorize periodic withdrawals during the accumulation period.
Owners entering into a SWP agreement instruct KILICO to withdraw selected
amounts from any of the Subaccounts or Guarantee Periods on a monthly,
quarterly, semi-annual or annual basis. Currently the SWP is available to 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 15 DAYS BEFORE OR 15 DAYS AFTER THE GUARANTEE PERIOD ENDS. IF THE AMOUNTS
DISTRIBUTED UNDER THE SWP EXCEED THE AMOUNT FREE OF WITHDRAWAL CHARGE (CURRENTLY
15% OF CERTIFICATE VALUE) THEN THE WITHDRAWAL CHARGE WILL BE APPLIED ON ANY
AMOUNTS EXCEEDING THE 15% FREE WITHDRAWAL. WITHDRAWALS TAKEN UNDER THE SWP MAY
BE SUBJECT TO THE 10% FEDERAL TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME
TAXES AND MAY BE SUBJECT TO 20% WITHHOLDING. SEE "FEDERAL INCOME TAXES." Owners
interested in SWP may obtain an application 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 Owner or KILICO.
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<PAGE> 43
EXPERTS
The consolidated balance sheet of KILICO as of December 31, 1997 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the year ended December 31, 1997 have been included herein and in the
registration statement in reliance upon the report of Coopers & Lybrand L.L.P.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The
consolidated balance sheet of KILICO as of December 31, 1996 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the period from January 4, 1996 to December 31, 1996 and for the year 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 referred to above contains an explanatory
paragraph that states as a result of the acquisition of its parent, Kemper
Corporation, the consolidated financial information for the period after the
acquisition is presented on a different cost basis than that for the period
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
Debra P. Rezabek, Senior Vice President, General Counsel and Corporate Secretary
for KILICO. Jorden Burt Boros Cicchetti Berenson & Johnson, 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 Certificate 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 a
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.
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<PAGE> 44
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, 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 that change in
control, Zurich and Insurance Partners owned 80 percent and 20 percent,
respectively, of Kemper and therefore KILICO. On February 27, 1998, Zurich
acquired Insurance Partner's remaining 20 percent interest for cash. As a result
of this transaction, Kemper and KILICO became wholly-owned subsidiaries of
Zurich.
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 values as of the acquisition date. The difference between
the allocated cost of $745.6 million of acquiring KILICO and the net fair values
of KILICO's assets and liabilities as of the acquisition date resulted in $254.9
million of goodwill. KILICO originally began to amortize goodwill on a
straight-line basis over twenty-five years, however, in the fourth quarter of
1997, KILICO changed its amortization period to twenty years. The change in
amortization periods was made to conform to Zurich's accounting practices and
policies and resulted in an increase in goodwill amortization of $5.1 million in
1997. KILICO has presented January 4, 1996 (the acquisition date) as the opening
purchase accounting balance sheet for comparative purposes, where appropriate,
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 the early 1990's, 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 4.9 percent at
year-end 1997.
40
<PAGE> 45
The management, operations and strategic directions of KILICO were also
integrated by the end of 1993 with those of another Kemper subsidiary, Federal
Kemper Life Assurance Company ("FKLA"). The integration streamlined management,
controlled costs, improved profitability, increased operating efficiencies and
productivity, and helped 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.
Beginning in 1995, KILICO also began to introduce and expand new and existing
product lines. In late 1995, KILICO began to sell term life insurance products
in order to balance its product mix and asset-liability structure. Over the last
three years, KILICO increased the competitiveness of its variable annuity
products by adding multiple variable subaccount investment options and
investment managers to existing variable annuity products. In 1996, KILICO
introduced a registered flexible individual variable life insurance product and
in 1997 KILICO introduced a non-registered individual and group variable
bank-owned life insurance contract ("BOLI") and a series of individual variable
life insurance contracts.
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 individual and group 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. KILICO's sales mainly
consist of deposits received on certain long duration annuity and variable life
insurance contracts as well as reinsurance premiums assumed from FKLA beginning
in 1996. (See note captioned "Reinsurance" in the notes to the consolidated
financial statements and see the table captioned "Sales" below.)
KILICO's fixed and variable 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 existing and new
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 as well as cost of
insurance charges which compensate KILICO for providing life insurance coverage
to the contractholder potentially in excess of their cash surrender values.
As a result of this strategy, KILICO's separate account assets and related sales
of its variable annuity and life products have increased as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
------------------- ----------
1997 1996 1996
-------- -------- ----------
<S> <C> <C> <C>
Separate account assets................................. $5,122.0 $2,127.2 $1,761.1
======== ======== ========
</TABLE>
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<PAGE> 46
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
PREACQUISITION
--------------
1997 1996 1995
-------- ------ --------------
<S> <C> <C> <C>
Variable annuity sales................................. $ 259.8 $254.6 $ 151.1
Variable life sales.................................... 2,708.6 .2 --
-------- ------ --------
Total separate account sales......................... $2,968.4 $254.8 $ 151.1
======== ====== ========
</TABLE>
Rating improvements in 1996 (see "Rankings and ratings" below) and the 1996
change in control also helped to increase KILICO's sales in 1997 and 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 introduced POWER V, a registered flexible premium variable
life insurance product. During mid-1997, KILICO also introduced variable BOLI
which is primarily marketed to banks and other large corporate entities and a
series of non-registered variable individual universal life insurance contracts
which are marketed primarily to high net worth individuals. These products are
being marketed and distributed by Investors Brokerage Services, Inc., ("IBS") a
wholly-owned subsidiary of KILICO. Excluding these contracts marketed and
distributed by IBS which accounted for $2,705.8 million of KILICO's first year
sales, INVEST Financial Corporation, ("INVEST") an affiliated company until June
28, 1996, and certain other unrelated companies of INVEST's new parent First
American National Bank, and EVEREN Securities, Inc., an affiliated company until
September 13, 1995, accounted for approximately 23.0 percent and 5.0 percent,
respectively, in 1997 of KILICO's first-year sales, compared with 24 percent and
12 percent, respectively, in 1996.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted general account annuity sales for KILICO over the
last several years. KILICO's general account fixed annuity sales were as follows
(in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
General account fixed annuity sales...................... $145.7 $140.6 $247.6
====== ====== ======
</TABLE>
Beginning 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. 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 and most of 1997, which influenced
potential buyers of fixed annuity products to purchase variable annuity
products, sales of general account annuities have increased only slightly in
1997, compared with 1996.
42
<PAGE> 47
Beginning in 1995, KILICO began to sell term life insurance products in order to
balance its product mix and asset-liability structure. During 1997 and 1996,
KILICO also assumed $21.1 million and $7.3 million, respectively, of term life
insurance premiums from FKLA. Excluding the amounts assumed from FKLA, KILICO's
total term life sales, including new and renewal premiums, net of reinsurance
ceded, amounted to $1.1 million in 1997, compared with $565 thousand in 1996 and
$236 thousand in 1995.
FEDERAL INCOME TAX DEVELOPMENTS
In early 1998, the Clinton Administration's Fiscal Year 1998 Budget ("Budget")
was released and contained certain proposals to change the taxation of
non-qualified fixed and variable annuities and variable life insurance
contracts. It is currently unknown whether or not such proposals will be
accepted, amended or omitted in the final 1999 Budget approved by Congress. If
the current Budget proposals are accepted, certain of KILICO's non-qualified
fixed and variable annuities and certain of its variable life insurance
products, including BOLI and the nonregistered individual variable universal
life insurance contract introduced during 1997, may no longer be tax advantaged
products and therefore no longer attractive to those customers who purchase them
because of their favorable tax attributes. Additionally, sales of such products
during 1998 may also be negatively impacted until the likelihood of the current
proposals being enacted into law has be determined.
YEAR 2000 COMPLIANCE
Many existing computer programs were originally designed without considering the
impact of the year 2000 and currently use only two digits to identify the year
in the date field. This issue affects nearly all companies and organizations and
could cause computer applications and systems to fail or create erroneous
results to occur for any transaction with a date of January 1, 2000, or later.
Many companies must undertake major projects to address the year 2000 issue and
each companies costs and uncertainties will depend on a number of factors,
including its software and hardware, and the nature of the industry. Companies
must also coordinate with other entities with which they electronically
interact, including suppliers, customers, creditors and other financial services
institutions.
If a company does not successfully address its year 2000 issues it could face
material adverse consequences in the form of lawsuits against the company, lost
business, erroneous results and substantial operating problems after January 1,
2000.
KILICO has taken substantial steps over the last several years to ensure that
its systems will be compliant for the year 2000. Such steps have included the
replacement of older systems with new systems which are already compliant. In
1996, KILICO replaced its investment accounting system and in 1997 KILICO
replaced its general ledger and accounts payable system. KILICO has also ensured
that new systems developed to support new product introductions in 1996 and 1997
are already year 2000 compliant. Data processing expenses related solely to
bringing KILICO's systems in compliance with the year 2000 amounted to $88
thousand in 1997 and KILICO anticipates that it will cost an additional $895
thousand to bring all remaining systems into compliance. KILICO has also
undertaken steps which require that all other entities with which KILICO
electronically interacts, including suppliers and other financial services
institutions, attest in writing to KILICO that their systems are year 2000
compliant.
43
<PAGE> 48
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, 1997, KILICO had three
ratios outside the usual ranges, the change in reserving ratio, the change in
premium ratio and the change in product mix ratio. KILICO's change in reserving
ratio reflected the level of interest-sensitive life surrenders and withdrawals
during 1997, as well as the 1997 reinsurance agreement with FKLA. KILICO's
change in premium ratio and change in product mix ratio reflected the $2.7
billion increase in BOLI premiums received during 1997. Other than certain
states requesting quarterly 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 1997 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 1997, 1996 and 1995 amounted to $1.2 million, $601 thousand and $5.8
million, respectively. Such amounts relate to accrued guaranty fund assessments
of $4.8 million, $5.8 million and $5.0 million at December 31, 1997, 1996 and
1995, respectively. Additional assessments charged to expense 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 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 asset adequacy rules are designed to
44
<PAGE> 49
assure that reserves and assets are adequate to cover liabilities under a
variety of economic scenarios. The focus of the 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>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
General account annuities................................... $3,137 $3,507
Interest-sensitive life insurance and other................. 709 743
Term life reserves.......................................... 10 7
Ceded future policy benefits................................ 383 427
------ ------
Total............................................. $4,239 $4,684
====== ======
</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, A
Mutual Legal Reserve Company ("FLA"), an affiliated mutual insurance company.
FLA shares directors, management, operations and employees with FKLA pursuant to
an administrative and management services agreement. FLA produces policies not
produced by FKLA or KILICO as well as other policies similar to certain FKLA
policies. At December 31, 1997 and 1996, KILICO's reinsurance recoverable from
FLA related to these coinsurance transactions totaled approximately $382.6
million and $427.2 million, respectively. Utilizing FKLA's employees, KILICO is
the servicing company for this coinsured business and is reimbursed by FLA for
the related servicing expenses.
During December 1997, KILICO entered into a funds held reinsurance agreement
with another Zurich affiliated company, EPICENTRE Reinsurance (Bermuda) Limited
("EPICENTRE"). Under the terms of this agreement, KILICO ceded, on a yearly
renewable term basis, ninety percent of the net amount at risk (death benefit
payable to the insured less the insured's separate account cash surrender value)
related to variable bank owned life insurance (BOLI), which is held in KILICO's
separate accounts. During 1997, KILICO ceded to EPICENTRE approximately $24.3
million of separate account fees (cost of insurance charges) paid to KILICO by
these policyholders for the life insurance coverage provided under the terms of
each separate account contract. KILICO has also withheld approximately $23.4
million of such funds due to EPICENTRE under the terms of the reinsurance
agreement as a component of benefits and funds payable in the accompanying
consolidated balance sheet in this Prospectus. KILICO remains primarily liable
to its policyholders for these amounts.
During 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 also recorded reserves in 1997 and 1996 of approximately
$7.9 million and $7.3 million, respectively. (See the note captioned
"Reinsurance" in the notes to the consolidated financial statements.)
45
<PAGE> 50
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 1995 than in earlier years, and were under review in
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 1997 and 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, 1997, KILICO utilized the services of approximately 620
employees of FKLA, which are also shared with FLA and Zurich Life Insurance
Company of America ("ZLICA"). 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.
In addition, certain of KILICO's variable life insurance and annuity products,
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.
46
<PAGE> 51
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, Scudder Kemper Investments, Inc. ("SKI"),
formerly Zurich Kemper Investments, Inc. ("ZKI"), and its subsidiaries and
affiliates, with KILICO's real estate-related investments being handled by a
majority-owned 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.)
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this report
and elsewhere (such as in other filings by KILICO with the Securities and
Exchange Commission, press releases, presentations by KILICO or its management
or oral statements) relative to markets for KILICO's products and trends in
KILICO's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend,"
and other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (i) general economic conditions and other factors, including
prevailing interest rate levels and stock market performance, which may affect
the ability of KILICO to sell its products, the market value of KILICO's
investments and the lapse rate and profitability of KILICO's contracts; (ii)
KILICO's ability to achieve anticipated levels of operational efficiencies
through certain cost-saving initiatives; \(iii) customer response to new
products, distribution channels and marketing initiatives; (iv) mortality,
morbidity, and other factors which may affect the profitability of KILICO's
insurance products; (v) changes in the Federal income tax laws and regulations
which may affect the relative tax advantages of some of KILICO's products; (vi)
increasing competition which could affect the sale of KILICO's products; (vii)
regulatory changes or actions, including those relating to regulation of
financial services affecting (among other things) bank sales and underwriting of
insurance products, regulations of the sale and underwriting and pricing of
insurance products; and (viii) the risk factors or uncertainties listed from
time to time in KILICO's other filings with the Securities and Exchange
Commission.
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.
47
<PAGE> 52
SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1997 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 DECEMBER 31 JANUARY 4 ----------------------------------
1997 1996 1996 1995 1994 1993
----------- ----------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE.............. $ 425.5 $ 356.2 $ -- $ 68.1(1) $ 330.5 $ 337.4
========= ======== ======== ======== ======== ========
NET INCOME EXCLUDING
REALIZED INVESTMENT
RESULTS.................. $ 31.9 $ 25.6 $ -- $ 74.2 $ 61.9 $ 33.7
========= ======== ======== ======== ======== ========
NET INCOME (LOSS).......... $ 38.7 $ 34.4 $ -- $ (133.0)(1) $ 26.4 $ 14.0
========= ======== ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account
assets................... $ 5,122.0 $2,127.2 $1,761.1 $1,761.1 $1,508.0 $1,499.5
========= ======== ======== ======== ======== ========
Total assets............... $10,589.7 $7,717.9 $7,682.7 $7,581.7 $7,537.1 $8,113.7
========= ======== ======== ======== ======== ========
Future policy benefits..... $ 3,856.9 $4,256.5 $4,585.1 $4,573.2 $4,843.7 $5,040.0
========= ======== ======== ======== ======== ========
Stockholder's equity....... $ 865.6 $ 751.0 $ 745.6 $ 605.9 $ 434.0 $ 654.6
========= ======== ======== ======== ======== ========
</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".)
48
<PAGE> 53
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 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 year
ended December 31, 1995 has been prepared on an historical cost basis and do not
reflect such purchase accounting adjustments.
RESULTS OF OPERATIONS
KILICO recorded net income of $38.7 million in 1997, compared with net income of
$34.4 million in 1996 and with a net loss of $133.0 million in 1995. The
increase in net income in 1997, compared with 1996, was due to a significant
increase in operating earnings before the amortization of goodwill, offset by an
increase in goodwill amortization and a slight decline in net realized capital
gains. The increase in net income in 1996, compared with 1995, 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
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
Operating earnings before
amortization of goodwill.... $ 47.2 $ 35.8 $ 74.2
Amortization of goodwill...... (15.3) (10.2) --
Net realized investment gains
(losses).................... 6.8 8.8 (207.2)
------ ------ -------
Net income (loss)... $ 38.7 $ 34.4 $(133.0)
====== ====== =======
</TABLE>
49
<PAGE> 54
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
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
Real estate-related gains
(losses)..................... $ 12.8 $ 11.4 $(211.6)
Fixed maturity write-downs..... (2.8) (.9) (4.7)
Other gains (losses), net...... (3.2) (1.7) 9.1
------ ------ -------
Total................ $ 6.8 $ 8.8 $(207.2)
====== ====== =======
</TABLE>
The higher level of real estate-related losses in 1995, compared with both 1997
and 1996, 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 1997, 1996 and 1995
relate primarily to the sale of fixed maturity investments. The fixed maturity
losses generated in 1997 and 1996 arose primarily from the sale of fixed
maturity investments, consisting of lower yielding U.S. Treasury bonds,
collateralized mortgage obligations and corporate bonds, related to ongoing
repositionings of KILICO's fixed maturity investment portfolio. The proceeds
from the repositionings, together with cash and short-term investments, were
reinvested into higher yielding corporate bonds and asset-backed securities in
1997 and 1996. Real estate-related gains in both 1997 and 1996, continue to
reflect KILICO's strategy to reduce its exposure to real estate-related
investments, as well as improving real estate market conditions in most areas of
the country. Fixed maturity write-downs in 1997 primarily reflect
other-than-temporary declines in value of certain U.S. dollar denominated fixed
maturity investments which have significant exposure to countries in Southeast
Asia. (See "INVESTMENTS" below.)
Operating earnings before the amortization of goodwill increased to $47.2
million in 1997, compared with $35.8 million in 1996. Operating earnings
increased in 1997 before the amortization of goodwill, compared with 1996,
primarily due to an increase in spread revenue (investment income earned less
interest credited), an increase in separate account fees and charges, an
increase in premium income and an increase in the deferral of insurance
acquisition costs, offset by an increase in claims incurred and other
policyholder benefits, taxes, licenses and fees, commissions, operating expenses
and an increase in the amortization of the value of business acquired.
Operating earnings before the amortization of goodwill decreased to $35.8
million in 1996, compared with $74.2 million in 1995, primarily due to purchase
accounting adjustments which reduced investment income and increased expenses.
Investment income was lower in 1996, compared with 1995, primarily reflecting
purchase accounting adjustments related to the amortization of premiums on fixed
maturity investments. Under purchase accounting, the fair 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
50
<PAGE> 55
investments was approximately $133.9 million greater than original par. The
amortization of such premiums reduced investment income by approximately $14.1
million in 1997 and $22.7 million in 1996, compared with 1995.
Investment income and interest credited also declined in 1997, compared with
1996 and 1995, as a result of a decrease in both total invested assets and
liabilities for future policy benefits to policyholders. 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,
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.
Investment income was positively impacted in 1997 and 1996 from the benefits of
capital contributions to KILICO and from the above-mentioned repositionings of
KILICO's investment portfolio.
The following table reflects KILICO's sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
PREACQUISITION
--------------
1997 1996 1995
-------- ------ --------------
<S> <C> <C> <C>
Annuities:
General account............ $ 145.7 $140.6 $247.6
Separate account........... 259.8 254.6 151.1
-------- ------ ------
Total annuities......... 405.5 395.2 398.7
-------- ------ ------
Life Insurance:
Separate account bank-owned
variable universal life
("BOLI")................ 2,700.0 -- --
Separate account variable
universal life.......... 8.6 .2 --
Term life.................. 22.2 7.8 .2
Interest-sensitive life.... -- .6 .2
-------- ------ ------
Total life.............. 2,730.8 8.6 .4
-------- ------ ------
Total sales... $3,136.3 $403.8 $399.1
======== ====== ======
</TABLE>
Sales of annuity products consist of total deposits received. General account
annuity sales increased only slightly in 1997, compared with 1996, due to the
current low interest rate environment. The decrease in 1996 general account
(fixed annuity) sales, compared with 1995, is reflective of the declining
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 1997, compared with 1996
and 1995, 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, the addition of new investment fund managers and a
strong overall 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
51
<PAGE> 56
several underlying investment funds which invest in stocks and bonds. 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 late 1995, KILICO introduced a registered flexible individual
variable life insurance product and in 1997 KILICO introduced several
non-registered variable universal life insurance contracts, BOLI and a series of
individual universal life insurance contracts. Sales of these separate account
variable products, like variable annuities, pose minimal investment risk for
KILICO as policyholders also invest in one or more underlying investment funds
which invest in stocks and bonds. KILICO receives premium tax and DAC tax
expense loads from certain contract holders, as well as administrative fees and
cost of insurance charges which compensate KILICO for providing life insurance
coverage to the contractholders in excess of their cash surrender values. Face
amount of new variable universal life insurance business issued amounted to
$59.6 billion in 1997, compared with $4.0 million in 1996.
In early 1998, the Clinton Administration's Fiscal Year 1998 Budget ("Budget")
was released and contained certain proposals to change the taxation of
non-qualified fixed and variable annuities and variable life insurance
contracts. It is currently unknown whether or not such proposals will be
accepted, amended or omitted in the final 1999 Budget approved by Congress. If
the current Budget proposals are accepted, certain of KILICO's non-qualified
fixed and variable annuities and certain of its variable life insurance
products, including BOLI and the non-registered individual variable universal
life insurance contract introduced during 1997, may no longer be tax advantaged
products and therefore no longer attractive to those customers who purchase them
because of their favorable tax attributes. Additionally, sales of such products
during 1998 may also be negatively impacted until the likelihood of the current
proposals being enacted into law has been determined.
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 1997 and 1996, KILICO also
assumed $21.1 million and $7.3 million, respectively, 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
$1.1 million in 1997, compared with $565 thousand in 1996 and $236 thousand in
1995. Face amount of new term business issued during 1997, 1996 and 1995
amounted to approximately $278 million, $187 million and $120 million,
respectively.
Included in separate account fees and charges are administrative fees received
from KILICO's separate account products of $31.0 million in 1997, compared with
$25.3 million and $21.9 million in 1996 and 1995, respectively. Administrative
fee revenue increased in each of the last three years due to growth in average
separate account assets.
Also included in separate account fees and charges in 1997 are cost of insurance
charges related to variable universal life insurance, primarily BOLI, of $27.6
million, of which $24.3 million of such fees were ceded to EPICENTRE. (See the
note captioned "Reinsurance" in the notes to the consolidated financial
statements.) Separate account fees and charges in 1997 also include premium tax
expense loads of $51.1 million related to BOLI.
Other income includes surrender charge revenue of $5.2 million in 1997, compared
with $5.4 million and $7.7 million in 1996 and 1995, respectively, as total
general account and separate account policyholder surrenders and withdrawals
decreased in 1997 and 1996, compared with 1995. The decrease in surrender charge
revenue in 1997, compared with 1996 and 1995 also reflects that 49 percent of
KILICO's fixed and variable annuity liabilities, excluding BOLI, at December 31,
1997 are subject to minimal (5 percent or less)
52
<PAGE> 57
or no surrender charges, compared with 57 percent in 1996 and 56 percent in
1995. 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, WITHDRAWALS AND DEATH BENEFITS
(in millions)
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
General account............ $703.1 $652.0 $755.9
Separate account........... 236.2 196.7 205.6
------ ------ ------
Total................. $939.3 $848.7 $961.5
====== ====== ======
</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 and 1997, have mitigated
at present, competitive pressures to increase existing renewal crediting rates
further.
General account surrenders, withdrawals and death benefits increased $51.1
million in 1997, compared with 1996, reflecting an increase of $18.2 million in
claims incurred as a result of the aforementioned term life insurance business
assumed from FKLA as well as an increase in overall surrenders and withdrawals
in 1997, compared with 1996. KILICO expects that the level of surrender and
withdrawal activity experienced in 1997 should remain at a similar level in 1998
given current projections for relatively stable interest rates.
Taxes licenses and fees increased in 1997 to $52.6 million of which $51.1
million of this increase was related to premium taxes on BOLI. Excluding the
taxes due on BOLI, of which KILICO received a corresponding expense load in
separate account fees and other charges, taxes licenses and fees amounted to
$1.5 million, compared with $2.2 million in 1996 and $6.9 million in 1995.
Taxes, licenses and fees were lower in 1997 and 1996, compared with 1995,
primarily reflecting the level of guaranty fund assessments in each of those
years. Expenses for such assessments totaled $1.2 million, $601 thousand, and
$5.8 million in 1997, 1996 and 1995, respectively. (See "Guaranty association
assessments" above.)
Commissions expense was higher in 1997, compared with both 1996 and 1995, due to
an increase in total sales, excluding BOLI.
Operating expenses declined in 1995, primarily as a result of a decrease in
headcount resulting from the uncertainty concerning KILICO's ownership.
Operating expenses increased in 1997 and 1996, compared with 1995, as a result
of restaffing after the completion of the merger, an increase in evidence costs
related to new term life sales and an increase in data processing expenses. Data
processing expenses increased to $10.8 million in 1997, compared with $4.1
million in 1996 and $3.7 million in 1995, primarily due to infrastructure
improvements related to new product development, a new general ledger and
accounts payable system, development of a data warehouse and costs related to
bringing KILICO's systems in compliance with the year 2000. Data processing
expenses related to bringing KILICO's systems in compliance with the year 2000
amounted to $88 thousand in 1997. KILICO currently anticipates that it will
53
<PAGE> 58
cost an additional $895 thousand to bring all remaining systems in compliance.
(See "Year 2000 Compliance" above.)
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1997, compared with 1996 and 1995. The deferral of
insurance acquisition costs increased in 1997, compared with both 1996 and 1995
reflecting an increase in commissions expense and operating expenses related
directly to the increase in production of new business.
Operating earnings were negatively impacted by the amortization of insurance
acquisition costs and the amortization of the value of business acquired in 1997
and 1996, compared with the amortization of insurance acquisition costs in 1995.
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 amortization of the value of business acquired increased in 1997, compared
with 1996, as a result of an increase in net operating earnings related to the
business previously acquired. The amortization of the value of business acquired
in 1997 and 1996 was also adversely affected by net realized capital gains in
1997 and 1996, while the net amortization of insurance acquisition costs in
1995, was positively affected by realized capital losses. Net realized capital
gains 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 difference between the cost of acquiring KILICO and the net fair value of
KILICO's assets and liabilities as of January 4, 1996 was recorded as goodwill.
During 1996, KILICO began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, KILICO changed its amortization period
to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, KILICO recorded an
increase in amortization expense of $5.1 million during 1997. The amortization
of goodwill increased expenses by $10.2 million in 1996, compared with 1995.
54
<PAGE> 59
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.
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
--------------- ---------------
<S> <C> <C> <C> <C>
Cash and short-term investments........................ $ 260 5.8% $ 74 1.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1................................... 3,004 67.1 3,231 71.5
NAIC(1) Class 2................................... 651 14.5 621 13.7
Below investment grade:
Performing........................................ 14 .3 13 .3
Nonperforming..................................... -- -- 1 --
Joint venture mortgage loans........................... 73 1.6 111 2.4
Third-party mortgage loans............................. 103 2.3 107 2.4
Other real estate-related investments.................. 44 1.0 50 1.1
Policy loans........................................... 282 6.3 288 6.4
Equity securities...................................... 25 .6 10 .2
Other.................................................. 21 .5 14 .4
------ ----- ------ -----
Total(2)..................................... $4,477 100.0% $4,520 100.0%
====== ===== ====== =====
</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 appreciation (depreciation) on fixed maturities at December 31, 1997
and 1996 was $24.6 million and $(63.2) million, respectively, 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.
55
<PAGE> 60
At December 31, 1997, investment-grade fixed maturities and cash and short-term
investments accounted for 87.4 percent of KILICO's invested assets and cash,
compared with 86.8 percent at December 31, 1996. Approximately 54.0 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1997,
compared with 58.4 percent at December 31, 1996.
Approximately 35.1 percent of KILICO's investment-grade fixed maturities at
December 31, 1997 were mortgage-backed securities, down from 36.4 percent at
December 31, 1996, due to sales and paydowns during 1997. 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.
As a result of the previously discussed repositionings of KILICO's fixed
maturity portfolio, approximately 10.8 percent and 8.8 percent of KILICO's
investment-grade fixed maturities at December 31, 1997 and 1996, respectively,
consisted of corporate asset-backed securities. The majority of KILICO's
investments in asset-backed securities were backed by home equity loans (27.7%),
auto loans (22.3%), manufactured housing loans (17.2%), equipment loans (13.7%),
and commercial mortgage backed securities ("CMBs") (10.7%).
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, 1997 and 1996 KILICO had unamortized premiums and discounts
related to mortgage-backed and asset-backed securities as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1997 1996
----- -----
<S> <C> <C>
Unamortized premiums........................................ $19.6 $24.7
===== =====
Unamortized discounts....................................... $ 5.2 $ 5.7
===== =====
</TABLE>
KILICO believes that as a result of the purchase accounting adjustments and the
current interest rate environment, anticipated prepayment activity in 1998 is
expected to result in reductions to future investment income similar to or
greater than those reductions experienced by KILICO in 1997.
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.
56
<PAGE> 61
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) 1997 1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed
bonds.............. $1,283.6 $219.1 $232.5 $145.1 $92.2 $64.5 $530.2 $1,283.6 $1,283.6
Average yield...... 6.58% 6.60% 6.61% 6.64% 6.64% 6.63% 6.67% 6.58% 6.58%
Asset-backed bonds... $ 353.0 $ 18.9 $ 16.9 $ 30.8 $35.5 $47.2 $203.7 $ 353.0 $ 353.0
Average yield...... 6.81% 6.85% 7.04% 7.05% 7.15% 7.13% 7.20% 6.81% 6.81%
CMBs................. $ 42.2 $ 0.3 $ 0.4 $ 0.4 $ 0.4 $ 8.0 $ 32.7 $ 42.2 $ 42.2
Average yield...... 6.64% 6.64% 6.64% 6.64% 6.64% 6.63% 6.63% 6.64% 6.64%
-------- -------- --------
$1,678.8 $1,678.8 $1,678.8
======== ======== ========
</TABLE>
<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, 1997, is 3.8 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately 1.0
year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.3 years.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1996, was 4.6 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately 1.7
years, while a 200 basis point decrease in interest rates would have decreased
the weighted average maturity by approximately 1.3 years.
As of December 31, 1997, KILICO had $54.7 million of U.S. dollar denominated
fixed maturity investments, after write-downs for other-than-temporary declines
in value, which have significant exposure to countries in Southeast Asia.
Approximately $5.6 million of such securities were from Korea, $21.9 million
were from Hong Kong, China, $20.4 million were from Malaysia and the remainder
of such bonds were from a United Kingdom bank with most of its loans issued to
countries in Southeast Asia. Write-downs on such securities, which were
considered to be other-than-temporary, as of December 31, 1997 amounted to $3.1
million. There can be no assurance that the current estimate for
other-than-temporary declines in value for such securities will prove accurate
over time due to changing economic conditions in Southeast Asia.
57
<PAGE> 62
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 9 issuers at December 31, 1997, totaled 0.3 percent
of cash and invested assets at both December 31, 1997 and December 31, 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. KILICO expects to increase its holdings
in this category selectively during 1998.
REAL ESTATE-RELATED INVESTMENTS
The $220.0 million real estate-related portfolio held by KILICO, consisting of
joint venture and third-party mortgage loans and other real estate-related
investments, constituted 4.9 percent of cash and invested assets at December 31,
1997, compared with $267.7 million, or 5.9 percent, at December 31, 1996. The
decrease in real estate-related investments during 1997 was primarily due to
asset sales.
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 $75.3 million at December 31, 1997. This amount represented a net decrease
of $122.1 million since December 31, 1996, primarily due to sales in 1997. As of
December 31, 1997, KILICO expects to fund approximately $21.2 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.)
Excluding the $4.0 million of real estate owned and $19.2 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $196.8 million
at December 31, 1997, after reserves and write-downs. Of this amount, $155.0
million are on accrual status with a weighted average interest rate of
approximately 8.82 percent. Of these accrual loans, 9.7 percent have terms
requiring current periodic payments of their full contractual interest, 53.4
percent require only partial payments or payments to the extent of cash flow of
the borrowers, and 36.9 percent defer all interest to maturity.
58
<PAGE> 63
The equity investments in real estate at December 31, 1997 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>
MORTGAGE LOANS OTHER REAL ESTATE-RELATED INVESTMENTS
---------------- ---------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ --------- ------------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... $111.0 $106.6 $ 30.9 $ 7.5 $11.7 $267.7(1)
Additions (deductions):
Fundings............................. 11.8 -- -- -- -- 11.8
Interest added to principal.......... 5.6 .7 -- -- -- 6.3
Sales/paydowns/distributions......... (47.9) (13.8) (10.4) (4.1) (3.0) (79.2)
Operating gain....................... -- -- -- -- .8 .8
Transfers............................ (9.1) 9.1 -- -- -- --
Realized investments gains........... 7.6 .4 2.2 .7 8.8 19.7
Other transactions, net.............. (6.3) -- (1.6) (.1) .9 (7.1)
------ ------ ------ ----- ----- ------
Balance at December 31, 1997......... $ 72.7 $103.0 $ 21.1 $ 4.0 $19.2 $220.0(3)
====== ====== ====== ===== ===== ======
</TABLE>
- ---------------
(1) Net of $11.8 million reserve and write-downs. Excludes $9.7 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 $9.2 million reserve and write-downs. Excludes $9.5 million of real
estate-related accrued interest.
REAL ESTATE CONCENTRATIONS AND OUTLOOK
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 "Unconsolidated Investees" and "Concentration of Credit Risk" in the
notes to the consolidated financial statements.)
As a result of KILICO's ongoing strategy to reduce its exposure to real
estate-related investments, as of December 31, 1997, KILICO had three remaining
properties which account for approximately 83.2 percent of KILICO's $220.0
million real estate-related portfolio.
The largest of these investments at December 31, 1997 amounted to $88.2 million
and consisted of second mortgages on nine hotel properties and two office
buildings in which Patrick M. Nesbitt or his affiliates, a third-party real
estate developer, have ownership interests. These hotels and office buildings
are geographically dispersed and the current market values of the underlying
properties substantially exceed the balances due on KILICO's mortgages. These
loans are on accrual status.
KILICO's loans to a master limited partnership (the "MLP") between subsidiaries
of Kemper and subsidiaries of Lumbermens, amounted to $60.5 million at December
31, 1997. The MLP's underlying
59
<PAGE> 64
investment primarily consists of a water development project located in
California's Sacramento River Valley. This project is currently in the final
stages of a permit process with various Federal and California State agencies
which will determine the long-term economic viability of the project. KILICO
currently anticipates that the permit process will be successfully completed in
1998. Loans to the MLP are on accrual status.
The remaining significant real estate-related investment amounted to $34.4
million at December 31, 1997 and consisted of various zoned and unzoned
residential commercial lots located in Hawaii, as well as a sewer treatment
plant which is located in the same geographical area as the residential lots.
The sewer treatment plant is currently under a sales contract and is expected to
close in early 1998. Due to certain negative zoning restriction developments in
January 1997 and a continuing economic slump in Hawaii, KILICO has placed these
real estate-related investments on nonaccrual status as of December 31, 1996.
KILICO is currently pursuing the zoning of all remaining unzoned properties, as
well as pursuing steps to sell all remaining zoned properties. However, due to
the state of Hawaii's economy, which has lagged behind the economic expansion of
most of the rest of the United States, KILICO anticipates that it could be
several additional years until all of KILICO's investments in Hawaii are
completely disposed of.
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.) 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. 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, if Kemper's and
KILICO's plans with respect to certain projects change or if necessary
construction or zoning permits are not obtained.
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 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
Potential problem loans(1)................. $ -- $ 3.2
Past due loans(2).......................... -- --
Nonaccrual loans (primarily Hawaiian
properties)(3)........................... 47.4 43.5
Real estate owned.......................... 4.0 7.5
----- -----
Total............................ $51.4 $54.2
===== =====
</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 $41.8 million
and $38.2 million at December 31, 1997 and December 31, 1996, respectively.
60
<PAGE> 65
NET INVESTMENT INCOME
KILICO's pre-tax net investment income totaled $296.2 million in 1997, compared
with $299.7 million in 1996 and $348.4 million in 1995. 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 1997 and 1996, compared with 1995, 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
--------------
1997 1996 1995
---- ---- --------------
<S> <C> <C> <C>
Fixed maturities................... $ .5 $ .7 $ .4
Real estate-related investments.... 3.9 .5 20.5
---- ---- -----
Total....................... $4.4 $1.2 $20.9
==== ==== =====
Basis points....................... 10 3 43
==== ==== =====
</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, 1997, KILICO
estimates foregone investment income in 1998 will be similar to the 1997 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.
REALIZED INVESTMENT RESULTS
Reflected in net income (loss) are after-tax realized investment gains of $6.8
million and $8.8 million in 1997 and 1996, respectively, compared with after-tax
realized investment losses of $207.2 million in 1995. (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
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<PAGE> 66
management's judgment more likely than not to be realized. (See note captioned
"Income Taxes" in the notes to the consolidated financial statements.)
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,
before declining again in 1997.
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.
A rising interest rate environment can increase net investment income as well as
contribute to both realized and unrealized fixed maturity investment losses,
while a declining interest rate environment can decrease net investment income
as well as contribute to both realized and unrealized fixed maturity investment
gains. Also, lower renewal crediting rates on annuities, compared with
competitors' higher new money crediting rates, have 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 49 percent of
KILICO's fixed and variable annuity liabilities as of December 31, 1997,
however, were no longer subject to significant surrender fees.
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, premium income, investment income,
separate account fees, 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.
62
<PAGE> 67
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $865.6 million at December 31, 1997, compared with
$751.0 million at December 31, 1996, and $745.6 million at January 4, 1996. The
1997 increase in stockholder's equity was primarily due to net income of $38.7
million, a $45.0 million capital contribution and an increase in stockholder's
equity related to the change in unrealized appreciation of $60.1 million related
to KILICO's fixed maturity investment portfolio due to falling interest rates
during 1997, offset by a dividend of $29.2 million to Kemper. 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.
EMERGING ISSUES
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses).
This statement requires that all items required to be reported be displayed with
the same prominence as other financial statements. This statement is effective
for fiscal years beginning after December 31, 1997. The impact of implementation
is not expected to be material to KILICO's reported net income before reporting
comprehensive income. Comprehensive income, however, by design, could be
materially different from reported net income, as changes in unrealized
appreciation and depreciation of investments for example will now be included as
a component of reported comprehensive income. Full implementation of SFAS No.
130 is expected in the first quarter of 1998.
In June 1997, the FASB also issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
how to report information about operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement is effective for fiscal years beginning
after December 31, 1997. Full implementation of SFAS No. 131 is expected in
December 1998 and the impact of implementation is not expected to be material to
KILICO.
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS. SFAS No. 132 revises standards for
disclosures related to pension and other postretirement benefit plans. This
statement is effective for fiscal years beginning after December 31, 1997. Full
implementation of SFAS No. 132 is expected in December 1998 and the impact of
implementation is not expected to be material to KILICO.
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<PAGE> 68
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 (53) 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 President and Director of Zurich Life Insurance Company of
since 1992. 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 (50) 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 FLA since December 1997. 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 (46) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and since December 1995. Senior Vice President and Chief
Chief Financial Officer since Financial Officer of FLA since January 1996. Senior Vice
December 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 (39) 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 April 1993
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 (42) Senior Vice President and Chief Actuary of FKLA since
Senior Vice President and December 1995. Senior Vice President and Chief Actuary of
Chief Actuary since FLA since January 1996. Senior Vice President and Chief
December 1995. Actuary of ZLICA since March 1996. Senior Vice President and
Chief Actuary of ZD since March 1996. Director of FLA since
June 1997. 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.
</TABLE>
64
<PAGE> 69
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Edward K. Loughridge (43) 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. Senior Vice President of
Banker's Trust from April 1995 to April 1996. Senior Vice
President of Fidelity Investments Insurance Services from
February 1992 to March 1995.
Debra P. Rezabek (42) 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.
Kenneth M. Sapp (52) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Vice President--Aetna Life Brokerage of Aetna Life &
1998. Annuity Company from February 1992 to January 1998.
George Vlaisavljevich (55) 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 (59) Director of FKLA, FLA and Scudder Kemper Investments, Inc.
Director since January 1996. (SKI) 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
Kemper since January 1996.
</TABLE>
65
<PAGE> 70
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
William H. Bolinder (54) 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 and Director of Kemper
since January 1996. Vice Chairman and Director of SKI 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 and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich-American Insurance
Group since August 1985. Vice President, General Council and
Secretary of Kemper since January 1996.
Markus Rohrbasser (43) 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>
66
<PAGE> 71
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------------------------------
OTHER LONG TERM
ANNUAL INCENTIVE PLAN OPTIONS/ ALL OTHER
NAME AND BONUS COMPENSATION PAYOUTS SARS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) ($)(2) ($)(3) ($)(2) (#)(4) ($)(5)(6)(7)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John B. Scott......... 1997 $171,000 $ -- $-- $-- $ -- $ 63,362
Chief Executive
Officer(1) 1996 212,500 94,000 -- 212,500 -- 142,498
1995 172,800 129,600 20,035 -- 15,360 260,106
Eliane C. Frye........ 1997 98,040 47,515 -- 91,590 -- 29,909
Executive Vice 1996 105,000 41,750 -- 69,750 -- 58,520
President(1) 1995 91,200 67,200 9,261 -- 10,560 41,546
Frederick L.
Blackmon............ 1997 96,300 54,225 -- 112,500 -- 19,699
Senior Vice President 1996 100,583 47,000 27,924 71,250 -- 11,226
and Chief Financial
Officer(1)
George
Vlaisavljevich...... 1997 252,500 146,000 39,922 243,000 -- 9,491
Senior Vice
President(1)
Phillip D. Meserve.... 1997 231,818 150,500 172,526 280,500 -- --
Senior Vice
President(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) Annual bonuses are paid pursuant to annual incentive plans. The amounts of
the bonuses earned in 1997 for Mr. Scott were not available as of the date
of this filing.
(3) 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 $21,437 in 1996 for Mr. Blackmon
and $24,498 and $52,526, respectively, for Messrs. Vlaisavljevich and
Meserve in 1997.
(e) Sign-on payment of $120,000 for Mr. Meserve in 1997.
67
<PAGE> 72
(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 defined contribution plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.
(b) Distributions from the Kemper and FKLA supplemental plans.
(6) Pursuant to the Conseco Merger Agreement, which was an agreement that was
subsequently terminated as the result of a failed merger attempt by Conseco,
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 stock 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, and Ms. Frye 1,680 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. Mr. Scott and Ms. Frye received
allocated cash out payments of $430,272, 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.
68
<PAGE> 73
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; Appendix A Table of Historical Hypothetical
Accumulation Unit Values and Performance Information; and Appendix B State
Premium Tax Chart. 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 Certificates. The Certificates are not entitled to
participate in earnings, dividends or surplus of KILICO.
CHANGE OF ACCOUNTANTS
On September 12, 1997, Kemper Investors Life Insurance Company ("KILICO")
appointed the accounting firm of Coopers & Lybrand L.L.P. as independent
accountants for the year ended December 31, 1997 to replace KPMG Peat Marwick
LLP effective with such appointment. KILICO's Board of Directors approved the
selection of Coopers & Lybrand L.L.P. as the new independent accountants.
Management had not consulted with Coopers & Lybrand L.L.P. on any accounting,
auditing or reporting matter, prior to that time.
During the two most recent fiscal years ended December 31, 1996, there have been
no disagreements with KPMG Peat Marwick LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure or any reportable events. KPMG Peat Marwick LLP's report on the
financial statements for the past two years contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
There were no disagreements with Coopers & Lybrand L.L.P. on accounting or
financial disclosures for the year ended December 31, 1997.
69
<PAGE> 74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder's
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated balance sheet of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the year then ended. In connection with our audit 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 and financial statement schedules based on our audit. The
financial statements of Kemper Investors Life Insurance Company and subsidiaries
for the period from January 4, 1996 to December 31, 1996 (post-acquisition
basis) and for the year ended December 31, 1995 (pre-acquisition basis), were
audited by other auditors, whose unqualified report, dated March 21, 1997,
included an explanatory paragraph that described the acquisition of Kemper
Investors Life Insurance Company as discussed in Note 1 to the financial
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kemper
Investors Life Insurance Company and subsidiaries as of December 31, 1997, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Chicago, Illinois
March 18, 1998
70
<PAGE> 75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated balance sheet of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the period from January 4, 1996 to December 31, 1996 (post-acquisition), and for
the year 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 of December 31, 1996 and 1995 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 and schedules 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 present fairly, in all material respects, the financial position of
Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1996
and the results of their operations and their cash flows for the
post-acquisition period, in conformity with generally accepted accounting
principles. Also, in our opinion, the aforementioned pre-acquisition
consolidated financial statements present fairly, in all material respects, the
results of their operations and their cash flows for the pre-acquisition period,
in conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
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 Corporation, the parent 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
71
<PAGE> 76
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1997, $3,644,075; December
31, 1996, $3,929,650)..................................... $ 3,668,643 $3,866,431
Short-term investments...................................... 236,057 71,696
Joint venture mortgage loans................................ 72,663 110,971
Third-party mortgage loans.................................. 102,974 106,585
Other real estate-related investments....................... 44,409 50,157
Policy loans................................................ 282,439 288,302
Equity securities........................................... 24,839 9,910
Other invested assets....................................... 20,820 13,597
----------- ----------
Total investments................................. 4,452,844 4,517,649
Cash........................................................ 23,868 2,776
Accrued investment income................................... 117,789 115,199
Goodwill.................................................... 229,393 244,688
Value of business acquired.................................. 138,482 189,639
Deferred insurance acquisition costs........................ 59,459 26,811
Deferred income taxes....................................... 39,993 --
Reinsurance recoverable..................................... 382,609 427,165
Receivable on sales of securities........................... 20,076 32,569
Other assets and receivables................................ 3,187 34,117
Assets held in separate accounts............................ 5,121,950 2,127,247
----------- ----------
Total assets...................................... $10,589,650 $7,717,860
=========== ==========
LIABILITIES
Future policy benefits...................................... $ 3,856,871 $4,256,521
Ceded future policy benefits................................ 382,609 427,165
Benefits and funds payable.................................. 150,524 36,142
Other accounts payable and liabilities...................... 212,133 59,462
Deferred income taxes....................................... -- 60,362
Liabilities related to separate accounts.................... 5,121,950 2,127,247
----------- ----------
Total liabilities................................. 9,724,087 6,966,899
----------- ----------
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.................................. 806,538 761,538
Unrealized gain (loss) on investments....................... 12,637 (47,498)
Retained earnings........................................... 43,888 34,421
----------- ----------
Total stockholder's equity........................ 865,563 750,961
----------- ----------
Total liabilities and stockholder's equity........ $10,589,650 $7,717,860
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
72
<PAGE> 77
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
PREACQUISITION
--------------
1997 1996 1995
-------- -------- --------------
<S> <C> <C> <C>
REVENUE
Net investment income................................... $296,195 $299,688 $ 348,448
Realized investment gains (losses)...................... 10,546 13,602 (318,700)
Premium income.......................................... 22,239 7,822 236
Separate account fees and charges....................... 85,413 25,309 21,909
Other income............................................ 11,087 9,786 16,192
-------- -------- ---------
Total revenue................................. 425,480 356,207 68,085
-------- -------- ---------
BENEFITS AND EXPENSES
Interest credited to policyholders...................... 199,782 223,094 237,984
Claims incurred and other policyholder benefits......... 28,372 14,255 7,631
Taxes, licenses and fees................................ 52,608 2,173 6,912
Commissions............................................. 32,602 25,962 24,881
Operating expenses...................................... 36,837 24,678 20,837
Deferral of insurance acquisition costs................. (38,177) (27,820) (36,870)
Amortization of insurance acquisition costs............. 3,204 2,316 14,423
Amortization of value of business acquired.............. 24,948 21,530 --
Amortization of goodwill................................ 15,295 10,195 --
-------- -------- ---------
Total benefits and expenses................... 355,471 296,383 275,798
-------- -------- ---------
Income (loss) before income tax expense (benefit)....... 70,009 59,824 (207,713)
Income tax expense (benefit)............................ 31,292 25,403 (74,664)
-------- -------- ---------
Net income (loss)............................. $ 38,717 $ 34,421 $(133,049)
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
73
<PAGE> 78
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
----------- ----------- --------- -----------
<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........................................ 761,538 743,104 491,994 491,994
Capital contributions from parent............... 45,000 18,434 -- --
Adjustment to reflect purchase accounting
method........................................ -- -- 251,110 --
-------- -------- -------- ---------
End of period......................... 806,538 761,538 743,104 491,994
-------- -------- -------- ---------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning
of period..................................... (47,498) -- 68,502 (236,443)
Unrealized gain (loss) on revaluation of
investments, net.............................. 60,135 (47,498) -- 304,945
Adjustment to reflect purchase accounting
method........................................ -- -- (68,502) --
-------- -------- -------- ---------
End of period......................... 12,637 (47,498) -- 68,502
-------- -------- -------- ---------
RETAINED EARNINGS, beginning of period.......... 34,421 -- 42,880 175,929
Net income (loss)............................... 38,717 34,421 -- (133,049)
Dividends to parent............................. (29,250) -- -- --
Adjustment to reflect purchase accounting
method........................................ -- -- (42,880) --
-------- -------- -------- ---------
End of period......................... 43,888 34,421 -- 42,880
-------- -------- -------- ---------
Total stockholder's equity............ $865,563 $750,961 $745,604 $ 605,876
======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
74
<PAGE> 79
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
PREACQUISITION
--------------
1997 1996 1995
--------- ----------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................... $ 38,717 $ 34,421 $(133,049)
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses (gains)................ (10,546) (13,602) 318,700
Interest credited and other charges............... 198,206 230,298 237,984
Deferred insurance acquisition costs.............. (34,973) (25,504) (22,447)
Amortization of value of business acquired........ 24,948 21,530 --
Amortization of goodwill.......................... 15,295 10,195 --
Amortization of discount and premium on
investments.................................... 17,866 25,743 4,586
Deferred income taxes............................. (99,370) (897) 38,423
Net change in current Federal income taxes........ 97,386 108,806 (86,990)
Benefits and premium taxes due related to separate
account bank-owned life insurance.............. 180,546 -- --
Other, net........................................ 17,168 (22,283) (29,905)
--------- ----------- ---------
Net cash provided from operating
activities................................. 445,243 368,707 327,302
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity................. 229,208 264,383 320,143
Fixed maturities sold prior to maturity........... 633,872 891,995 297,637
Mortgage loans, policy loans and other invested
assets......................................... 131,866 168,727 450,573
Cost of investments purchased or loans originated:
Fixed maturities.................................. (606,028) (1,369,091) (549,867)
Mortgage loans, policy loans and other invested
assets......................................... (76,350) (119,044) (131,966)
Short-term investments, net......................... (164,361) 300,819 (168,351)
Net change in receivable and payable for securities
transactions...................................... 29,746 (31,667) (1,397)
Net reductions in other assets...................... 244 115 1,996
--------- ----------- ---------
Net cash provided by investing activities.... 178,197 106,237 218,768
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits.......................................... 145,687 141,159 247,778
Withdrawals....................................... (745,510) (700,084) (755,917)
Capital contributions from parent................... 45,000 18,434 --
Dividends to parent................................. (29,250) -- --
Other............................................... (18,275) 42,512 (35,309)
--------- ----------- ---------
Net cash used in financing activities........ (602,348) (497,979) (543,448)
--------- ----------- ---------
Net increase (decrease) in cash......... 21,092 (23,035) 2,622
CASH, beginning of period............................. 2,776 25,811 23,189
--------- ----------- ---------
CASH, end of period................................... $ 23,868 $ 2,776 $ 25,811
========= =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
75
<PAGE> 80
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 that change in control, Zurich and Insurance Partners owned 80
percent and 20 percent, respectively, of Kemper and therefore the Company. On
February 27, 1998, Zurich acquired Insurance Partner's remaining 20 percent
interest for cash. As a result of this transaction, Kemper and the Company
became wholly-owned subsidiaries of Zurich.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements in order for them to conform to the 1997
presentation.
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 years ended December 31, 1996 and 1997, 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 where appropriate 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 values as of the acquisition date. The difference between
the cost of acquiring the Company and the net fair values of the Company's
assets and liabilities as of the acquisition date has been recorded as goodwill.
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 began to amortize goodwill during 1996 on a straight-line basis over
twenty-five years. In December of 1997, the Company changed its amortization
period to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, the Company
recorded an increase in goodwill amortization expense of $5.1 million during
1997.
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, 1997, the Company
believes that no such adjustment is necessary.
76
<PAGE> 81
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, 2002 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 (actual).................................. $190,222 $(31,427) $ 9,897 $168,692
1997 (actual).................................. 168,692 (34,906) 9,958 143,744
1998........................................... 143,744 (25,633) 8,933 127,044
1999........................................... 127,044 (23,701) 7,873 111,216
2000........................................... 111,216 (21,668) 6,876 96,424
2001........................................... 96,424 (19,122) 5,973 83,275
2002........................................... 83,275 (17,835) 5,134 70,574
</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, 1997 and
1996, this adjustment increased (decreased) the value of business acquired by
$(5.3) million and $20.9 million, respectively, and stockholder's equity by
approximately $(3.4) million and $13.6 million, respectively.
77
<PAGE> 82
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. 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, 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
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 3.0 percent to 7.3 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 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.
78
<PAGE> 83
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and equity securities 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 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; 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.
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.
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.
79
<PAGE> 84
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 amounted to $108.8 million and $25.2 million, respectively. The Company
paid Federal income taxes of $29.0 million and $28.1 million directly to the
United States Treasury Department during 1997 and 1996, respectively.
80
<PAGE> 85
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, 1997
U.S. treasury securities and obligations of U.S.
government agencies and authorities............ $ 6,258 $ 6,298 $ 4 $ (44)
Obligations of states and political subdivisions,
special revenue and nonguaranteed.............. 29,330 29,308 160 (138)
Debt securities issued by foreign governments.... 92,563 92,722 188 (347)
Corporate securities............................. 1,861,655 1,846,588 24,733 (9,666)
Mortgage and asset-backed securities............. 1,678,837 1,669,159 10,035 (357)
---------- ---------- ------- --------
Total fixed maturities.................... $3,668,643 $3,644,075 $35,120 $(10,552)
========== ========== ======= ========
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)
========== ========== ======= ========
</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.
81
<PAGE> 86
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The Company's $220.0 million real estate portfolio at December 31, 1997 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1997 and 1996, total impaired real estate-related
loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross...................... $39.3 $39.8
Impaired loans with reserves--gross......................... 2.2 7.6
----- -----
Total gross impaired loans........................... 41.5 47.4
Reserves related to impaired loans.......................... (2.1) (4.4)
----- -----
Net impaired loans................................... $39.4 $43.0
===== =====
</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, 1997 and 1996, the Company's deficit
in equity investments considered in determining reserves and write-downs
amounted to $0 and $5.9 million, respectively. The Company had an average
balance of $45.2 million and $30.8 million in impaired loans for 1997 and 1996,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance.
At December 31, 1997 and December 31, 1996, loans on nonaccrual status, before
reserves and write-downs, amounted to $47.4 million and $43.5 million,
respectively. The Company's nonaccrual loans are generally included in impaired
loans.
At December 31, 1997, securities carried at approximately $6.3 million were on
deposit with governmental agencies as required by law.
Proceeds from sales of investments in fixed maturities prior to maturity were
$633.9 million, $892.0 million and $297.6 million during 1997, 1996 and 1995,
respectively. Gross gains of $3.1 million, $9.9 million and $21.2 million and
gross losses of $13.7 million, $16.2 million and $11.9 million were realized on
sales and write-downs of fixed maturities in 1997, 1996 and 1995, respectively.
82
<PAGE> 87
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1997, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST VALUE
(in thousands) -------- ----------
<S> <C> <C>
One year or less............................................ $ 47,724 $ 47,797
Over one year through five.................................. 649,279 648,291
Over five years through ten................................. 988,849 984,495
Over ten years.............................................. 303,954 294,333
Securities not due at a single maturity date, primarily
mortgage and asset-backed securities(1)................... 1,678,837 1,669,159
---------- ----------
Total fixed maturities............................... $3,668,643 $3,644,075
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 3.8 years.
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- -------- --------------
<S> <C> <C> <C>
Interest and dividends on fixed maturities............ $250,170 $250,683 $269,934
Dividends on equity securities........................ 2,123 646 681
Income from short-term investments.................... 4,128 9,130 13,159
Income from mortgage loans............................ 16,283 20,257 40,494
Income from policy loans.............................. 20,549 20,700 19,658
Income from other real estate-related investments..... 6,631 4,917 15,565
Income from other loans and investments............... 2,045 2,480 1,555
-------- -------- --------
Total investment income........................ 301,929 308,813 361,046
Investment expense.................................... (5,734) (9,125) (12,598)
-------- -------- --------
Net investment income.......................... $296,195 $299,688 $348,448
======== ======== ========
</TABLE>
83
<PAGE> 88
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Realized gains (losses) for the years ended December 31, 1997, 1996 and 1995,
were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-----------------------------------------------
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- ------- --------------
<S> <C> <C> <C>
Real estate-related................................... $ 19,758 $17,462 $(325,611)
Fixed maturities...................................... (10,656) (6,344) 9,336
Equity securities..................................... 914 -- (346)
Other................................................. 530 2,484 (2,079)
-------- ------- ---------
Realized investment gains (losses) before income tax
expense (benefit)................................ 10,546 13,602 (318,700)
Income tax expense (benefit) 3,691 4,761 (111,545)
-------- ------- ---------
Net realized investment gains (losses).............. $ 6,855 $ 8,841 $(207,155)
======== ======= =========
</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, 1997,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
---------------------------------------------------------
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
(in thousands) ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C>
Fixed maturities................................ $ 87,787 $(63,219) $ $351,964
Equity and other securities..................... (103) 1,256 -- 180
Adjustment to deferred insurance acquisition
costs......................................... (2,325) 1,307 -- (14,277)
Adjustment to value of business acquired........ (26,209) 20,947 -- --
-------- -------- -- --------
Unrealized gain (loss) before income tax
expense.................................... 59,150 (39,709) -- 337,867
Income tax expense (benefit).................... (985) 7,789 -- 32,922
-------- -------- -- --------
Net unrealized gain (loss) on
investments........................... $ 60,135 $(47,498) $-- $304,945
======== ======== == ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1997 and 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
84
<PAGE> 89
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) UNCONSOLIDATED INVESTEES (CONTINUED)
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, 1997 and December 31, 1996, the Company's net equity
investment in unconsolidated investees amounted to $19.3 million and $11.7
million, respectively. The Company's share of net income related to such
unconsolidated investees amounted to $835 thousand and $223 thousand in 1997 and
1996, respectively, and a net loss of $453 thousand in 1995.
(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 and
asset-backed securities and real estate.
Approximately 35.1 percent of the Company's investment-grade fixed maturities at
December 31, 1997 were mortgage-backed securities, down from 36.4 percent at
December 31, 1996, due to sales and paydowns during 1997. 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. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
Approximately 10.8 percent and 8.8 percent of the Company's investment-grade
fixed maturities at December 31, 1997 and 1996, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (27.7%), auto loans
(22.3%), manufactured housing loans (17.2%), equipment loans (13.7%), and
commercial mortgage backed securities (10.7%).
85
<PAGE> 90
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
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, 1997
<TABLE>
<S> <C>
California................... 38.2%
Hawaii....................... 14.2
Colorado..................... 9.8
Oregon....................... 9.2
Washington................... 9.1
Florida...................... 6.4
Texas........................ 5.1
Michigan..................... 3.7
Ohio......................... 3.3
Illinois..................... 1.0
-----
Total.............. 100.0%
=====
</TABLE>
DISTRIBUTION BY PROPERTY TYPE AS OF
DECEMBER 31, 1997
<TABLE>
<S> <C>
Hotel........................ 41.3%
Land......................... 28.2
Residential.................. 13.1
Retail....................... 3.3
Office....................... 3.1
Industrial................... .9
Other........................ 10.1
-----
Total.............. 100.0%
=====
</TABLE>
Undeveloped land represented approximately 28.2 percent of the Company's real
estate portfolio at December 31, 1997. 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 mortgage 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, 1997, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $88.2 million, or
40.1 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1997,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.
At December 31, 1997, loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company
("Lumbermens"), a former affiliate, constituted
86
<PAGE> 91
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
approximately $60.5 million, or 27.5 percent, of the Company's real estate
portfolio. Kemper's interest is 75 percent at December 31, 1997. At December 31,
1997, MLP-related commitments accounted for approximately $7.4 million of the
Company's off-balance-sheet legal commitments, which the Company expects to
fund.
At December 31, 1997, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold or written-down to zero. However, the Company
continues to have Prime Group-related commitments, which accounted for $25.7
million of the Company's off-balance-sheet legal commitments at December 31,
1997. The Company does not expect to fund any of these commitments.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- ------- --------------
<S> <C> <C> <C>
Current............................................. $130,662 $26,300 $(113,087)
Deferred............................................ (99,370) (897) 38,423
-------- ------- ---------
Total..................................... $ 31,292 $25,403 $ (74,664)
======== ======= =========
</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 each filed 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.
The actual income tax expense (benefit) for 1997, 1996 and 1995 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 1997, 1996, and 1995 to income (loss) before
income tax expense (benefit).
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ------- ------- --------------
<S> <C> <C> <C>
Computed expected tax expense (benefit).............. $24,503 $20,938 $(72,700)
Difference between "expected" and actual tax expense
(benefit):
State taxes........................................ 1,801 913 (1,370)
Amortization of goodwill........................... 5,353 3,568 --
Foreign tax credit................................. (278) -- (183)
Other, net......................................... (87) (16) (411)
------- ------- --------
Total actual tax expense (benefit)......... $31,292 $25,403 $(74,664)
======= ======= ========
</TABLE>
87
<PAGE> 92
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis 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 valuation allowance is subject to future adjustments based upon, among other
items, the Company's estimates of future operating earnings and capital gains.
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 asset or liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 JANUARY 4
1997 1996 1996
(in thousands) ----------- ------------ ---------
<S> <C> <C> <C>
Deferred Federal tax assets:
Deferred insurance acquisition costs.................. $ 75,522 $ 4,520 $ --
Unrealized losses on investments...................... -- 16,624 --
Life policy reserves.................................. 43,337 46,452 46,654
Unearned revenue...................................... 37,243 -- --
Real estate-related................................... 13,400 20,642 27,736
Other investment-related.............................. 3,298 5,409 1,773
Other................................................. 4,371 3,639 9,750
-------- -------- --------
Total deferred Federal tax assets.................. 177,171 97,286 85,913
Valuation allowance................................... (15,201) (31,825) (15,201)
-------- -------- --------
Total deferred Federal tax assets after valuation
allowance........................................ 161,970 65,461 70,712
-------- -------- --------
Deferred Federal tax liabilities:
Value of business acquired............................ 48,469 66,373 66,578
Deferred insurance acquisition costs.................. 20,811 9,384 --
Depreciation and amortization......................... 20,201 15,473 15,490
Other investment-related.............................. 18,774 28,855 37,919
Unrealized gains on investments....................... 9,002 -- --
Other................................................. 4,720 5,738 4,197
-------- -------- --------
Total deferred Federal tax liabilities............. 121,977 125,823 124,184
-------- -------- --------
Net deferred Federal tax assets (liabilities)........... $ 39,993 $(60,362) $(53,472)
======== ======== ========
</TABLE>
88
<PAGE> 93
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The net deferred tax assets relate primarily to unearned revenue and the tax on
deferred insurance acquisition costs ("DAC Tax") associated with $2.7 billion of
new 1997 sales from a non-registered individual and group variable bank-owned
life insurance contract ("BOLI"). As a result of proposed tax law changes, as
more fully discussed below, the level of DAC Tax experienced in 1997 is not
anticipated to occur in future periods and it is expected that the Company will
return to its normalized earnings patterns in 1998. Management believes that it
is more likely, than not, that the results of future operations will generate
sufficient taxable income over the ten year amortization period of the unearned
revenue and DAC Tax to realize such deferred tax assets.
In early 1998, the Clinton Administration's Fiscal Year 1998 Budget ("Budget")
was released and contained certain proposals to change the taxation of
non-qualified fixed and variable annuities and variable life insurance
contracts, including BOLI. It is currently unknown whether or not such proposals
will be accepted, amended or omitted in the final 1999 Budget approved by
Congress. If the current Budget proposals are accepted, certain of the Company's
non-qualified fixed and variable annuities and certain of its variable life
insurance products, including BOLI and the non-registered individual variable
universal life insurance contracts introduced during 1997, may no longer be tax
advantaged products and therefore no longer attractive to those customers who
purchase them because of their favorable tax attributes. Additionally, sales of
such products during 1998 may also be negatively impacted until the likelihood
of the current proposals being enacted into law has been determined.
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 $45.0 million and $18.4
million during 1997 and 1996, respectively. The Company paid cash dividends of
$29.3 million to Kemper during 1997.
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, 1997 and December 31, 1996, joint venture
mortgage loans totaled $72.7 million and $111.0 million, respectively, and
during 1997, 1996 and 1995, the Company earned interest income on these joint
venture loans of $7.5 million, $9.5 million and $19.6 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 Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper
Investments, Inc., an affiliated company, and the information systems of Kemper
Service Company ("KSvC"), an SKI subsidiary, based on the Company's share of
administrative, legal, marketing, investment management, information systems and
operation and support services. During 1997, 1996 and 1995, expenses allocated
to the Company from SKI and KSvC amounted to $114 thousand, $1.7 million and
$4.4 million, respectively. The Company also paid to SKI investment management
fees of $3.5 million, $3.6 million and $3.4 million during 1997, 1996 and 1995,
respectively. In addition, expenses allocated to
89
<PAGE> 94
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
the Company from FKLA during 1997, 1996 and 1995 amounted to $30.0 million,
$10.5 million and $14.3 million, respectively.
During 1995, the Company sold certain mortgages and real estate-related
investments, net of reserves, amounting to approximately $3.5 million 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 an affiliated non-life
realty subsidiary for cash. The Company also paid to Kemper real estate
subsidiaries $2.2 million, $1.8 million and $1.8 million in 1997, 1996 and 1995,
respectively, 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 Fidelity Life Association, a Mutual Legal
Reserve Company ("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, 1997 and 1996, the reinsurance recoverable related to the
fixed-rate annuity liabilities ceded to FLA amounted to $382.6 million and
$427.2 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 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. Premiums assumed during 1997 under the
terms of the treaty amounted to $21.1 million and the face amount which remained
outstanding at December 31, 1997 amounted to $12.6 billion.
The Company's retention limit on term life insurance prior to 1997 was $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. Effective January 1, 1997, the Company ceded 90 percent of all new
term life insurance premiums to outside reinsurers. Term life reserves ceded to
outside reinsurers on the Company's direct business amounted to approximately
$139 thousand and $102 thousand as of December 31, 1997 and 1996, respectively.
90
<PAGE> 95
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
During December 1997, the Company entered into a funds held reinsurance
agreement with a Zurich affiliated company, EPICENTRE Reinsurance (Bermuda)
Limited ("EPICENTRE"). Under the terms of this agreement, the Company ceded, on
a yearly renewable term basis, ninety percent of the net amount at risk (death
benefit payable to the insured less the insured's separate account cash
surrender value) related to a new product developed in 1997, a non-registered
variable bank-owned life insurance contract ("BOLI"), which is held in the
Company's separate accounts. During 1997, the Company issued $59.3 billion (face
amount) of new BOLI business and ceded $51.1 billion (face amount) to EPICENTRE
under the terms of the treaty. During 1997, the Company also ceded $24.3 million
of separate account fees (cost of insurance charges) to EPICENTRE. The Company
has also withheld approximately $23.4 million of such funds due to EPICENTRE
under the terms of the reinsurance agreement as a component of benefits and
funds payable in the accompanying consolidated balance sheet as of December 31,
1997.
(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 $1.9 million and $1.7 million at December 31, 1997 and 1996,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.25 percent and 7.75 percent for 1997 and 1996, respectively.
The assumed health care trend rate used was based on projected experience for
1997 and 1998, 8 percent in 1999, gradually declining to 5.0 percent by the year
2002 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, 1997 and 1996 by $242 thousand and $191 thousand, respectively.
The Company also provides certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement.
(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.
91
<PAGE> 96
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Although neither 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.
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
1997 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, 1997.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1997, the Company had future legal loan commitments and stand-by
financing agreements totaling $75.3 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 $21.2 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) 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
92
<PAGE> 97
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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 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, SKI.
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 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 1997 and 1996 to be 5.25 percent and 4.75 percent,
respectively, while the assumed average market crediting rate was 6.0 percent
and 5.8 percent in 1997 and 1996, respectively.
93
<PAGE> 98
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities......................... $3,668,643 $3,668,643 $3,866,431 $3,866,431
Cash and short-term investments.......... 259,925 259,925 74,472 74,472
Mortgage loans and other real
estate-related assets................. 220,046 220,046 267,713 267,713
Policy loans............................. 282,439 282,439 288,302 288,302
Equity securities........................ 24,839 24,839 9,910 9,910
Other invested assets.................... 20,820 24,404 13,597 13,597
Financial instruments recorded as
liabilities:
Life policy benefits, excluding term life
reserves.............................. 3,846,023 4,050,852 4,249,264 4,101,588
</TABLE>
(13) 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. The maximum amount of dividends which can
be paid by the Company without prior approval in 1998 is $58.4 million. The
Company paid cash dividends of $29.3 million to Kemper during 1997. The Company
paid no cash dividends in 1996 or 1995.
The Company's net income (loss) and capital and surplus as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income (loss).......................................... $ 58,372 $ 37,287 $(64,707)
======== ======== ========
Statutory capital and surplus.............................. $476,924 $411,837 $383,374
======== ======== ========
</TABLE>
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<PAGE> 99
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997 OPERATING SUMMARY
Net investment income......................... $74,249 $74,050 $72,950 $ 74,946
Realized investment gains (losses)............ 889 8,161 (3,032) 4,528
Premium income................................ 5,008 4,121 3,938 9,172
Separate account fees and other income........ 8,909 12,961 12,215 62,415(1)
------- ------- ------- --------
Total revenue......................... 89,055 99,293 86,071 151,061
------- ------- ------- --------
Interest credited and benefits to
policyholders.............................. 57,859 56,643 57,965 55,687
Commissions, taxes, licenses and fees......... 8,023 9,475 8,389 59,323(1)
Operating expenses............................ 7,175 8,780 10,014 10,868
Net deferral of insurance acquisition costs... (7,216) (6,877) (7,471) (13,409)
Amortization of value of business acquired.... 4,821 6,991 6,743 6,393
Amortization of goodwill...................... 2,547 2,552 2,549 7,647(2)
------- ------- ------- --------
Total benefits and expenses........... 73,209 77,564 78,189 126,509
------- ------- ------- --------
Income before income tax expense.............. 15,846 21,729 7,882 24,552
Income tax expense............................ 5,678 8,723 3,778 13,113
------- ------- ------- --------
Net income............................ $10,168 $13,006 $ 4,104 $ 11,439
======= ======= ======= ========
1996 OPERATING SUMMARY
Net investment income......................... $72,302 $74,647 $76,070 $ 76,669
Realized investment gains (losses)............ (1,248) (2,439) 13,518 3,771
Premium income................................ 130 109 150 7,433(3)
Separate account fees and other income........ 8,028 9,419 8,478 9,170
------- ------- ------- --------
Total revenue......................... 79,212 81,736 98,216 97,043
------- ------- ------- --------
Interest credited and benefits to
policyholders.............................. 58,296 57,335 57,512 64,206
Commissions, taxes, licenses and fees......... 6,868 6,486 6,819 7,962
Operating expenses............................ 5,440 4,920 6,974 7,344
Net deferral of insurance acquisition costs... (5,032) (7,302) (5,434) (7,736)
Amortization of value of business acquired.... 4,234 2,787 11,582 2,927
Amortization of goodwill...................... 2,547 2,552 2,549 2,547
------- ------- ------- --------
Total benefits and expenses........... 72,353 66,778 80,002 77,250
------- ------- ------- --------
Income before income tax expense.............. 6,859 14,958 18,214 19,793
Income tax expense............................ 3,513 6,402 7,391 8,097
------- ------- ------- --------
Net income............................ $ 3,346 $ 8,556 $10,823 $ 11,696
======= ======= ======= ========
</TABLE>
- ---------------
Notes:
(1) Reflects premium tax expense loads received and premium taxes incurred of
$49.1 million related to new BOLI sales of $2.6 billion in the fourth
quarter of 1997.
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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
years.
(3) Reflects the assumption of term life insurance business from FKLA.
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<PAGE> 101
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
</TABLE>
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:
(1 + .05) 4
-.0726961* = [ ----------------- ] - 1
(1 + .065 + .005)
The Market Value Adjustment is a reduction of $3,053.24 from the Guarantee
Period Value:
-3,053.24 = -.0726961 X 42,000.00
The Market Adjusted Value would be:
$38,946.76 = $42,000.00 - $3,053.24
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 15% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$1,986.29 = $38,946.76 X .85 X .06
Thus, the amount payable on a full withdrawal would be:
$36,960.48 = $38,946.76 - $1,986.29
- ---------------
* Actual calculation utilizes 10 decimal places.
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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:
-$1,526.62 = -.0726961 X $21,000.00
The Market Adjusted Value would be:
$19,473.38 = $21,000.00 - $1,526.62
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:
$819.68 = ($19,473.38 - .15 X $38,946.76) X .06
Thus, the amount payable on this partial withdrawal would be:
$18,653.70 = $19,473.38 - $819.68
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:
(1 + .05) 4
+.0192766 = [ ---------------- ] - 1
(1 + .04 + .005)
The Market Value Adjustment is an increase of $809.62 to the Guarantee Period
Value:
$809.62 = $42,000.00 X .0192766
The Market Adjusted Value would be:
$42,809.62 = $42,000.00 + $809.62
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,183.29 = $42,809.62 X .85 X .06
Thus, the amount payable on withdrawal would be:
$40,626.33 = $42,809.62 - $2,183.29
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$404.81 = $21,000.00 X .0192766
The Market Adjusted Value of $21,000.00 would be:
$21,404.81 = $21,000.00 + $404.81
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:
$899.00 = ($21,404.81 - .1 X $42,809.62) X .06
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Thus, the amount payable on this partial withdrawal would be:
$20,505.81 = $21,404.81 - $899.00
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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APPENDIX B
KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND
VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT
This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of Individual Retirement Annuities (IRAs), Roth
Individual Retirement Annuities (Roth IRAs) and Simple Individual Retirement
Annuities (SIMPLE IRAs). Internal Revenue Service regulations require that this
be given to each person desiring to establish an IRA, Roth 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 Certificate 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 Certificate is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), Section 408A of the Code for use as a Roth IRA, or
of Section 408(p) of the Code for use as a SIMPLE IRA, whichever is applicable.
The Certificate has not been approved as to form for use as an IRA, Roth 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 Certificate, and does
not represent a determination on the merits of the Certificate.
1. The amount in your IRA, Roth IRA, and SIMPLE IRA, whichever is applicable,
must be fully vested at all times and the entire interest of the owner must be
nonforfeitable.
2. The Certificate must be nontransferable by the owner.
3. The Certificate must have flexible premiums.
4. For IRAs and SIMPLE IRAs, 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"). However, section
401(a)(9)(A) of the Code (relating to minimum distributions required to commence
at age 70 1/2), and the incidental death benefit requirements of section 401(a)
of the Code, do not apply to Roth IRAs.
If you die before your entire interest in your Certificate is distributed,
unless otherwise permitted under applicable law, any remaining interest in the
Certificate must be distributed to your beneficiary by December 31 of the
calendar year containing the fifth anniversary of your death; except that: (1)
if the interest is payable to an individual who is your designated beneficiary
(within the meaning of section 401(a)(9) of the Code), the designated
beneficiary may elect to receive the entire interest over his or her life, or
over a period certain not extending beyond his or her life expectancy,
commencing on or before December 31 of the calendar year immediately following
the calendar year in which you die; and (2) if the designated beneficiary is
your spouse, the Certificate will be treated as his or her own IRA, or, where
applicable, Roth IRA.
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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,
including a Roth 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 FOR IRAS AND SIMPLE IRAS
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 Certificate 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 part
of the premium for this Certificate 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. CONTRIBUTION LIMITS AND ALLOWANCE OF DEDUCTION FOR IRAS
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.
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<PAGE> 106
2. Beginning in 1997, in the case of a married couple filing a joint return, up
to $2,000 can be contributed to each spouse's IRA, even if one spouse has little
or no compensation. This means that the total combined contributions that can be
made to both IRAs can be as much as $4,000 for the year. Previously, if one
spouse had no compensation or elected to be treated as having no compensation,
the total combined contributions to both IRAs could not be more than $2,250.
3. Also beginning in 1997, in the case of a married couple with unequal
compensation who file a joint return, the limit on the deductible contributions
to the IRA of the spouse with less compensation is the smaller of:
a. $2,000 or
b. The total compensation of both spouses, reduced by any deduction allowed
for contributions to IRAs of the spouse with more compensation.
The deduction for contributions to both spouses' IRAs may be further limited if
either spouse is covered by an employer retirement plan.
4. Beginning in 1998, even if your spouse is covered by an employer retirement
plan, you may be able to deduct your contributions to an IRA if you are not
covered by an employer plan. The deduction is limited to $2,000 and it must be
reduced if your adjusted gross income on a joint return is more than $150,000
but less than $160,000. Your deduction is eliminated if your income on a joint
return is $160,000 or more.
5. 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 a 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.
6. 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.
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.
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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 FOR IRAS AND SIMPLE IRAS
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 FOR IRAS AND SIMPLE IRAS
You must start receiving minimum distributions required under the Certificate
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 Certificate 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. ROTH IRAS
1. If your contract is a special type of individual retirement plan known as
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to an "IRA"
are to an "individual retirement plan," within the meaning of section
7701(a)(37) of the
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Code, other than a Roth IRA.) Roth IRAs are treated the same as other IRAs,
except as described here. However, the provisions of the Code governing Roth
IRAs may be modified by pending legislation. We will notify you of any such
changes.
2. The IRS is not presently accepting submissions for opinion letters approving
annuities as Roth IRAs, but will issue in the future procedures for requesting
such opinion letters. We will apply for approval as soon as possible after the
IRS issues its procedures on this matter. Such approval will be a determination
only as to the form of the annuity, and will not represent a determination of
the merits of the annuity.
3. If your Certificate is a Roth IRA, we will send you a Roth IRA endorsement to
be attached to, and to amend, your contract after we obtain approval of the
endorsement from the IRS and your state insurance department. We reserve the
right to amend the contract as necessary or advisable from time to time to
comply with future changes in the Internal Revenue Code, regulations or other
requirements imposed by the IRS to obtain or maintain its approval of the
annuity as a Roth IRA.
4. Earnings in your Roth IRA are not taxed until they are distributed to you,
and will not be taxed if they are paid as a "qualified distribution," as
described to you in section L, below.
J. ELIGIBILITY AND CONTRIBUTIONS FOR ROTH IRAS
1. Generally, you are eligible to establish or make a contribution to your Roth
IRA on or after January 1, 1998, only if you meet certain income limits. No
deduction is allowed for contributions to your Roth IRA. Contributions to your
Roth IRA may be made even after you attain age 70 1/2.
2. The aggregate amount of contributions for any taxable year to all IRAs,
including all Roth IRAs, maintained for your benefit (the "contribution limit")
generally is the lesser of $2,000 and 100% of your compensation for the taxable
year. However, if you file a joint return and receive less compensation for the
taxable year than your spouse, the contribution limit for the taxable year is
the lesser of $2,000 and the sum of (1) your compensation for the taxable year,
and (2) your spouse's compensation for the taxable year reduced by any
deductible contributions to an IRA of your spouse, and by any contributions to a
Roth IRA for your spouse, for the taxable year.
The contribution limit for any taxable year is reduced (but not below zero) by
the amount which bears the same ratio to such amount as:
(a) the excess of (i) your adjusted gross income for the taxable year, over
(ii) the "applicable dollar amount", bears to
(b) $15,000 (or $10,000 if you are married).
For this purpose, "adjusted gross income" is determined in accordance with
section 219(g)(3) of the Code and (1) excludes any amount included in gross
income as a result of any rollover from, transfer from, or conversion of an IRA
to a Roth IRA, and (2) is reduced by any deductible IRA contribution. In
addition, the "applicable dollar amount" is equal to $150,000 for a married
individual filing a joint return, $0 for a married individual filing a separate
return, and $95,000 for any other individual.
A "qualified rollover contribution" (discussed in section K, below), and a
non-taxable transfer from another Roth IRA, are not taken into account for
purposes of determining the contribution limit.
K. ROLLOVERS, TRANSFERS AND CONVERSIONS TO ROTH IRAS
1. Rollovers And Transfers -- A rollover may be made to a Roth IRA only if it is
a "qualified rollover contribution." A "qualified rollover contribution" is a
rollover to a Roth IRA from another Roth IRA or
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from an IRA, but only if such rollover contribution also meets the rollover
requirements for IRAs under section 408(d)(3). In addition, a transfer may be
made to a Roth IRA directly from another Roth IRA or from an IRA.
You may not make a qualified rollover contribution or transfer in a taxable year
from an IRA to a Roth IRA if (a) your adjusted gross income for the taxable year
exceeds $100,000 or (b) you are married and file a separate return.
The rollover requirements of section 408(d)(3) are complex and should be
carefully considered before you make a rollover. One of the requirements is that
the amount received be paid into another IRA (or Roth IRA) within 60 days after
receipt of the distribution. In addition, a rollover contribution from a Roth
IRA may be made by you only once a year. The one-year period begins on the date
you receive the Roth IRA distribution, not on the date you roll it over
(reinvest it) into another Roth IRA. If you withdraw assets from a Roth IRA, you
may roll over part of the withdrawal tax free into another Roth IRA and keep the
rest of it. A portion of the amount you keep may be included in your gross
income.
2. Taxation of Rollovers And Transfers to Roth IRAs -- A qualified rollover
contribution or transfer from a Roth IRA maintained for your benefit to another
Roth IRA maintained for your benefit which meets the rollover requirements for
IRAs under section 408(d)(3) is tax-free.
In the case of a qualified rollover contribution or a transfer from an IRA
maintained for your benefit to a Roth IRA maintained for your benefit, any
portion of the amount rolled over or transferred which would be includible in
your gross income were it not part of a qualified rollover contribution or a
nontaxable transfer will be includible in your gross income. However, section
72(t) of the Code (relating to the 10 percent penalty tax on premature
distributions) will not apply. If such a rollover or transfer occurs before
January 1, 1999, any portion of the amount rolled over or transferred which is
required to be included in gross income will be so included ratably over the
4-taxable year period beginning with the taxable year in which the rollover or
transfer is made.
Pending legislation may modify these rules retroactively to January 1, 1998.
3. Transfers of Excess IRA Contributions to Roth IRAs -- If, before the due date
of your federal income tax return for any taxable year (not including
extensions), you transfer, from an IRA, contributions for such taxable year (and
earnings thereon) to a Roth IRA, such amounts will not be includible in gross
income to the extent that no deduction was allowed with respect to such amount.
4. Taxation of Conversions of IRAs to Roth IRAs -- All or part of amounts in an
IRA maintained for your benefit may be converted into a Roth IRA maintained for
your benefit. The conversion of an IRA to a Roth IRA is treated as a special
type of qualified rollover contribution. Hence, you must be eligible to make a
qualified rollover contribution in order to convert an IRA to a Roth IRA. A
conversion typically will result in the inclusion of some or all of your IRA's
value in gross income, as described above.
A conversion of an IRA to a Roth IRA can be made without taking an actual
distribution from your IRA. For example, an individual may make a conversion by
notifying the IRA issuer or trustee, whichever is applicable.
UNDER SOME CIRCUMSTANCES, IT MIGHT NOT BE ADVISABLE TO ROLLOVER, TRANSFER, OR
CONVERT ALL OR PART OF AN IRA TO A ROTH IRA. WHETHER YOU SHOULD DO SO WILL
DEPEND ON YOUR PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING, BUT NOT LIMITED
TO, SUCH FACTORS AS WHETHER YOU QUALIFY TO MAKE SUCH A ROLLOVER, TRANSFER, OR
CONVERSION, YOUR FINANCIAL SITUATION, AGE, CURRENT AND FUTURE INCOME NEEDS,
YEARS TO RETIREMENT, CURRENT AND FUTURE TAX RATES, YOUR
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ABILITY AND DESIRE TO PAY CURRENT INCOME TAXES WITH RESPECT TO AMOUNTS ROLLED
OVER, TRANSFERRED, OR CONVERTED, AND WHETHER SUCH TAXES MIGHT NEED TO BE PAID
WITH WITHDRAWALS FROM YOUR ROTH IRA (SEE DISCUSSION BELOW OF "NONQUALIFIED
DISTRIBUTIONS"). YOU SHOULD CONSULT A QUALIFIED TAX ADVISOR BEFORE ROLLING OVER,
TRANSFERRING, OR CONVERTING ALL OR PART OF AN IRA TO A ROTH IRA.
5. Separate Roth IRAs -- Due to the complexity of, and proposed changes to, the
tax law, it may be advantageous to maintain amounts rolled over, transferred, or
converted from an IRA in separate Roth IRAs from those containing regular Roth
IRA contributions. For the same reason, you should consider maintaining a
separate Roth IRA for each amount rolled over, transferred, or converted from an
IRA. These considerations should be balanced against the additional costs you
may incur from maintaining multiple Roth IRAs. You should consult your tax
advisor if you intend to contribute rollover, transfer, or conversion amounts to
your Policy, or if you intend to roll over or transfer amounts from your Policy
to another Roth IRA maintained for your benefit.
L. INCOME TAX CONSEQUENCES OF ROTH IRAS
1. Qualified Distributions -- Any "qualified distribution" from a Roth IRA is
excludible from gross income. A "qualified distribution" is a payment or
distribution which satisfies two requirements. First, the payment or
distribution must be (a) made after you attain 59 1/2, (b) made after your
death, (c) attributable to your being disabled, or (d) a "qualified special
purpose distribution" (I.E., a qualified first-time homebuyer distribution under
section 72(t)(2)(F) of the Code). Second, the payment or distribution must be
made in a taxable year that is at least five years after (1) the first taxable
year for which a contribution was made to any Roth IRA established for you, or
(2) in the case of a rollover from, or a conversion of, an IRA to a Roth IRA,
the taxable year in which the rollover or conversion was made if the payment or
distribution is allocable (as determined in the manner set forth in guidance
issued by the IRS) to the rollover contribution or conversion (or to income
allocable thereto).
2. Nonqualified Distributions -- A distribution from a Roth IRA which is not a
qualified distribution is taxed under section 72 (relating to annuities), except
that such distribution is treated as made first from contributions to the Roth
IRA to the extent that such distribution, when added to all previous
distributions from the Roth IRA, does not exceed the aggregate amount of
contributions to the Roth IRA. For purposes of determining the amount taxed, (a)
all Roth IRAs established for you will be treated as one contract, (b) all
distributions during any taxable year from Roth IRAs established for you will be
treated as one distribution, and (c) the value of the contract, income on the
contract, and investment in the contract, if applicable, will be computed as of
the close of the calendar year in which the taxable year begins.
An additional tax of 10% is imposed on nonqualified distributions (including
amounts deemed distributed as the result of a prohibited loan or use of your
Roth IRA as security for a loan) made before the benefited individual has
attained age 59 1/2, unless one of the exceptions discussed in Section N
applies.
M. TAX ON EXCESS CONTRIBUTIONS
1. You must pay a 6% excise tax each year on excess contributions that remain in
your Certificate. Generally, an excess contribution is the amount contributed to
your Certificate 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.
106
<PAGE> 111
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 Certificate 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.
N. TAX ON PREMATURE DISTRIBUTIONS
There is an additional tax on premature distributions from your IRA, Roth IRA or
SIMPLE 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 distribution which is made on or after your death, or on account of you
being disabled within the meaning of section 72(m)(7) of the Code;
3. To a distribution which is part of a series of substantially equal periodic
payments (made at least annually) over your life or your life expectancy or the
joint life or joint life expectancy of you and your beneficiary; or
4. To a distribution which is used for qualified first-time homebuyer expenses,
qualified high education expenses, certain medical expenses, or by an unemployed
individual to pay health insurance premiums.
O. 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, Roth IRA or SIMPLE IRA excise taxes,
you do not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
P. BORROWING
If you borrow money against your Certificate or use it as security for a loan,
the Certificate will lose its classification as an IRA, Roth IRA or SIMPLE IRA ,
whichever is applicable, and you must include in gross income the fair market
value of the contract as of the first day of your tax year. In addition, you may
be subject to the tax on premature distributions described above. (Note: This
Certificate does not allow borrowings against it, nor may it be assigned or
pledged as collateral for a loan.)
Q. REPORTING
We will provide you with any reports required by the Internal Revenue Service.
R. ESTATE TAX
Generally, the value of your IRA, including your Roth IRA, is included in your
gross estate for federal estate tax purposes.
107
<PAGE> 112
S. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
AND MVA OPTION.
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Certificate will be assessed a daily charge of an amount which will equal
an aggregate of 1.25% per annum.
2. An annual records maintenance charge of $30.00 will be assessed against the
Separate Account Value each Certificate Year. If no values are in the
Subaccounts, the charge will be assessed against Guarantee Period Value.
3. Withdrawal and early annuitization charges will be assessed based on the
Certificate Years elapsed since the Certificate was issued as described in the
prospectus under the heading "Withdrawal Charge."
Withdrawals, transfers and early annuitizations of Guarantee Period Value may be
subject to a Market Value Adjustment as described in the prospectus under the
heading "Market Value Adjustment."
4. The method used to compute and allocate the annual earnings is contained in
the prospectus under the heading "Accumulation Unit Value" for Separate Account
Value and under the headings "Guarantee Periods of the MVA Option" and
"Establishment of Guaranteed Interest Rates" for Guarantee Period Value.
5. The growth in value of your Certificate is neither guaranteed nor projected
but is based on the investment experience of the Subaccounts or rates of
interest as declared by Kemper Investors Life Insurance Company.
108
<PAGE> 113
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED
DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
KEMPER PASSPORT
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
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 May 1, 1998. 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-4
Experts..................................................... B-4
Financial Statements........................................ B-4
Independent Auditors' Reports............................... B-5
Financial Statements of the Separate Account................ B-8
Appendix A Table of Historical Hypothetical Accumulation
Unit Values and Performance Information................... B-25
Appendix B State Premium Tax Chart.......................... B-38
</TABLE>
<PAGE> 114
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 Portfolio
of the Kemper Investors Fund (the "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 Coopers & Lybrand L.L.P.,
Chicago, Illinois, for the year ended December 31, 1997. The firm performed the
annual audit of the financial statements of the Separate Account and KILICO for
the year ended December 31, 1997.
The independent auditors for the Separate Account prior to 1997 were 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 Certificates are sold by licensed insurance agents, where the Certificates
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 Certificates are
distributed through the principal underwriter for the Separate Account,
Investors Brokerage Services, Inc., a subsidiary of KILICO, which enters into
selling group agreements with the 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. During 1997, 1996 and 1995, KILICO incurred gross commissions payable
of approximately $5.6, $8.1 and $2.8 million, respectively, to licensed
insurance agents.
PERFORMANCE INFORMATION OF SUBACCOUNTS
As described in the prospectus, a Subaccount's historical performance may be
shown in the form of standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, Kemper Investment Grade Bond Subaccount, Kemper Government
Securities Subaccount, and Kemper Global Income Subaccount; and "yield" and
"effective yield" information may be provided in the case of the Kemper Money
Market Subaccount #1 and Kemper Money Market Subaccount #2 (collectively, the
"Kemper Money Market Subaccounts"). These various measures of performance are
described below.
A Subaccount's standardized average annual total return quotation is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The standardized 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 Certificate to all Certificate Owner accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this
B-1
<PAGE> 115
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. Standardized average annual total return figures are annualized and,
therefore, represent the average annual percentage change in the value of a
Subaccount over the applicable period.
No standard formula has been prescribed for calculating total return
performance. Nonstandardized total return performance for a specific period is
calculated by first taking an investment (assumed to be $40,000 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. Premium taxes are not included in the
term charges. The nonstandardized 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 $40,000 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. Both
annualized and nonannualized (cumulative) nonstandardized total return figures
may be provided. Annualized nonstandardized total return figures represent the
average annual percentage change in the value of a Subaccount over the
applicable period while nonannualized (cumulative) figures represent the actual
percentage change over the applicable period.
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover periods of one, three, five and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in a
Subaccount (life of Subaccount). Nonstandardized total return will cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper Money Market Subaccount, Kemper Total Return Subaccount and
Kemper High Yield Subaccount, and for periods from December 9, 1983 (inception)
for the Kemper Growth Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount, the Kemper Investment Grade Bond
Subaccount, and the Kemper Government Securities Subaccount, and the Kemper
Global Income Subaccount is computed in accordance with a standard method
prescribed by rules of the Securities and Exchange Commission. The yields for
the Kemper High Yield Subaccount, the Kemper Government Securities Subaccount
and the Kemper Investment Grade Bond Subaccount, based upon the one month period
ended March 31, 1998 were 6.96%, 4.89% and 4.13%, respectively. 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 unit values
on
B-2
<PAGE> 116
the last day of the period, according to the following formula that assumes a
semi-annual reinvestment of income:
<TABLE>
<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 Subaccounts' yields are 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
yield for the seven-day period ended March 31, 1998 was 3.85% for the Kemper
Money Market Subaccount #1 and 5.10% for Kemper Money Market Subaccount #2. The
average portfolio maturity was 27 days.
The Kemper Money Market Subaccounts' effective yields are 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 effective yield for the seven-day period ended
March 31, 1998 was 3.92% for the Kemper Money Market Subaccount #1 and 5.23% for
Kemper Money Market Subaccount #2.
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 six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years.
Yield, effective yield and nonstandardized total return do not reflect the
effect of the Withdrawal Charge or premium taxes that may be imposed upon the
redemption of units. Standardized 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.
B-3
<PAGE> 117
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes, including the
Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, the
Consumer Price Index, the CDA Certificate of Deposit Index, the Salomon Brothers
High Grade Corporate Bond Index, the Lehman Brothers Government/Corporate Bond
Index, the Merrill Lynch Government/Corporate Master Index, the Lehman Brothers
Long Government/Corporate Bond Index, the Lehman Brothers Government/Corporate
1-3 Year Bond Index, the Standard & Poor's Midcap 400 Index, the NASDAQ
Composite Index, the Russell 2000 Index and the Morgan Stanley Capital
International Europe, Australia, Far East Index. In addition, the Subaccounts
may provide performance analysis rankings of Lipper Analytical Services, Inc.,
the VARDS Report, MORNINGSTAR, INC., Ibbotson Associates or Micropal. 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. 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, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE, BROKER
WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
The tables in Appendix A include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1997, and compares these quotations to various indexes.
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, 1997 and the related statements of
operations for the year then ended and the statements of changes in contract
owners' equity for the year then ended has been included herein in reliance upon
the report of Coopers & Lybrand L.L.P., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The statement of changes in contract owners' equity of the Separate Account for
the year ended December 31, 1996 has 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 the Certificates and also
reflect assets attributable to other variable annuity contracts offered by
KILICO through the Separate Account.
B-4
<PAGE> 118
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS OF
KEMPER INVESTORS LIFE INSURANCE COMPANY AND
CONTRACT OWNERS OF KILICO VARIABLE ANNUITY SEPARATE ACCOUNT:
We have audited the accompanying statements of assets and liabilities and
contract owners' equity of the Kemper Money Market Subaccount, Kemper Money
Market Subaccount #2, Kemper Total Return Subaccount, Kemper High Yield
Subaccount, Kemper Growth Subaccount, Kemper Government Securities Subaccount,
Kemper International Subaccount, Kemper Small Cap Growth Subaccount, Kemper
Investment Grade Bond Subaccount, Kemper Contrarian Value Subaccount, Kemper
Small Cap Value Subaccount, Kemper Value+Growth Subaccount, Kemper Horizon 20+
Subaccount, Kemper Horizon 10+ Subaccount, Kemper Horizon 5 Subaccount, Kemper
Global Income Subaccount and Kemper Blue Chip Subaccount of KILICO Variable
Annuity Separate Account as of December 31, 1997 and the related statements of
operations and the statements of changes in contract owners' equity for the year
then ended, except for Kemper Global Income Subaccount and Kemper Blue Chip
Subaccount as to which the period is May 1, 1997 (commencement of operations) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The statement of changes in contract
owners' equity for the year ended December 31, 1996 was audited by other
auditors, whose report, dated March 26, 1997, expressed an unqualified opinion
on that statement.
We conducted our audit 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, 1997 by correspondence with
the transfer agent. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the December 31, 1997 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, 1997 and
the results of their operations and changes in their contract owners' equity for
the year then ended, except for Kemper Global Income Subaccount and Kemper Blue
Chip Subaccount as to which the period is May 1, 1997 (commencement of
operations) to December 31, 1997, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 20, 1998
B-5
<PAGE> 119
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying statement of changes in contract owners' equity
of the Kemper Money Market Subaccount, Kemper Money Market Subaccount #2, Kemper
Total Return Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount,
Kemper Government Securities Subaccount, Kemper International Subaccount, Kemper
Small Cap Growth Subaccount, Kemper Investment Grade Bond Subaccount, Kemper
Contrarian Value Subaccount, Kemper Small Cap Value Subaccount, Kemper
Value+Growth Subaccount, Kemper Horizon 20+ Subaccount, Kemper Horizon 10+
Subaccount, and Kemper Horizon 5 Subaccount of KILICO Variable Annuity Separate
Account (the Account) for the year ended December 31, 1996. This financial
statement is the responsibility of the Account's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the changes in the contract owners' equity of the
subaccounts of KILICO Variable Annuity Separate Account for the year ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 26, 1997
B-6
<PAGE> 120
[INTENTIONALLY LEFT BLANK]
B-7
<PAGE> 121
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT KEMPER
MARKET MARKET RETURN YIELD GROWTH SECURITIES INTERNATIONAL
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... $73,754 6,379 743,633 306,171 527,701 72,906 160,865
Dividends and other
receivables................ 200 17 142 40 69 5 28
------- ----- ------- ------- ------- ------ -------
Total assets.......... 73,954 6,396 743,775 306,211 527,770 72,911 160,893
------- ----- ------- ------- ------- ------ -------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 82 -- 796 327 564 78 172
Other payables............. 118 2 195 63 106 12 125
------- ----- ------- ------- ------- ------ -------
Total liabilities..... 200 2 991 390 670 90 297
------- ----- ------- ------- ------- ------ -------
Contract owners' equity...... $73,754 6,394 742,784 305,821 527,100 72,821 160,596
======= ===== ======= ======= ======= ====== =======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. $ 3,881 5,218 203,480 96,788 187,968 39,559 107,157
Accumulated net investment
income (loss).............. 69,873 1,176 301,262 181,924 202,725 30,968 7,987
Accumulated net realized gain
on sales of investments.... -- -- 88,300 6,525 61,033 1,024 18,107
Unrealized appreciation of
investments................ -- -- 149,742 20,584 75,374 1,270 27,345
------- ----- ------- ------- ------- ------ -------
Contract owners' equity...... $73,754 6,394 742,784 305,821 527,100 72,821 160,596
======= ===== ======= ======= ======= ====== =======
<CAPTION>
KEMPER
SMALL CAP
GROWTH
SUBACCOUNT
----------
<S> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... 112,970
Dividends and other
receivables................ 25
-------
Total assets.......... 112,995
-------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 115
Other payables............. 17
-------
Total liabilities..... 132
-------
Contract owners' equity...... 112,863
=======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. 72,054
Accumulated net investment
income (loss).............. 7,311
Accumulated net realized gain
on sales of investments.... 11,120
Unrealized appreciation of
investments................ 22,378
-------
Contract owners' equity...... 112,863
=======
</TABLE>
See accompanying notes to financial statements.
B-8
<PAGE> 122
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 GLOBAL INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5,463 78,165 33,296 27,952 6,474 9,169 4,902 326 2,080
1 20 14 21 5 4 3 -- 3
----- ------ ------ ------ ----- ----- ----- --- -----
5,464 78,185 33,310 27,973 6,479 9,173 4,905 326 2,083
----- ------ ------ ------ ----- ----- ----- --- -----
5 68 35 29 7 10 5 -- 2
1 35 25 23 4 3 2 -- 3
----- ------ ------ ------ ----- ----- ----- --- -----
6 103 60 52 11 13 7 -- 5
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
5,144 64,882 28,513 23,759 5,342 7,793 4,402 307 2,017
(37) (395) (220) (224) (86) (83) (47) (7) (20)
73 2,762 1,143 618 177 138 98 21 27
278 10,833 3,814 3,768 1,035 1,312 445 5 54
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
</TABLE>
B-9
<PAGE> 123
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL KEMPER KEMPER GOVERNMENT KEMPER
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions.............. $3,938 374 107,616 23,900 112,090 6,229 9,141
Expenses:
Mortality and expense risk
and administrative
charges.................. 999 1 9,756 3,824 6,893 1,011 2,301
------ --- ------- ------ ------- ----- ------
Net investment income
(loss)..................... 2,939 373 97,860 20,076 105,197 5,218 6,840
------ --- ------- ------ ------- ----- ------
Net realized and unrealized
gain (loss) on investments:
Net realized gain (loss) on
sales of investments..... -- -- 21,466 5,634 13,791 (133) 9,738
Change in unrealized
appreciation
(depreciation) of
investments.............. -- -- 1,837 2,376 (29,191) 284 (2,788)
------ --- ------- ------ ------- ----- ------
Net realized and unrealized
gain (loss) on
investments................ -- -- 23,303 8,010 (15,400) 151 6,950
------ --- ------- ------ ------- ----- ------
Net increase in contract
owners' equity resulting
from operations............ $2,939 373 121,163 28,086 89,797 5,369 13,790
====== === ======= ====== ======= ===== ======
<CAPTION>
KEMPER
SMALL CAP
GROWTH
SUBACCOUNT
----------
<S> <C>
Dividends and capital gains
distributions.............. 8,510
Expenses:
Mortality and expense risk
and administrative
charges.................. 1,226
------
Net investment income
(loss)..................... 7,284
------
Net realized and unrealized
gain (loss) on investments:
Net realized gain (loss) on
sales of investments..... 8,226
Change in unrealized
appreciation
(depreciation) of
investments.............. 8,507
------
Net realized and unrealized
gain (loss) on
investments................ 16,733
------
Net increase in contract
owners' equity resulting
from operations............ 24,017
======
</TABLE>
- ---------------
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
1997.
See accompanying notes to financial statements.
B-10
<PAGE> 124
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP KEMPER KEMPER KEMPER KEMPER GLOBAL KEMPER
GRADE BOND VALUE VALUE VALUE+GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5 INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ---------- ------------ ----------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
303 181 121 40 60 29 -- --
28
621 357 282 98 113 62 7 20
54
--- ------ ----- ----- --- ----- --- -- ---
(26) (318) (176) (161) (58) (53) (33) (7) (20)
--- ------ ----- ----- --- ----- --- -- ---
2,750 1,194 619 161 129 97 21 27
71
9,122 3,077 3,038 777 945 320 5 54
248
--- ------ ----- ----- --- ----- --- -- ---
319 11,872 4,271 3,657 938 1,074 417 26 81
--- ------ ----- ----- --- ----- --- -- ---
293 11,554 4,095 3,496 880 1,021 384 19 61
=== ====== ===== ===== === ===== === == ===
</TABLE>
B-11
<PAGE> 125
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT KEMPER
MARKET MARKET RETURN YIELD GROWTH SECURITIES INTERNATIONAL
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income
(loss)................... $ 2,939 373 97,860 20,076 105,197 5,218 6,840
Net realized gain (loss) on
sales of investments..... -- -- 21,466 5,634 13,791 (133) 9,738
Change in unrealized
appreciation
(depreciation) of
investments.............. -- -- 1,837 2,376 (29,191) 284 (2,788)
-------- ------- ------- ------- ------- ------- -------
Net increase in contract
owners' equity
resulting from
operations............. 2,939 373 121,163 28,086 89,797 5,369 13,790
-------- ------- ------- ------- ------- ------- -------
Account unit transactions:
Proceeds from units sold... 21,938 7,884 36,774 26,456 32,804 6,125 14,396
Net transfers (to) from
affiliated divisions and
subaccounts.............. 7,054 (10,145) (30,823) (473) (35,916) (6,847) (14,865)
Payments for units
redeemed................. (17,525) (213) (75,741) (34,745) (43,779) (11,513) (15,633)
-------- ------- ------- ------- ------- ------- -------
Net increase (decrease)
in contract owners'
equity from account
unit transactions...... 11,467 (2,474) (69,790) (8,762) (46,891) (12,235) (16,102)
-------- ------- ------- ------- ------- ------- -------
Total increase (decrease) in
contract owners' equity.... 14,406 (2,101) 51,373 19,324 42,906 (6,866) (2,312)
Beginning of period.......... 59,348 8,495 691,411 286,497 484,194 79,687 162,908
-------- ------- ------- ------- ------- ------- -------
End of period................ $ 73,754 6,394 742,784 305,821 527,100 72,821 160,596
======== ======= ======= ======= ======= ======= =======
<CAPTION>
KEMPER
SMALL CAP
GROWTH
SUBACCOUNT
----------
<S> <C>
Operations:
Net investment income
(loss)................... 7,284
Net realized gain (loss) on
sales of investments..... 8,226
Change in unrealized
appreciation
(depreciation) of
investments.............. 8,507
-------
Net increase in contract
owners' equity
resulting from
operations............. 24,017
-------
Account unit transactions:
Proceeds from units sold... 14,943
Net transfers (to) from
affiliated divisions and
subaccounts.............. 11,461
Payments for units
redeemed................. (6,408)
-------
Net increase (decrease)
in contract owners'
equity from account
unit transactions...... 19,996
-------
Total increase (decrease) in
contract owners' equity.... 44,013
Beginning of period.......... 68,850
-------
End of period................ 112,863
=======
</TABLE>
- ---------------
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
1997.
See accompanying notes to financial statements.
B-12
<PAGE> 126
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 GLOBAL INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(26) (318) (176) (161) (58) (53) (33) (7) (20)
71 2,750 1,194 619 161 129 97 21 27
248 9,122 3,077 3,038 777 945 320 5 54
----- ------ ------ ------ ----- ----- ----- --- -----
293 11,554 4,095 3,496 880 1,021 384 19 61
----- ------ ------ ------ ----- ----- ----- --- -----
1,403 16,729 8,235 8,265 1,223 1,730 1,182 44 1,073
2,113 31,875 9,674 7,531 1,114 1,220 1,152 263 1,027
(224) (2,935) (1,625) (1,266) (179) (395) (200) -- (83)
----- ------ ------ ------ ----- ----- ----- --- -----
3,292 45,669 16,284 14,530 2,158 2,555 2,134 307 2,017
----- ------ ------ ------ ----- ----- ----- --- -----
3,585 57,223 20,379 18,026 3,038 3,576 2,518 326 2,078
1,873 20,859 12,871 9,895 3,430 5,584 2,380 -- --
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
</TABLE>
B-13
<PAGE> 127
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT
MARKET MARKET RETURN 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 affiliated
divisions 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
======== ====== ======= ======= ======= =======
<CAPTION>
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income (loss)....... 942 478
Net realized gain (loss) on sales
of investments................... 5,409 2,710
Change in unrealized appreciation
(depreciation) of investments.... 14,729 8,276
------- ------
Net increase in contract owners'
equity resulting from
operations..................... 21,080 11,464
------- ------
Account unit transactions:
Proceeds from units sold........... 20,272 13,879
Net transfers (to) from affiliated
divisions and subaccounts........ 819 11,423
Payments for units redeemed........ (13,606) (3,253)
------- ------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... 7,485 22,049
------- ------
Total increase (decrease) in contract
owners' equity..................... 28,565 33,513
Beginning of period.................. 134,343 35,337
------- ------
End of period........................ 162,908 68,850
======= ======
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-14
<PAGE> 128
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(11) (77) (44) (63) (28) (30) (14)
2 12 (51) (1) 16 9 1
30 1,711 737 730 258 367 125
----- ------ ------ ----- ----- ----- -----
21 1,646 642 666 246 346 112
----- ------ ------ ----- ----- ----- -----
1,262 9,908 6,111 6,223 2,580 4,108 1,453
632 9,522 6,244 3,214 620 1,206 887
(42) (217) (126) (208) (16) (76) (72)
----- ------ ------ ----- ----- ----- -----
1,852 19,213 12,229 9,229 3,184 5,238 2,268
----- ------ ------ ----- ----- ----- -----
1,873 20,859 12,871 9,895 3,430 5,584 2,380
-- -- -- -- -- -- --
----- ------ ------ ----- ----- ----- -----
1,873 20,859 12,871 9,895 3,430 5,584 2,380
===== ====== ====== ===== ===== ===== =====
</TABLE>
B-15
<PAGE> 129
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. Kemper Corporation
was acquired by an investor group led by Zurich Insurance Company ("Zurich") on
January 4, 1996. Effective February 27, 1998, KILICO and Kemper Corporation
became wholly-owned subsidiaries of Zurich.
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
a total of twenty-eight subaccounts with various subaccount options available to
Contract Owners depending upon their respective Contracts. A total of only
sixteen subaccount options are presented in the accompanying financial
statements, (the Kemper Money Market Subaccounts represent only one subaccount),
as available subaccount options to Contract Owners. Each subaccount invests
exclusively in the shares of a corresponding portfolio of the Investors Fund
Series (the "Fund"), an open-end diversified management investment company.
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 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, 1997.
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 a first in, first out ("FIFO") 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.
B-16
<PAGE> 130
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In early 1998, the Clinton Administration's Fiscal Year 1999 Budget was released
and contained certain proposals to change the taxation of non-qualified fixed
and variable annuities. It is currently unknown whether such proposals will be
adopted, amended or omitted in the final 1999 budget approved by Congress.
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
INVESTMENTS
INVESTORS FUND SERIES:
Kemper Money Market Subaccount (Money Market and Money
Market #2 Subaccounts).................................... 80,133 $ 80,133
Kemper Total Return Subaccount.............................. 263,494 593,891
Kemper High Yield Subaccount................................ 236,229 285,587
Kemper Growth Subaccount.................................... 175,849 452,327
Kemper Government Securities Subaccount..................... 60,389 71,636
Kemper International Subaccount............................. 99,620 133,520
Kemper Small Cap Growth Subaccount.......................... 57,375 90,592
Kemper Investment Grade Bond Subaccount..................... 4,886 5,185
Kemper Contrarian Value Subaccount.......................... 51,507 67,332
Kemper Small Cap Value Subaccount........................... 27,124 29,482
Kemper Value+Growth Subaccount.............................. 19,616 24,184
Kemper Horizon 20+ Subaccount............................... 4,700 5,439
Kemper Horizon 10+ Subaccount............................... 7,114 7,857
Kemper Horizon 5 Subaccount................................. 4,006 4,457
Kemper Global Income Subaccount............................. 316 321
Kemper Blue Chip Subaccount................................. 1,864 2,026
----------
TOTAL INVESTMENTS................................... $1,853,969
==========
</TABLE>
The underlying investments of the Fund's subaccounts are summarized below.
KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests primarily in short-term
obligations of major banks and corporations. The Kemper Money Market Subaccount
represents the ADVANTAGE III Kemper Money Market Subaccount and the PASSPORT
Kemper Money Market Subaccount #1. Kemper 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.
B-17
<PAGE> 131
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
KEMPER TOTAL RETURN SUBACCOUNT: This subaccount'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 subaccount may also make private
placement investments (which are normally restricted securities).
KEMPER HIGH YIELD SUBACCOUNT: This subaccount 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.
KEMPER GROWTH SUBACCOUNT: This subaccount'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).
KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests primarily in
U.S. Government securities. The subaccount will also invest in fixed-income
securities other than U.S. Government securities and will engage in options and
financial futures transactions.
KEMPER INTERNATIONAL SUBACCOUNT: This subaccount'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.
KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount'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 subaccount'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.
KEMPER INVESTMENT GRADE BOND SUBACCOUNT: This subaccount seeks high current
income by investing primarily in a diversified portfolio of investment grade
debt securities. At least 65% of the subaccount's total assets will be invested
in investment grade corporate debt securities, U.S. Government or Canadian
Government agencies and commercial paper. The subaccount may also invest in
preferred stocks. The subaccount may also invest up to 35% of its total assets
in below investment grade debt and will also engage in options and financial
futures transactions.
KEMPER CONTRARIAN VALUE (FORMERLY VALUE) SUBACCOUNT: This subaccount seeks to
achieve a high rate of total return. The subaccount invests primarily in a
diversified portfolio of the common stocks of larger listed companies, which are
believed to be undervalued.
KEMPER SMALL CAP VALUE SUBACCOUNT: This subaccount seeks long-term capital
appreciation. The subaccount invests primarily in a diversified portfolio of
small company equity securities with market capitalization of $100 million to
$1.0 billion, which are believed to be undervalued.
KEMPER VALUE+GROWTH SUBACCOUNT: This subaccount seeks growth of capital through
professional management of a portfolio of growth and value stocks. These stocks
include stocks of large established companies, as well as stocks of small
companies. The subaccount may also engage in options and financial futures
transactions.
B-18
<PAGE> 132
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
KEMPER HORIZON 20+ SUBACCOUNT: This subaccount is designed for investors with
approximately a 20+ year investment horizon, and seeks growth of capital, with
income as a secondary objective. The subaccount invests approximately 80% of its
total assets in a variety of equity securities and 20% in a variety of fixed
income securities.
KEMPER HORIZON 10+ SUBACCOUNT: This subaccount 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. The subaccount invests
approximately 60% of its total assets in a variety of equity securities and 40%
in a variety of fixed income securities.
KEMPER HORIZON 5 SUBACCOUNT: This subaccount 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. The
subaccount invests approximately 40% of its total assets in a variety of equity
securities and 60% in a variety of fixed income securities.
KEMPER GLOBAL INCOME SUBACCOUNT: This subaccount seeks to provide high current
income consistent with prudent total return asset management. The subaccount
will invest in common stocks of well capitalized, established companies that are
believed to have the potential for growth of capital, earnings and dividends. At
least 65% of the subaccounts total assets in common stocks will be in companies
with a market capitalization of at least $1.0 billion at the time of initial
investment. The subaccount will also engage in options and financial futures
transactions.
KEMPER BLUE CHIP SUBACCOUNT: This subaccount seeks growth of capital and of
income. The subaccount will invest in investment grade foreign and U.S. fixed
income securities, with at least 65% of the subaccounts total assets invested in
securities of issuers located in at least three countries. The subaccount will
also engage in options and financial futures transactions.
(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 Kemper 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
B-19
<PAGE> 133
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)
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. The records
maintenance charge for both ADVANTAGE III and PASSPORT contracts are waived for
all individual contracts whose investment value exceeds $50,000 on the date of
assessment.
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Kemper Money Market, Kemper Total Return, Kemper High
Yield, and Kemper Growth 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 administrative
expenses, and records maintenance charges are excluded and, for each subaccount,
charges for taxes, extraordinary expenses, and brokerage and transaction costs
are excluded. During the year December 31, 1997, 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.
Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper Investments,
Inc., an affiliated company, is the investment manager of the Fund.
Investors Brokerage Services, Inc. ("IBS"), a wholly-owned subsidiary of KILICO,
is the principal underwriter for the Separate Account.
(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, and
contract charges to, each subaccount. 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-20
<PAGE> 134
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Contract Owners' equity at December 31, 1997, 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 CONTRACTS
KEMPER MONEY MARKET SUBACCOUNT
Flexible Payment, Qualified............................... 633 $2.394 $ 1,514
Flexible Payment, Nonqualified............................ 4,338 2.394 10,385
Periodic Payment, Qualified............................... 11,579 2.285 26,456
Periodic Payment, Nonqualified............................ 4,637 2.285 10,595
----------
48,950
----------
KEMPER TOTAL RETURN SUBACCOUNT
Flexible Payment, Qualified............................... 864 6.501 5,617
Flexible Payment, Nonqualified............................ 4,277 6.019 25,743
Periodic Payment, Qualified............................... 82,149 6.205 509,698
Periodic Payment, Nonqualified............................ 13,699 5.781 79,191
----------
620,249
----------
KEMPER HIGH YIELD SUBACCOUNT
Flexible Payment, Qualified............................... 323 6.341 2,047
Flexible Payment, Nonqualified............................ 2,096 6.071 12,726
Periodic Payment, Qualified............................... 22,729 6.052 137,554
Periodic Payment, Nonqualified............................ 8,934 5.896 52,674
----------
205,001
----------
KEMPER GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 227 6.371 1,449
Flexible Payment, Nonqualified............................ 1,162 6.350 7,374
Periodic Payment, Qualified............................... 54,987 6.112 336,083
Periodic Payment, Nonqualified............................ 11,574 6.103 70,642
----------
415,548
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Flexible Payment, Qualified............................... 149 1.725 257
Flexible Payment, Nonqualified............................ 908 1.725 1,566
Periodic Payment, Qualified............................... 15,434 1.684 25,992
Periodic Payment, Nonqualified............................ 11,033 1.684 18,581
----------
46,396
----------
KEMPER INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified............................... 376 1.723 649
Flexible Payment, Nonqualified............................ 1,006 1.723 1,734
Periodic Payment, Qualified............................... 55,729 1.693 94,356
Periodic Payment, Nonqualified............................ 9,543 1.693 16,157
----------
112,896
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 195 2.240 436
Flexible Payment, Nonqualified............................ 657 2.240 1,471
Periodic Payment, Qualified............................... 33,789 2.216 74,872
Periodic Payment, Nonqualified............................ 4,509 2.216 9,992
----------
86,771
----------
</TABLE>
B-21
<PAGE> 135
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------ ----------
<S> <C> <C> <C>
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Flexible Payment, Qualified............................... 13 $1.111 $ 15
Flexible Payment, Nonqualified............................ 303 1.111 337
Periodic Payment, Qualified............................... 694 1.105 767
Periodic Payment, Nonqualified............................ 338 1.105 374
----------
1,493
----------
KEMPER CONTRARIAN VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 59 1.505 89
Flexible Payment, Nonqualified............................ 95 1.505 143
Periodic Payment, Qualified............................... 18,994 1.498 28,446
Periodic Payment, Nonqualified............................ 9,619 1.498 14,405
----------
43,083
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 3 1.220 4
Flexible Payment, Nonqualified............................ 58 1.220 71
Periodic Payment, Qualified............................... 10,592 1.214 12,855
Periodic Payment, Nonqualified............................ 1,519 1.214 1,843
----------
14,773
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 24 1.414 33
Flexible Payment, Nonqualified............................ 119 1.414 169
Periodic Payment, Qualified............................... 4,889 1.407 6,880
Periodic Payment, Nonqualified............................ 824 1.407 1,160
----------
8,242
----------
KEMPER HORIZON 20+ SUBACCOUNT
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 1,170 1.360 1,592
Periodic Payment, Nonqualified............................ 83 1.360 113
----------
1,705
----------
KEMPER HORIZON 10+ SUBACCOUNT
Flexible Payment, Qualified............................... 10 1.279 12
Flexible Payment, Nonqualified............................ 9 1.279 11
Periodic Payment, Qualified............................... 1,616 1.273 2,057
Periodic Payment, Nonqualified............................ 261 1.273 332
----------
2,412
----------
KEMPER HORIZON 5 SUBACCOUNT
Flexible Payment, Qualified............................... -- 1.215 --
Flexible Payment, Nonqualified............................ 42 1.215 50
Periodic Payment, Qualified............................... 917 1.209 1,108
Periodic Payment, Nonqualified............................ 192 1.209 232
----------
1,390
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY........................................ $1,608,909
==========
</TABLE>
B-22
<PAGE> 136
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
PASSPORT CONTRACTS
KEMPER MONEY MARKET #1 SUBACCOUNT
Qualified............................................. 4,222 $ 1.199 $ 5,062
Nonqualified.......................................... 16,465 1.199 19,742
----------
24,804
----------
KEMPER MONEY MARKET #2 SUBACCOUNT
Qualified............................................. 1,654 1.292 2,136
Nonqualified.......................................... 3,297 1.292 4,258
----------
6,394
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified............................................. 17,721 1.685 29,869
Nonqualified.......................................... 54,980 1.685 92,666
----------
122,535
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified............................................. 13,014 1.883 24,501
Nonqualified.......................................... 40,535 1.883 76,319
----------
100,820
----------
KEMPER GROWTH SUBACCOUNT
Qualified............................................. 15,200 2.066 31,410
Nonqualified.......................................... 38,784 2.066 80,142
----------
111,552
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified............................................. 4,153 1.359 5,644
Nonqualified.......................................... 15,292 1.359 20,781
----------
26,425
----------
KEMPER INTERNATIONAL SUBACCOUNT
Qualified............................................. 7,020 1.698 11,921
Nonqualified.......................................... 21,070 1.698 35,779
----------
47,700
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified............................................. 3,122 2.220 6,930
Nonqualified.......................................... 8,632 2.220 19,162
----------
26,092
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified............................................. 918 1.106 1,014
Nonqualified.......................................... 2,668 1.106 2,951
----------
3,965
----------
</TABLE>
B-23
<PAGE> 137
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT
Qualified............................................. 6,437 $ 1.499 $ 9,650
Nonqualified.......................................... 16,911 1.499 25,349
----------
34,999
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Qualified............................................. 3,943 1.215 4,789
Nonqualified.......................................... 11,269 1.215 13,688
----------
18,477
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Qualified............................................. 3,897 1.408 5,489
Nonqualified.......................................... 10,075 1.408 14,190
----------
19,679
----------
KEMPER HORIZON 20+ SUBACCOUNT
Qualified............................................. 1,058 1.361 1,440
Nonqualified.......................................... 2,441 1.361 3,323
----------
4,763
----------
KEMPER HORIZON 10+ SUBACCOUNT
Qualified............................................. 1,090 1.274 1,389
Nonqualified.......................................... 4,206 1.274 5,359
----------
6,748
----------
KEMPER HORIZON 5 SUBACCOUNT
Qualified............................................. 276 1.210 334
Nonqualified.......................................... 2,623 1.210 3,174
----------
3,508
----------
KEMPER GLOBAL INCOME SUBACCOUNT
Qualified............................................. 30 1.020 30
Nonqualified.......................................... 290 1.020 296
----------
326
----------
KEMPER BLUE CHIP SUBACCOUNT
Qualified............................................. 220 1.106 243
Nonqualified.......................................... 1,659 1.106 1,835
----------
2,078
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY......... $ 560,865
==========
</TABLE>
B-24
<PAGE> 138
APPENDIX A
TABLE OF HISTORICAL HYPOTHETICAL* ACCUMULATION UNIT VALUES
AND PERFORMANCE INFORMATION
The historical accumulation unit values are for the life of the Separate Account
in its present organization as a unit investment trust and in its prior
organization as several managed separate accounts based on current deductions
and charges applicable to the Certificates. The Certificates were first offered
January 6, 1992. Values may have varied had assets actually been allocated to
the Separate Account under the Certificates.
HISTORICAL HYPOTHETICAL ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
KEMPER MONEY MARKET
SUBACCOUNT #1
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/06/82 ................... .521904
12/31/82 ................... .561706
12/31/83 ................... .605415
12/31/84 ................... .661060
12/31/85 ................... .705934
12/31/86 ................... .743260
12/31/87 ................... .782353
12/31/88 ................... .830274
12/31/89 ................... .894703
12/31/90 ................... .955536
12/31/91 ................... .999459
12/31/92 ................... 1.021027
12/31/93 ................... 1.037409
12/31/94 ................... 1.065127
12/31/95 ................... 1.111573
12/31/96 ................... 1.153353
12/31/97 ................... 1.199008
</TABLE>
<TABLE>
<CAPTION>
KEMPER MONEY MARKET
SUBACCOUNT #2
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/06/82 ................... .488861
12/31/82 ................... .526477
12/31/83 ................... .569164
12/31/84 ................... .623384
12/31/85 ................... .669150
12/31/86 ................... .709261
12/31/87 ................... .752167
12/31/88 ................... .804725
12/31/89 ................... .874829
12/31/90 ................... .944037
12/31/91 ................... .999255
12/31/92 ................... 1.033619
12/31/93 ................... 1.063332
12/31/94 ................... 1.105349
12/31/95 ................... 1.167919
12/31/96 ................... 1.227089
12/31/97 ................... 1.291613
</TABLE>
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/14/82 ................... .271127
12/31/82 ................... .334579
12/31/83 ................... .388564
12/31/84 ................... .364932
12/31/85 ................... .462836
12/31/86 ................... .526008
12/31/87 ................... .522732
12/31/88 ................... .578123
12/31/89 ................... .707717
12/31/90 ................... .734077
12/31/91 ................... .997337
12/31/92 ................... 1.001657
12/31/93 ................... 1.109293
12/31/94 ................... .991561
12/31/95 ................... 1.233678
12/31/96 ................... 1.422563
12/31/97 ................... 1.685450
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/14/82 ................... .309713
12/31/82 ................... .382894
12/31/83 ................... .433711
12/31/84 ................... .482077
12/31/85 ................... .579127
12/31/86 ................... .673071
12/31/87 ................... .703823
12/31/88 ................... .805071
12/31/89 ................... .784945
12/31/90 ................... .655406
12/31/91 ................... .982658
12/31/92 ................... 1.142847
12/31/93 ................... 1.354484
12/31/94 ................... 1.307729
12/31/95 ................... 1.516342
12/31/96 ................... 1.707976
12/31/97 ................... 1.882768
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/13/83 ................... .336632
12/31/83 ................... .346384
12/31/84 ................... .378954
12/31/85 ................... .468051
12/31/86 ................... .504874
12/31/87 ................... .507011
12/31/88 ................... .502672
12/31/89 ................... .636443
12/31/90 ................... .632214
12/31/91 ................... .995577
12/31/92 ................... 1.018405
12/31/93 ................... 1.152836
12/31/94 ................... 1.092975
12/31/95 ................... 1.435510
12/31/96 ................... 1.724222
12/31/97 ................... 2.066379
</TABLE>
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
07/13/87 ................... .700085
12/31/87 ................... .710087
12/31/88 ................... .723278
12/31/89 ................... .811610
12/31/90 ................... .881949
12/31/91 ................... 1.004106
12/31/92 ................... 1.050227
12/31/93 ................... 1.104499
12/31/94 ................... 1.060977
12/31/95 ................... 1.246817
12/31/96 ................... 1.262885
12/31/97 ................... 1.358996
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/92 ................... .980721
12/31/93 ................... 1.286576
12/31/94 ................... 1.225134
12/31/95 ................... 1.365361
12/31/96 ................... 1.570689
12/31/97 ................... 1.698099
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/94 ................... 1.030937
12/31/95 ................... 1.324483
12/31/96 ................... 1.674797
12/31/97 ................... 2.219929
</TABLE>
B-25
<PAGE> 139
<TABLE>
<CAPTION>
KEMPER
INVESTMENT GRADE
BOND SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.027174
12/31/97 ................... 1.106151
</TABLE>
<TABLE>
<CAPTION>
KEMPER CONTRARIAN VALUE
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.163902
12/31/97 ................... 1.498831
</TABLE>
<TABLE>
<CAPTION>
KEMPER
SMALL CAP VALUE
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.010142
12/31/97 ................... 1.214542
</TABLE>
<TABLE>
<CAPTION>
KEMPER
VALUE+GROWTH
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.136559
12/31/97 ................... 1.408420
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 20+
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.144182
12/31/97 ................... 1.361426
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 10+
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.104505
12/31/97 ................... 1.273820
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 5 SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.086828
12/31/97 ................... 1.209733
</TABLE>
<TABLE>
<CAPTION>
KEMPER
BLUE CHIP SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/97 ................... 1.106221
</TABLE>
<TABLE>
<CAPTION>
KEMPER
GLOBAL INCOME SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/97 ................... 1.020218
</TABLE>
- ---------------
* As of January 6, 1992 the accumulation unit values are based on actual
performance.
B-26
<PAGE> 140
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT................... 28.78%
Life of Subaccount (from 05/01/96)................. 22.32
Life of Portfolio (from 05/01/96).................. 59,929 49.82 27.42 N/A
One Year........................................... 51,487 28.72 28.72 19.93
KEMPER VALUE+GROWTH SUBACCOUNT....................... 23.92%
Life of Subaccount (from 05/01/96)................. 17.90
Life of Portfolio (from 05/01/96).................. 56,315 40.79 22.76 N/A
One Year........................................... 49,546 23.87 23.87 15.56
KEMPER HORIZON 20+ SUBACCOUNT........................ 18.99%
Life of Subaccount (from 05/01/96)................. 14.96
Life of Portfolio (from 05/01/96).................. 54,425 36.06 20.27 N/A
One Year........................................... 47,563 18.91 18.91 9.90
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------------------------------------------------------------
DOW JONES DOW JONES STANDARD & STANDARD & CONSUMER CONSUMER
INDUSTRIAL(5) INDUSTRIAL(5) POOR'S 500(6) POOR'S 500(6) PRICE INDEX(7) PRICE INDEX(7)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
------------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE
SUBACCOUNT
Life of Portfolio (from
05/01/96)................... 41.85 23.31 48.25 26.62 3.72 2.21
One Year...................... 22.64 22.64 31.01 31.01 1.70 1.70
KEMPER VALUE+GROWTH SUBACCOUNT
Life of Portfolio (from
05/01/96)................... 41.85 23.31 48.25 26.62 3.72 2.21
One Year...................... 22.64 22.64 31.01 31.01 1.70 1.70
KEMPER HORIZON 20+ SUBACCOUNT
Life of Portfolio (from
05/01/96)................... 41.85 23.31 48.25 26.62 3.72 2.21
One Year...................... 22.64 22.64 31.01 31.01 1.70 1.70
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-36 for additional information.
B-27
<PAGE> 141
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
------------------------------- --------------
YEAR TO DATE (%) ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
RETURN(3) VALUE(4) RETURN RETURN RETURN
---------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET SUBACCOUNT(20)........ 3.96%
Life of Subaccount (from 04/06/82)...... 4.33
Life of Portfolio (from 04/06/82)....... 91,545 128.86 5.41 N/A
Ten Years............................... 61,044 52.61 4.32 2.45
Five Years.............................. 46,874 17.19 3.22 0.29
Three Years............................. 44,956 12.39 3.97 0.30
One Year................................ 41,553 3.88 3.88 (4.26)
KEMPER HIGH YIELD SUBACCOUNT(19).......... 10.23%
Life of Subaccount (from 04/06/82)...... 11.44
Life of Portfolio (from 04/06/82)....... 236,460 491.15 11.96 N/A
Ten Years............................... 106,659 166.65 10.30 8.84
Five Years.............................. 65,799 64.50 10.47 8.12
Three Years............................. 57,525 43.81 12.88 9.62
One Year................................ 44,065 10.16 10.16 1.95
KEMPER GOVERNMENT SECURITIES SUBACCOUNT... 7.61%
Life of Subaccount (from 11/03/89)...... 5.39
Life of Portfolio (from 09/03/87)....... 76,603 91.51 6.49 N/A
Ten Years............................... 76,354 90.89 6.67 N/A
Five Years.............................. 51,658 29.15 5.25 2.86
Three Years............................. 51,177 27.94 8.56 5.38
One Year................................ 43,018 7.54 7.54 (0.38)
KEMPER INVESTMENT GRADE BOND SUBACCOUNT... 7.69%
Life of Subaccount (from 05/01/96)...... 2.10
Life of Portfolio (from 05/01/96)....... 44,231 10.58 6.21 N/A
One Year................................ 43,060 7.65 7.65 0.76
KEMPER GLOBAL INCOME SUBACCOUNT(18)....... N/A
Life of Subaccount (from 05/01/97)...... N/A
Life of Portfolio (from 05/01/97)....... 40,806 2.01 N/A N/A
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-36 for additional information.
B-28
<PAGE> 142
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------------------------
SALOMON BROS SALOMON BROS
CDA CERT CDA CERT HIGH GRADE HIGH GRADE
CONSUMER CONSUMER OF DEPOSIT OF DEPOSIT CORP BOND CORP BOND
PRICE INDEX(7) PRICE INDEX(7) INDEX(8) INDEX(8) INDEX(9) INDEX(9)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
-------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET
SUBACCOUNT(20)
Life of Portfolio (from
04/06/82)............ N/A N/A N/A N/A N/A N/A
Ten Years.............. 39.93 3.42 80.38 6.08 180.09 10.85
Five Years............. 13.69 2.60 27.98 5.06 55.46 9.23
Three Years............ 7.72 2.51 18.39 5.79 45.69 13.36
One Year............... 1.70 1.70 5.77 5.77 12.96 12.96
KEMPER HIGH YIELD
SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)............ N/A N/A N/A N/A N/A N/A
Ten Years.............. 39.93 3.42 N/A N/A N/A N/A
Five Years............. 13.69 2.60 N/A N/A N/A N/A
Three Years............ 7.72 2.51 N/A N/A N/A N/A
One Year............... 1.70 1.70 N/A N/A N/A N/A
KEMPER GOVERNMENT
SECURITIES SUBACCOUNT
Life of Portfolio (from
09/03/87)............ N/A N/A N/A N/A 191.45 10.91
Ten Years.............. 39.93 3.42 N/A N/A 180.09 10.85
Five Years............. 13.69 2.60 N/A N/A 55.46 9.23
Three Years............ 7.72 2.51 N/A N/A 45.69 13.36
One Year............... 1.70 1.70 N/A N/A 12.96 12.96
KEMPER INVESTMENT GRADE
BOND SUBACCOUNT
Life of Portfolio (from
05/01/96)............ 3.72 2.21 N/A N/A 22.33 12.85
One Year............... 1.70 1.70 N/A N/A 12.96 12.96
KEMPER GLOBAL INCOME
SUBACCOUNT(18)
Life of Portfolio (from
05/01/97)............ 0.69 0.69 N/A N/A N/A N/A
<CAPTION>
COMPARED TO
---------------------------
LEHMAN BROS. LEHMAN BROS.
GOVT/CORP GOVT/CORP
BOND BOND
INDEX(10) INDEX(10)
CUMULATIVE % ANNUALIZED %
RETURN RETURN
------------ ------------
<S> <C> <C>
KEMPER MONEY MARKET
SUBACCOUNT(20)
Life of Portfolio (from
04/06/82)............ N/A N/A
Ten Years.............. N/A N/A
Five Years............. N/A N/A
Three Years............ N/A N/A
One Year............... N/A N/A
KEMPER HIGH YIELD
SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)............ N/A N/A
Ten Years.............. 139.88 9.14
Five Years............. 44.29 7.61
Three Years............ 34.68 10.43
One Year............... 9.76 9.76
KEMPER GOVERNMENT
SECURITIES SUBACCOUNT
Life of Portfolio (from
09/03/87)............ N/A N/A
Ten Years.............. 139.88 9.14
Five Years............. 44.29 7.61
Three Years............ 34.68 10.43
One Year............... 9.76 9.76
KEMPER INVESTMENT GRADE
BOND SUBACCOUNT
Life of Portfolio (from
05/01/96)............ 16.45 9.57
One Year............... 9.76 9.76
KEMPER GLOBAL INCOME
SUBACCOUNT(18)
Life of Portfolio (from
05/01/97)............ 9.12 9.12
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-36 for additional information.
B-29
<PAGE> 143
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
--------------------------------------------------------------------------------------
LEHMAN BROS LEHMAN BROS LEHMAN BROS
MERRILL LYNCH MERRILL LYNCH LONG LONG GOVT/CORP
GOVT/CORP GOVT/CORP GOVT/CORP GOVT/CORP 1-3 YEAR
MASTER INDEX(11) MASTER INDEX(11) BOND INDEX(12) BOND INDEX(12) BOND INDEX(13)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE %
RETURN RETURN RETURN RETURN RETURN
---------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET SUBACCOUNT(20)
Life of Portfolio (from
04/06/82)...................... N/A N/A N/A N/A N/A
Ten Years........................ N/A N/A N/A N/A N/A
Five Years....................... N/A N/A N/A N/A N/A
Three Years...................... N/A N/A N/A N/A N/A
One Year......................... N/A N/A N/A N/A N/A
KEMPER HIGH YIELD SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)...................... N/A N/A N/A N/A N/A
Ten Years........................ 140.51 9.17 N/A N/A N/A
Five Years....................... 44.49 7.64 N/A N/A N/A
Three Years...................... 36.50 10.39 N/A N/A N/A
One Year......................... 9.78 9.78 N/A N/A N/A
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
Life of Portfolio (from
09/03/87)...................... N/A N/A N/A N/A N/A
Ten Years........................ 140.51 9.17 139.88 9.14
Five Years....................... 44.49 7.64 44.29 7.61 N/A
Three Years...................... 36.50 10.39 34.68 10.43 N/A
One Year......................... 9.78 9.78 9.76 9.76 N/A
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
Life of Portfolio (from
05/01/96)...................... N/A N/A N/A N/A N/A
One Year......................... 9.78 9.78 N/A N/A N/A
KEMPER GLOBAL INCOME PORTFOLIO(18)
Life of Portfolio (from
05/01/97)...................... N/A N/A N/A N/A N/A
<CAPTION>
COMPARED TO
--------------
LEHMAN BROS
GOVT/CORP
1-3 YEAR
BOND INDEX(13)
ANNUALIZED %
RETURN
--------------
<S> <C>
KEMPER MONEY MARKET SUBACCOUNT(20)
Life of Portfolio (from
04/06/82)...................... N/A
Ten Years........................ N/A
Five Years....................... N/A
Three Years...................... N/A
One Year......................... N/A
KEMPER HIGH YIELD SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)...................... N/A
Ten Years........................ N/A
Five Years....................... N/A
Three Years...................... N/A
One Year......................... N/A
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
Life of Portfolio (from
09/03/87)...................... N/A
Ten Years........................
Five Years....................... N/A
Three Years...................... N/A
One Year......................... N/A
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
Life of Portfolio (from
05/01/96)...................... N/A
One Year......................... N/A
KEMPER GLOBAL INCOME PORTFOLIO(18)
Life of Portfolio (from
05/01/97)...................... N/A
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-36 for additional information.
B-30
<PAGE> 144
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
------------------------ RETURN(2)
CUMULATIVE ANNUALIZED ------------
YEAR TO DATE(%) (%) (%) ANNUALIZED
RETURN(3) ENDING VALUE(4) RETURN RETURN (%) RETURN
--------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER GROWTH SUBACCOUNT............... 19.84%
Life of Subaccount (from 12/09/83)... 13.12
Life of Portfolio (from 12/09/83).... 244,715 511.79 13.75 N/A
Ten Years............................ 162,599 306.50 15.06 13.83
Five Years........................... 81,021 102.55 15.16 12.77
Three Years.......................... 75,549 88.87 23.61 20.25
One Year............................. 47,909 19.77 19.77 11.06
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------------------------------
STANDARD & STANDARD &
POOR'S POOR'S
STANDARD & STANDARD & CONSUMER CONSUMER MIDCAP MIDCAP
POOR'S 500 (6) POOR'S 500 (6) PRICE INDEX (7) PRICE INDEX (7) INDEX (14) INDEX (14)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
-------------- -------------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER GROWTH
SUBACCOUNT
Life of Portfolio
(from 12/09/83).... 487.82 13.42 60.14 3.41 N/A N/A
Ten Years............ 292.76 14.66 39.93 3.42 492.25 19.47
Five Years........... 122.72 17.37 13.69 2.60 107.64 15.74
Three Years.......... 111.30 28.32 7.72 2.51 96.75 25.32
One Year............. 31.01 31.01 1.70 1.70 30.44 30.44
<CAPTION>
COMPARED TO
---------------------------
NASDAQ NASDAQ
COMPOS (15) COMPOS (15)
CUMULATIVE % ANNUALIZED %
RETURN RETURN
------------ ------------
<S> <C> <C>
KEMPER GROWTH
SUBACCOUNT
Life of Portfolio
(from 12/09/83).... 459.82 13.03
Ten Years............ 375.19 16.86
Five Years........... 131.97 18.33
Three Years.......... 108.83 27.83
One Year............. 21.64 21.64
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-36 for additional information.
B-31
<PAGE> 145
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER SMALL CAP GROWTH.............................. 32.55%
Life of Subaccount (from 05/02/94)................. 21.96
Life of Portfolio (from 05/02/94).................. 88,741 121.85 24.26 N/A
Three Years........................................ 86,076 115.19 29.07 26.13
One Year........................................... 52,999 32.50 32.50 23.82
KEMPER SMALL CAP VALUE SUBACCOUNT.................... 20.23%
Life of Subaccount (from 05/01/96)................. 7.85
Life of Portfolio (from 05/01/96).................. 48,562 21.41 12.33 N/A
One Year........................................... 48,075 20.19 20.19 12.27
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------------------------
CONSUMER PRICE CONSUMER PRICE RUSSELL 2000 RUSSELL 2000 NASDAQ NASDAQ
INDEX(7) INDEX(7) INDEX(16) INDEX(16) COMPOS(15) COMPOS(15)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
-------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER SMALL CAP GROWTH
Life of Portfolio (from
05/02/94)....................... 9.91 2.61 72.03 15.96 112.01 22.77
Three Years....................... 7.72 2.51 74.56 20.42 108.83 27.83
One Year.......................... 1.70 1.70 20.52 20.52 21.64 21.64
KEMPER SMALL CAP VALUE SUBACCOUNT
Life of Portfolio (from
05/01/96)....................... 3.72 2.21 24.76 14.18 30.90 17.51
One Year.......................... 1.70 1.70 20.52 20.52 21.64 21.64
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-36 for additional information.
B-32
<PAGE> 146
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
-------------------------------- ------------
YEAR TO DATE(%) CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED
RETURN(3) ENDING VALUE(4) RETURN RETURN (%) RETURN
--------------- --------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER INTERNATIONAL
SUBACCOUNT(18)............... 8.11%
Life of Subaccount (from
01/06/92).................. 7.42
Life of Portfolio (from
01/06/92).................. 67,815 69.54 9.21 N/A
Five Years................... 69,183 72.96 11.57 9.40
Three Years.................. 55,408 38.52 11.47 8.42
One Year..................... 43,225 8.06 8.06 0.71
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------------------------
STANDARD & STANDARD & CONSUMER PRICE CONSUMER PRICE
POOR'S 500(6) POOR'S 500(6) INDEX(7) INDEX(7)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
KEMPER INTERNATIONAL SUBACCOUNT(18)
Life of Portfolio (from 01/06/92)...................... 132.57 15.15 17.06 2.67
Five Years............................................. 122.72 17.37 13.69 2.60
Three Years............................................ 111.30 28.32 7.72 2.51
One Year............................................... 31.01 31.01 1.70 1.70
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------
MORGAN STANLEY MORGAN STANLEY
MORGAN STANLEY MORGAN STANLEY INTER'L WORLD INTER'L WORLD
EAFE INDEX (17) EAFE INDEX (17) INDEX (21) INDEX (21)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
KEMPER INTERNATIONAL SUBACCOUNT(18)
Life of Portfolio (from 01/06/92)......... 53.34 7.40 72.34 9.52
Five Years................................ 73.96 11.71 88.40 13.51
Three Years............................... 21.09 6.59 51.41 14.84
One Year.................................. 2.06 2.06 14.17 14.17
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-36 for additional information.
B-33
<PAGE> 147
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
---------------------------------- --------------
YEAR TO DATE ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
(%) RETURN(3) VALUE(4) RETURN RETURN RETURN
------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER TOTAL RETURN SUBACCOUNT(19)......... 18.48%
Life of Subaccount (from 04/06/82)....... 10.89
Life of Portfolio (from 04/06/82)........ 231,524 478.81 11.81 N/A
Ten Years................................ 128,832 222.08 12.41 10.80
Five Years............................... 67,486 67.96 10.93 8.22
Three Years.............................. 68,234 70.58 19.48 15.98
One Year................................. 47,361 18.40 18.40 9.46
KEMPER HORIZON 10+ SUBACCOUNT.............. 15.33%
Life of Subaccount (from 05/01/96)....... 10.41
Life of Portfolio (from 05/01/96)........ 50,922 27.31 15.57 N/A
One Year................................. 46,101 15.25 15.25 6.53
KEMPER HORIZON 5 SUBACCOUNT................ 11.31%
Life of Subaccount (from 05/01/96)....... 7.20
Life of Portfolio (from 05/01/96)........ 48,363 20.91 12.05 N/A
One Year................................. 44,497 11.24 11.24 3.12
KEMPER BLUE CHIP SUBACCOUNT................ N/A
Life of Subaccount (from 05/01/97)....... N/A
Life of Portfolio (from 05/01/97)........ 44,243 10.61 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------------------------------------------------------------
CONSUMER CONSUMER LEHMAN BROS LEHMAN BROS
STANDARD & STANDARD & PRICE PRICE GOVT/CORP 1-3 GOVT/CORP 1-3
POOR'S 500(6) POOR'S 500(6) INDEX(7) INDEX(7) YEAR BOND(13) YEAR BOND(13)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
------------- ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER TOTAL RETURN
SUBACCOUNT(19)
Life of Portfolio (from
04/06/82).................. N/A N/A N/A N/A N/A N/A
Ten Years.................... 292.76 14.66 39.93 3.42 103.34 7.35
Five Years................... 122.72 17.37 13.69 2.60 32.09 5.72
Three Years.................. 111.30 28.32 7.72 2.51 24.45 7.56
One Year..................... 31.01 31.01 1.70 1.70 6.66 6.66
KEMPER HORIZON 10+ SUBACCOUNT
Life of Portfolio (from
05/01/96).................. 48.25 26.62 3.72 2.21 11.59 6.80
One Year..................... 31.01 31.01 1.70 1.70 6.66 6.66
KEMPER HORIZON 5 SUBACCOUNT
Life of Portfolio (from
05/01/96).................. 48.25 26.62 3.72 2.21 11.59 6.80
One Year..................... 31.01 31.01 1.70 1.70 6.66 6.66
KEMPER BLUE CHIP SUBACCOUNT
Life of Portfolio (from
05/01/97).................. 22.55 22.55 0.69 0.69 5.11 5.11
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-36 for additional information.
B-34
<PAGE> 148
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------
MERRILL LYNCH MERRILL LYNCH LEHMAN BROS LEHMAN BROS
GOVT/CORP GOVT/CORP GOVT/CORP GOVT/CORP
MASTER INDEX (11) MASTER INDEX (11) BOND INDEX (10) BOND INDEX (10)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
KEMPER TOTAL RETURN SUBACCOUNT(19)
Life of Portfolio (from 04/06/82)...... N/A N/A N/A N/A
Ten Years.............................. 140.51 9.17 139.88 9.14
Five Years............................. 44.49 7.64 44.29 7.61
Three Years............................ 36.50 10.39 34.68 10.43
One Year............................... 9.78 9.78 9.76 9.76
KEMPER HORIZON 10+ SUBACCOUNT
Life of Portfolio (from 05/01/96)...... 18.07 10.48 16.45 9.57
One Year............................... 9.78 9.78 9.76 9.76
KEMPER HORIZON 5 SUBACCOUNT
Life of Portfolio (from 05/01/96)...... 18.07 10.48 16.45 9.57
One Year............................... 9.78 9.78 9.78 9.76
KEMPER BLUE CHIP SUBACCOUNT
Life of Portfolio (from 05/01/97)...... 9.57 9.75 9.12 9.12
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-36 for additional information.
B-35
<PAGE> 149
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Nonstandardized Total Return figures quoted are based on a hypothetical
$40,000 initial investment and assumes the deduction of all recurring
charges and fees applicable under the Contract except for the Withdrawal
Charge and any charge for applicable premium taxes which may be imposed in
certain states.
(2) The Standardized Average Annual Total Return figures quoted are based on a
hypothetical $1,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract including the
applicable Withdrawal Charge that may be imposed at the end of the quoted
period. Premium taxes are not reflected.
(3) The Year to Date percentage return figures quoted are based on the change
in unit values for the period January 1, 1997 through December 31, 1997.
(4) The Ending Values quoted are based on a $10,000 initial investment and
assumes the deduction of all recurring charges and fees applicable under
the Contract except for the Withdrawal Charge and any charge for applicable
premium taxes which may be imposed in certain states.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) The Merrill Lynch Government/Corporate Master Index is based upon the total
returns 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).
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) The Morgan Stanley 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.
(18) There are special risks associated with investing in non-U.S. companies,
including fluctuating foreign currency exchange rates, foreign governmental
regulations and differing degrees of liquidity that may adversely affect
portfolio securities.
(19) The high yield potential offered by these Subaccounts reflect the
substantial risks associated with investments in high-yield bonds.
B-36
<PAGE> 150
(20) An investment in the Kemper Money Market Subaccount is neither insured nor
guaranteed by the U.S. government. There can be no assurance that the
Kemper Money Market Portfolio will be able to maintain a stable net asset
value of $1.00 per share.
(21) 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.
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
--------------------------------
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE 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 Certificates. 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 charges and expenses under
Kemper Passport: 1.10% mortality and expense risk; .15% administration charges;
6% 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 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.
B-37
<PAGE> 151
APPENDIX B
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
-------------------------------
QUALIFIED NON-QUALIFIED
STATE PLANS PLANS
----- --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
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 Certificate Value.
B-38
<PAGE> 152
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of issuance and distribution of the Contracts and Certificates,
other than any underwriting discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Registration Fees........ $14,729.64**
Printing and Engraving...................................... $50,000
Accounting Fees and Expenses................................ $15,000
Legal Fees and Expenses..................................... $ 2,500
----------
Total Expenses.......................... $82,229.64
==========
</TABLE>
- ---------------
* Expenses are estimated and are for period from May 1, 1996 to May 1, 1997 for
continuous offering of interests pursuant to Rule 415 but are not deducted
from proceeds.
** $100 paid with initial registration on March 31, 1992. Registration fees of
$25,100 were previously paid under File No. 33-33547, No. 33-43462 and No.
33-46881, to which this Registration Statement relates pursuant to Rule 429
under the Securities Act of 1933.
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 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. Certain offerings were 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 principal 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> 153
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S> <C>
(1)1 (a) Distribution Agreement
(2)1 (b) Specimen Selling Group Agreement of Investors Brokerage
Services, Inc.
(2)1 (c) General Agent Agreement
(2)4 (a) Form of Group Variable and Market Value Adjusted Annuity
Contract
(2)4 (b) Form of Certificate to Variable and Market Value Adjusted
Annuity Contract and Enrollment Application
(2)4 (c) Form of Individual Variable and Market Value Adjusted
Annuity Contract and Enrollment Application
(2)4 (d) Form of Endorsement to Variable and Market Value Adjusted
Deferred Annuity Contract
(2)4 (e) Form of Endorsement to Certificate to Variable and Market
Value Adjusted Deferred Annuity Contract
(1)5 Opinion and Consent of Counsel regarding legality
23 (a) Consents of Coopers & Lybrand L.L.P., Independent
Accountants
23 (b) Consent of KPMG Peat Marwick LLP, Independent Auditors
(1)23 (c) Consent of Counsel (See Exhibit 5)
(2)24 Power of Attorney Forms
(4)99 (a) Schedule IV: Reinsurance (year ended December 31, 1997)
(4)99 (b) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1997)
(2)99 (c) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1996)
(3)99 (d) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1995)
(1)99 (e) Notice Concerning Regulatory Relief
</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 Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-02491) filed on or about April 23, 1997.
(3) Incorporated herein by reference to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-02491) filed on or about April 25, 1996.
(4) Incorporated herein by reference to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-4 for KILICO Variable Annuity Separate
Account (File No. 33-43501) filed on or about April 16, 1998.
(B) FINANCIAL STATEMENTS
Reports of Independent Auditors
KILICO and Subsidiaries Consolidated Balance Sheets, as of December 31,
1997 and 1996
KILICO and Subsidiaries Consolidated Statements of Operations, years ended
December 31, 1997, 1996 and 1995
KILICO and Subsidiaries Consolidated Statements of Stockholder's Equity,
years ended December 31, 1997, 1996 and January 4, 1996, and 1995
KILICO and Subsidiaries Consolidated Statements of Cash Flows, years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Schedule V: Valuation and qualifying accounts
II-2
<PAGE> 154
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;
(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, officer 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> 155
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 21st day of April, 1998.
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 21st day of April, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/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
Frederick L. Blackmon Principal Accounting Officer)
/s/ LOREN J. ALTER Director
- -----------------------------------------------
Loren J. Alter
/s/ DAVID A. BOWERS Director
- -----------------------------------------------
David A. Bowers
Director
- -----------------------------------------------
Markus Rohrbasser
</TABLE>
II-4
<PAGE> 156
EXHIBIT LIST
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
23(a) Consents of Coopers & Lybrand L.L.P., Independent
Accountants
23(b) Consent of KPMG Peat Marwick LLP, Independent Auditors
</TABLE>
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Individual and Group Variable and Market Value
Adjusted Deferred Annuity Contracts
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-02491) of our report dated February 20, 1998, on our audit
of the financial statements of KILICO Variable Annuity Separate Account
and to the reference to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Chicago, Illinois
April 23, 1998
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Individual and Group Variable and Market Value
Adjusted Deferred Annuity Contracts
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-02491) of our report dated March 18, 1998, on our audit of
the consolidated financial statements of Kemper Investors Life
Insurance Company and to the reference to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Chicago, Illinois
April 23, 1998
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Kemper Investors Life Insurance Company
We consent to the use of our reports included herein on the consolidated
financial statements of Kemper Investors Life Insurance Company (KILICO) and on
the financial statement 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.
KPMG PEAT MARWICK LLP
Chicago, Illinois
April 23, 1998
