<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 1999
REGISTRATION NO. 333-22389
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
AMENDMENT NO. 5 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Illinois 36-3050975
-------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Kemper Drive
Long Grove, Illinois 60049
(847) 550-5500
----------------------------------------------------- 6312
(Address, including zip code, and telephone number, -------------------------
including area code, of registrant's principal executive (Primary Standard Industrial
offices) Classification Code Number)
</TABLE>
Debra P. Rezabek, Esq.
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
(847) 550-7390
---------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
Frank Julian, 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 Registration Statement becomes effective.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
------------------
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<PAGE> 2
This amendment to the registration statement on Form S-1 includes two
prospectuses describing Individual and Group Variable, Fixed and Market Value
Adjusted Deferred Annuity Contracts which are substantially identical, except
that the Contract described in the second prospectus makes available to Contract
owners different investment subaccounts of Registrant than does the Contract
described in the original prospectus.
<PAGE> 3
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
-------- ---------------- ---------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus.................... Facing Page and Outside Front Cover Page of
Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Table of Contents.
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Summary; Not Applicable as to Ratio of
Earnings to Fixed Charges.
4. Use of Proceeds................................... KILICO, The MVA Option, The Separate Account
and The Funds--The MVA Option; Business--
Investments.
5. Determination of Offering Price................... Not Applicable.
6. Dilution.......................................... Not Applicable.
7. Selling of Security Holders....................... Not Applicable.
8. Plan of Distribution.............................. Distribution of Contracts.
9. Description of Securities to be Registered........ Summary; The Contracts; The Accumulation
Period; Contract Charges and Expenses.
10. Interests of Named Experts and Counsel............ Experts; Legal Matters.
11. Information with Respect to the Registrant........ Federal Income Taxes; Business; Management's
Discussion and Analysis of Financial
Condition and Results of Operations; Legal
Proceedings; Financial Statements.
12. Disclosure of Commission Position on
Indemnification For Securities Act Liabilities.... Part II, Item 17.
</TABLE>
<PAGE> 4
PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
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INDIVIDUAL AND GROUP VARIABLE,
FIXED AND MARKET
VALUE ADJUSTED DEFERRED ANNUITY
CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
This prospectus describes Variable, Fixed and Market Value Adjusted Deferred
Annuity Contracts of Kemper Investors Life Insurance Company that are designed
to provide benefits under retirement plans which may qualify for certain federal
tax advantages. Depending on particular state requirements, the Contracts may be
issued on a group or individual basis. Contracts issued on an individual basis
are represented by a Certificate. All discussion of "Contracts" includes issued
on an individual or group basis.
You may allocate purchase payments to one or more of the variable options, the
fixed option or the fixed option subject to a market value adjustment. The
(CONTINUED)
THE CONTRACTS ARE NOT ISSUED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR SAVINGS
INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE CONTRACTS THAT YOU
SHOULD KNOW BEFORE INVESTING. YOU SHOULD READ IT BEFORE INVESTING AND KEEP IT
FOR FUTURE REFERENCE. WE HAVE FILED A STATEMENT OF ADDITIONAL INFORMATION
("SAI") WITH THE SECURITIES AND EXCHANGE COMMISSION. THE CURRENT SAI HAS THE
SAME DATE AS THIS PROSPECTUS AND IS INCORPORATED BY REFERENCE IN THIS
PROSPECTUS. YOU MAY OBTAIN A FREE COPY BY WRITING US OR CALLING (847) 550-5500.
A TABLE OF CONTENTS FOR THE SAI APPEARS ON PAGE 90. YOU MAY ALSO FIND THIS
PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC") AT THE SEC'S WEB SITE AT
HTTP://WWW.SEC.GOV.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1999.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
Contract currently offers thirty-one investment options, each of which is a
Subaccount of KILICO Variable Annuity Separate Account. Currently, you may
choose among the following Portfolios:
KEMPER VARIABLE SERIES (formerly Investors Fund Series): Kemper Money Market;
Kemper Government Securities; Kemper Investment Grade Bond; Kemper Global
Income; Kemper Horizon 5; Kemper High Yield; Kemper Horizon 10+; Kemper Total
Return; Kemper Horizon 20+; Kemper Value + Growth; Kemper Blue Chip; Kemper
International; Kemper Contrarian Value (formerly Kemper Value); Kemper Small Cap
Value; Kemper Small Cap Growth; Kemper Growth; Kemper Aggressive Growth; Kemper
Technology Growth; Kemper Global Blue Chip; Kemper International Growth and
Income; Kemper-Dreman High Return Equity; Kemper-Dreman Financial Services.
SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A SHARES): Scudder VLIF Global
Discovery; Scudder VLIF Growth and Income; Scudder VLIF International; Scudder
VLIF Capital Growth.
JANUS ASPEN SERIES: Janus Aspen Growth; Janus Aspen Growth and Income.
WARBURG PINCUS TRUST: Warburg Emerging Markets; Warburg Post-Venture Capital.
Subaccounts and Portfolios may be added or deleted in the future. Contract
values allocated to any of the Subaccounts vary, reflecting the investment
experience of the selected Subaccounts. Contract values allocated to the Fixed
account or one or more Guarantee Periods of the Market Value Adjustment Option
accumulate on a fixed basis.
<PAGE> 6
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 4
SUMMARY OF EXPENSES......................................... 7
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 15
FIXED ACCOUNT OPTION........................................ 24
THE CONTRACTS............................................... 24
CONTRACT CHARGES AND EXPENSES............................... 34
THE ANNUITY PERIOD.......................................... 37
FEDERAL INCOME TAXES........................................ 42
DISTRIBUTION OF CONTRACTS................................... 51
VOTING RIGHTS............................................... 51
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 51
DOLLAR COST AVERAGING....................................... 52
SYSTEMATIC WITHDRAWAL PLAN.................................. 53
EXPERTS..................................................... 53
LEGAL MATTERS............................................... 54
SPECIAL CONSIDERATIONS...................................... 54
AVAILABLE INFORMATION....................................... 54
BUSINESS.................................................... 54
PROPERTIES.................................................. 64
LEGAL PROCEEDINGS........................................... 64
SELECTED FINANCIAL DATA..................................... 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 66
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS................... 84
EXECUTIVE COMPENSATION...................................... 89
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 92
FINANCIAL STATEMENTS........................................ 92
CHANGE OF ACCOUNTANTS....................................... 92
</TABLE>
<PAGE> 7
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATED GUARANTEE PERIOD VALUE--The sum of an Owner's Guarantee Period
Values.
ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments and upon the continuation of whose life annuity payments
involving life contingencies depend.
ANNUITY DATE--The date on which annuity payments are to commence.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person designated to receive any benefits under a
Contract upon the death of the Annuitant or the Owner prior to the Annuity
Period.
COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.
CONTRACT--A Variable, Fixed and Market Value Adjusted Annuity Contract
offered by this Prospectus.
CONTRACT VALUE--The sum of the values of the Owner's Separate Account
Contract Value, Accumulated Guarantee Period Value and Fixed Account
Contract Value.
CONTRACT YEAR--Period between anniversaries of the Contract's Date of
Issue.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Contract's
Date of Issue.
CONTRIBUTION YEAR--Each one year period following the date a Purchase
Payment is made.
DATE OF ISSUE--The date on which the first Contract Year commences.
FIXED ACCOUNT--The General Account of KILICO to which a Contract Owner may
allocate all or a portion of Purchase Payments or Contract Value. We
guarantee a minimum rate of interest on Purchase Payments allocated to the
Fixed Account.
FIXED ACCOUNT CONTRACT VALUE--The value of the Owner's Contract interest in
the Fixed Account.
1
<PAGE> 8
FIXED ANNUITY--An annuity under which the amount of each annuity payment
does not vary with the investment experience of a Subaccount and is
guaranteed by KILICO.
FUND OR FUNDS--Kemper Variable Series (formerly Investors Fund Series),
Scudder Variable Life Investment Fund, Janus Aspen Series and Warburg
Pincus Trust including any Portfolios thereunder.
GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
separate account.
GUARANTEED INTEREST RATE--The rate of interest We establish for a given
Guarantee Period.
GUARANTEE PERIOD--The time when an amount is credited with a Guaranteed
Interest Rate. Guarantee Period options may range from one to ten years, at
Our option.
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.
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula on any date prior to the end of a Guarantee
Period.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula prior to the end of
that Guarantee Period. The adjustment reflects the change in the value of
the Guarantee Period Value due to changes in interest rates since the date
the Guarantee Period commenced. The adjustment is computed using the
market value adjustment formula stated in the Contract.
NON-QUALIFIED PLAN CONTRACT--A Contract which does not receive favorable
tax treatment under Sections 401, 403, 408, 408A or 457 of the Internal
Revenue Code.
OWNER OR OWNER--The person designated in the Contract as having the
privileges of ownership defined in the Contract.
PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to herein as a
Fund.
PURCHASE PAYMENTS--Amounts paid to Us for an Owner.
QUALIFIED PLAN CONTRACT--A Contract issued in connection with a retirement
plan which receives favorable tax treatment under Sections 401, 403, 408,
408A or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT CONTRACT VALUE--The sum of the Owner's Contract interest
in the Subaccount(s).
2
<PAGE> 9
SUBACCOUNTS--The thirty-one subdivisions of the Separate Account, the
assets of which consist solely of shares of the corresponding Portfolios.
SUBACCOUNT VALUE--The value of the Owner's Contract interest in each
Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which the Owner's
Contract has an interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Contract Value in the first seven Contribution Years
after a Purchase Payment is made or against certain annuitizations of
Contract Value in the first seven Contribution Years after a Purchase
Payment is made.
WITHDRAWAL VALUE--Contract Value, plus or minus any applicable Market Value
Adjustment, less any premium tax payable if the Contract is being
annuitized, minus any Withdrawal Charge applicable to that Contract.
3
<PAGE> 10
SUMMARY
Because this is a summary, it does not contain all of the information that may
be important. Read the entire Prospectus and Statement of Additional Information
before deciding to invest.
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified Plan and Qualified Plan Contracts are described in
this Prospectus.
The minimum initial Purchase Payment is $1,000 and, subject to certain
exceptions, the minimum subsequent payment is $500. An allocation to a
Subaccount, Fixed Account or Guarantee Period must be at least $500. Our prior
approval is required for Purchase Payments over $1,000,000. (See "The
Contracts," page 24.)
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts selected by the Owner. Each Subaccount invests in one
of the following corresponding Portfolios:
- - Kemper Money Market
- - Kemper Government Securities
- - Kemper Investment Grade Bond
- - Kemper Global Income
- - Kemper Horizon 5
- - Kemper High Yield
- - Kemper Horizon 10+
- - Kemper Total Return
- - Kemper Horizon 20+
- - Kemper Value+Growth
- - Kemper Blue Chip
- - Kemper International
- - Kemper Contrarian Value
- - Kemper Small Cap Value
- - Kemper Small Cap Growth
- - Kemper Growth
- - Kemper Aggressive Growth
- - Kemper Technology Growth
- - Kemper Global Blue Chip
- - Kemper International Growth and Income
- - Kemper-Dreman High Return Equity
- - Kemper-Dreman Financial Services
- - Scudder VLIF Global Discovery
- - Scudder VLIF Growth and Income
- - Scudder VLIF International
- - Scudder VLIF Capital Growth
- - Janus Aspen Growth
- - Janus Aspen Growth and Income
- - Warburg Emerging Markets
- - Warburg Post-Venture Capital
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccounts.
The Fixed Account has fixed accumulations and benefits. We guarantee that
Purchase Payments allocated to the Fixed Account earn a minimum fixed interest
rate of 3%. In our discretion, We may credit interest in excess of 3%. (See
"Fixed Account Option," page 24.)
The MVA Option also provides fixed accumulations. The MVA Option is only
available during the Accumulation Period. An Owner may allocate amounts to one
or more Guarantee Periods. We may offer additional Guarantee Periods at
4
<PAGE> 11
our discretion. For new Contracts, We may limit the number of Guarantee Period
options available to three (3). We credit interest daily to amounts allocated to
the MVA Option. We declare the rate at Our sole discretion. We guarantee amounts
allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee
Periods selected by the Owner. These guaranteed amounts are subject to any
applicable Withdrawal Charge, Market Value Adjustment or Records Maintenance
Charge. We will not change a Guaranteed Interest Rate for the duration of the
Guarantee Period. However, Guaranteed Interest Rates for subsequent Guarantee
Periods are set at Our discretion. At the end of a Guarantee Period, a new
Guarantee Period for the same duration starts, unless the Owner timely elects
another Guarantee Period. The interests under the Contract relating to the MVA
Option are registered under the Securities Act of 1933 but are not registered
under the Investment Company Act of 1940. (See "The MVA Option," page 15.)
The investment risk under the Contracts is borne by the Owner, unless Contract
Values are allocated to:
- the MVA Option and are guaranteed to receive the Guaranteed Interest Rate
or
- the Fixed Option and are guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization,
subject to certain limitations. A transfer from a Guarantee Period is subject to
a Market Value Adjustment unless effected within 30 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 29 and 40, respectively.)
An Owner may withdraw Contract Value subject to Withdrawal Charges, any
applicable Market Value Adjustment and other specified conditions. (See
"Withdrawal During Accumulation Period," page 30.)
We do not deduct sales charges from Purchase Payments. Each Contract Year, an
Owner may withdraw or surrender the Contract, without Withdrawal Charge, up to
the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of Contract Value. If the Owner withdraws a larger amount, the
excess Purchase Payments withdrawn are subject to a Withdrawal Charge.
The Withdrawal Charge is:
- 7% in the first Contribution Year
- 6% in the second Contribution Year
- 5% in the third and fourth Contribution Years
- 4% in the fifth Contribution Year
5
<PAGE> 12
- 3% in the sixth Contribution Year
- 2% in the seventh Contribution Year
- 0% thereafter
(See "Withdrawal Charge," page 35.) The Withdrawal Charge also applies at the
annuitization of Accumulation Units in their seventh Contribution Year or
earlier, except as set forth under "Withdrawal Charge." Withdrawals may be
subject to income tax, a 10% penalty tax, and other tax consequences.
Withdrawals from Qualified Plan Contracts may be limited by the Internal Revenue
Code (the "Code"). (See "Federal Income Taxes," page 42.)
Contract charges include:
- mortality and expense risk
- administrative expenses
- records maintenance
- applicable premium taxes
- Guaranteed Retirement Income Benefit
(See "Charges Against the Separate Account," page 34.) In addition, the
investment advisers to the Funds deduct varying charges against the assets of
the Funds for which they provide investment advisory services. (See the Funds'
prospectuses for such information.)
The Contract may be purchased in connection with retirement plans qualifying
either under Section 401 or 403(b) of the Code or as individual retirement
annuities including Roth IRAs. The Contract is also available in connection with
state and municipal deferred compensation plans and non-qualified deferred
compensation plans. (See "Taxation of Annuities in General," page 42 and
"Qualified Plans," page 46.)
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period will depend on the state in
which the Contract is issued. However, it will be at least ten days from the
date the Owner receives the Contract. (See "The Contracts," page 24.) In
addition, a special free look period applies in some circumstances to Contracts
issued as Individual Retirement Annuities, Simplified Employee Pensions--IRAs or
as Roth Individual Retirement Annuities.
6
<PAGE> 13
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SUMMARY OF EXPENSES
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CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments).............................. None
Contingent Deferred Sales Load (as a percentage of amount surrendered)(1)
Year of Withdrawal After Purchase
First year........................... 7%
Second year.......................... 6%
Third year........................... 5%
Fourth year.......................... 5%
Fifth year........................... 4%
Sixth year........................... 3%
Seventh year......................... 2%
Eighth year and following............ 0%
Surrender Fees...................................................................................... None
Exchange Fee(2)..................................................................................... $25
ANNUAL CONTRACT FEE (Records Maintenance Charge)(3)................................................. $30
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense
Risk.................................. 1.25%
Administration.......................... .15%
Account Fees and
Expenses.............................. 0%
---------
Total Separate Account
Annual Expenses....................... 1.40%
=========
GUARANTEED RETIREMENT INCOME BENEFIT
CHARGE
Annual Expense (as a percentage of
Contract Value)....................... .25%
</TABLE>
FUND ANNUAL EXPENSES(After Fee Waivers and Expense
Reductions)
(as percentage of each Portfolio's average net assets for
the period ended December 31, 1998)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
MONEY GOVERNMENT INVESTMENT GLOBAL KEMPER
MARKET SECURITIES GRADE BOND(9) INCOME(8)(10) HORIZON 5(9)
------ ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Management
Fees... .50% .55% .60% .72% .60%
Other
Expenses... .04 .11 .07 .33 .06
Total
Portfolio
Annual
Expenses.. .54 .66 .67 1.05 .66
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER
HIGH HORIZON TOTAL HORIZON VALUE+
YIELD 10+(9) RETURN 20+(9) GROWTH(9)
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Management
Fees... .60% .60% .55% .60% .75%
Other
Expenses... .05 .04 .05 .07 .03
Total
Portfolio
Annual
Expenses.. .65 .64 .60 .67 .78
</TABLE>
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
BLUE KEMPER CONTRARIAN SMALL CAP SMALL CAP
CHIP(8)(9) INTERNATIONAL VALUE(9) VALUE(9) GROWTH
---------- ------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Management
Fees... .65% .75% .75% .75% .65%
Other
Expenses... .11 .18 .03 .05 .05
Total
Portfolio
Annual
Expenses... .76 .93 .78 .80 .70
<CAPTION>
KEMPER KEMPER-
KEMPER KEMPER KEMPER INTERNATIONAL DREMAN
KEMPER AGGRESSIVE TECHNOLOGY GLOBAL BLUE GROWTH AND HIGH RETURN
GROWTH GROWTH(6) GROWTH(10) CHIP(7)(10) INCOME(7)(10) EQUITY(7)(10)
------ ---------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Management
Fees... .60% .67% .66% 0.00% 0.00% .42%
Other
Expenses... .05 .28 .29 1.56 1.12 .45
Total
Portfolio
Annual
Expenses... .65 .85 .95 1.56 1.12 .87
</TABLE>
<TABLE>
<CAPTION>
KEMPER- SCUDDER SCUDDER
DREMAN SCUDDER VLIF VLIF SCUDDER VLIF
FINANCIAL GLOBAL GROWTH AND VLIF CAPITAL
SERVICES(7)(10) DISCOVERY(11) INCOME INTERNATIONAL GROWTH
--------------- ------------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C>
Management
Fees... .62% .91% .47% .87% .47%
Other
Expenses... .97 .81 .09 .18 .04
Total
Portfolio
Annual
Expenses... .99 1.72 .56 1.05 .51
<CAPTION>
JANUS WARBURG
JANUS ASPEN WARBURG POST-
ASPEN GROWTH AND EMERGING VENTURE
GROWTH(4) INCOME(4) MARKETS(5) CAPITAL(5)
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Management
Fees... .65% 0.00% .20% 1.08%
Other
Expenses... .03 1.25 1.20 .24
Total
Portfolio
Annual
Expenses... .68 1.25 1.40 1.32
</TABLE>
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7
<PAGE> 14
(1) A Contract Owner may withdraw up to the greater of (i) the excess of
Contract Value over total Purchase Payments subject to Withdrawal Charges
less prior withdrawals that were previously assessed a Withdrawal Charge,
and (ii) 10% of the Contract Value in any Contract Year without assessment
of any charge. In certain circumstances We may reduce or waive the
contingent deferred sales charge.
(2) We reserve the right to charge a fee of $25 for each transfer of Contract
Value in excess of 12 transfers per calendar year.
(3) Applies to Contracts with a Contract Value less than $50,000 on the date of
assessment. In certain circumstances We may reduce or waive the annual
Records Maintenance Charge.
(4) The expense figures shown are net of certain fee waivers or reductions from
Janus Capital Corporation. Without such waivers, Management Fees, Other
Expenses and Total Portfolio Annual Expenses for the Portfolios for the
fiscal year ended December 31, 1998 would have been: .72%, .03% and .75%,
respectively, for the Growth Portfolio; and .75%, 2.31% and 3.06%,
respectively, for the Growth and Income Portfolio. See the prospectus and
Statement of Additional Information of Janus Aspen Series for a description
of these waivers.
(5) The expense figures shown are net of certain fee waivers or reductions from
Warburg Pincus Asset Management, Inc. and its affiliates based on actual
expenses for fiscal year ended December 31, 1998. Without such waivers,
Management Fees, Other Expenses and Total Portfolio Annual Expenses for the
Portfolios would have been 1.25%, 6.96% and 8.21%, respectively, for the
Emerging Markets Portfolio; and 1.25%, .45% and 1.70%, respectively, for
the Post-Venture Capital Portfolio. Fee waivers and expense reimbursements
may be discontinued at any time.
(6) Portfolios commenced operations after 5/1/99. "Other Expenses" have been
estimated.
(7) Portfolios commenced operations after 5/1/98. "Other Expenses" have been
estimated.
(8) Portfolios commenced operations 5/1/97. "Other Expenses" have been
estimated.
(9) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this Prospectus, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the amount necessary to limit total operating
expenses of the following described Portfolios to the amounts set forth
after the Portfolio manner: Kemper Value + Growth Portfolio (.84%), Kemper
Contrarian Value Portfolio (.80%), Kemper Small Cap Value Portfolio (.84%),
Kemper Horizon 5 Portfolio (.97%), Kemper Horizon 10+ Portfolio (.83%),
Kemper Horizon 20+ Portfolio (.93%), Kemper Investment Grade Bond Portfolio
(.80%), and Kemper Blue Chip Portfolio (.95%). The amounts set forth in the
table above reflect actual expenses for the past fiscal year, which were
lower than these expense limits.
(10) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this Prospectus, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the amount necessary to limit total operating
expenses of the Kemper Aggressive Growth, Kemper Technology Growth,
Kemper-Dreman Financial Services, Kemper-Dreman High Return Equity, Kemper
International Growth and Income, Kemper Global Blue Chip and Kemper Global
Income Portfolios of Kemper Variable Series to the levels set forth in the
table above. Without taking into effect these expense caps, for the
Aggressive Growth, Technology Growth, Financial Services, High Retune
Equity, International Growth and Income, Global Blue Chip and Global Income
Portfolios of Kemper Variable Series: management fees are estimated to be
.75%, .75%, .75%, .75%, 1.00%, 1.00% and .75%. Other Expenses are estimated
to be .28%, .29%, .97%, .45%, 18.54%, 11.32%, and .33%, respectively, and
total operating expenses are estimated to be 1.03%, 1.04%, 1.72%, 1.20%,
19.54%, 12.32%, and 1.08%, respectively. In addition, for Kemper
International Growth and Income and Kemper Global Blue Chip, the investment
manager has agreed to limit its management fee to .70% and .85%,
respectively, of such portfolios for one year from the date of this
Prospectus.
(11) Until April 10, 1998, the Adviser waived a portion of its management fee to
limit the expenses of the Global Discovery Portfolio to 1.50% of the
average daily net assets.
8
<PAGE> 15
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 Kemper Money Market #1(1) $ 92 $116 $152 $228
end of
the periods shown, you would pay the Kemper Government Securities 93 120 158 241
following expenses on a $1,000 Kemper Investment Grade Bond 93 120 158 242
investment,
assuming 5% annual return on assets: Kemper Global Income 97 131 177 281
Kemper Horizon 5 93 120 158 214
Kemper High Yield 93 119 157 240
Kemper Horizon 10+ 93 119 157 239
Kemper Total Return 93 118 155 234
Kemper Horizon 20+ 93 102 158 242
Kemper Value+Growth 94 123 164 253
Kemper Blue Chip 94 123 163 251
Kemper International 96 128 171 269
Kemper Contrarian Value 94 123 164 235
Kemper Small Cap Value 94 124 165 255
Kemper Small Cap Growth 94 121 160 245
Kemper Growth 93 119 157 240
Kemper Aggressive Growth
Kemper Technology Growth
Kemper Global Blue Chip 102 146 202 332
Kemper International Growth and 98 133 181 288
Income
Kemper-Dreman High Return 95 126 168 263
Equity
Kemper-Dreman Financial 96 129 174 275
Services
Scudder VLIF Global Discovery 103 150 216 347
Scudder VLIF Growth and Income 92 117 153 230
Scudder VLIF International 97 131 177 281
Scudder VLIF Capital Growth 92 115 150 205
Janus Aspen Growth 93 120 159 234
Janus Aspen Growth and Income 99 137 187 301
Warburg Emerging Markets 109 141 194 316
Warburg Post-Venture Capital 99 139 190 308
</TABLE>
9
<PAGE> 16
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
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(1) $ 20 $ 61 $106 $228
Kemper Government Securities 21 65 112 241
Kemper Investment Grade Bond 21 66 122 242
Kemper Global Income 25 77 132 281
Kemper Horizon 5 21 65 112 214
Kemper High Yield 21 65 111 240
Kemper Horizon 10+ 21 65 111 239
Kemper Total Return 21 63 109 234
Kemper Horizon 20+ 21 66 112 242
Kemper Value+Growth 22 69 118 253
Kemper Blue Chip 22 68 117 251
Kemper International 24 74 126 261
Kemper Contrarian Value 22 69 118 235
Kemper Small Cap Value 23 70 119 255
Kemper Small Cap Growth 22 66 114 245
Kemper Growth 21 65 111 240
Kemper Aggressive Growth
Kemper Technology Growth
Kemper Global Blue Chip 30 93 158 332
Kemper International Growth and 26 79 136 288
Income
Kemper-Dreman High Return 23 72 123 263
Equity
Kemper-Dreman Financial 24 75 129 275
Services
Scudder VLIF Global Discovery 32 98 166 347
Scudder VLIF Growth and Income 20 62 107 230
Scudder VLIF International 25 77 132 281
Scudder VLIF Capital Growth 20 61 104 225
Janus Aspen Growth 21 66 113 234
Janus Aspen Growth and Income 27 83 142 301
Warburg Emerging Markets 29 88 150 316
Warburg Post-Venture Capital 28 96 146 308
</TABLE>
10
<PAGE> 17
The purpose of the preceding table which includes the "SUMMARY OF EXPENSES" on
the prior page, is to assist Contract Owners in understanding the various costs
and expenses that a Contract Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH
MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. "Management Fees" and "Other Expenses" in the "SUMMARY OF
EXPENSES" for the Portfolios have been provided by Scudder Kemper Investments,
Inc., Janus Capital Corporation and Warburg Pincus Asset Management, Inc., as
applicable, and have not been independently verified. The Example assumes a 5%
annual rate of return pursuant to requirements of the Securities and Exchange
Commission. This hypothetical rate of return is not intended to be
representative of past or future performance of any Subaccount. The Records
Maintenance Charge is a single charge, it is not a separate charge for each
Subaccount. In addition, the effect of the Records Maintenance Charge has been
reflected in the Example by applying the percentage derived by dividing the
total amounts of annual Records Maintenance Charge collected by the total net
assets of all the Subaccounts in the Separate Account. See "Contract Charges and
Expenses" for more information regarding the various costs and expenses.
(1)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 first Contribution Year.
11
<PAGE> 18
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
31, 1998:
<TABLE>
<CAPTION>
1998
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD* ----
<S> <C>
Kemper Money Market Subaccount #1 10.003
Kemper Money Market Subaccount #2 10.004
Kemper Total Return Subaccount 9.983
Kemper High Yield Subaccount 10.003
Kemper Growth Subaccount 9.889
Kemper Government Securities Subaccount 10.012
Kemper International Subaccount 9.944
Kemper Small Cap Growth Subaccount** 9.867
Kemper Investment Grade Bond Subaccount*** 10.014
Kemper Contrarian Value Subaccount*** 10.029
Kemper Small Cap Value Subaccount*** 9.943
Kemper Value+Growth Subaccount*** 9.937
Kemper Horizon 20+ Subaccount*** 9.951
Kemper Horizon 10+ Subaccount*** 9.957
Kemper Horizon 5 Subaccount*** 9.974
Kemper Blue Chip Subaccount**** 9.964
Kemper Global Income Subaccount**** 10.009
Kemper Aggressive Growth Subaccount***** --
Kemper Technology Growth Subaccount***** --
Kemper Global Blue Chip Subaccount 9.989
Kemper International Growth and Income
Subaccount 9.964
Kemper-Dreman High Return Equity Subaccount 9.997
Kemper-Dreman Financial Services Subaccount 10.049
Scudder VLIF Global Discovery Subaccount 9.911
Scudder VLIF Growth and Income Subaccount 10.033
Scudder VLIF International Subaccount 9.972
Scudder VLIF Capital Growth Subaccount 9.985
Janus Aspen Growth Subaccount 9.912
Janus Aspen Growth and Income Subaccount 9.908
Warburg Emerging Markets Subaccount 9.755
Warburg Post-Venture Capital Subaccount 9.882
</TABLE>
12
<PAGE> 19
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1998
ACCUMULATION UNIT VALUE AT END OF PERIOD ----
<S> <C>
Kemper Money Market Subaccount #1 10.213
Kemper Money Market Subaccount #2 10.297
Kemper Total Return Subaccount 10.542
Kemper High Yield Subaccount 9.646
Kemper Growth Subaccount 10.007
Kemper Government Securities Subaccount 10.332
Kemper International Subaccount 9.429
Kemper Small Cap Growth Subaccount** 11.070
Kemper Investment Grade Bond
Subaccount*** 10.417
Kemper Contrarian Value Subaccount*** 10.712
Kemper Small Cap Value Subaccount*** 8.431
Kemper Value+Growth Subaccount*** 10.697
Kemper Horizon 20+ Subaccount*** 10.228
Kemper Horizon 10+ Subaccount*** 10.290
Kemper Horizon 5 Subaccount*** 10.354
Kemper Blue Chip Subaccount**** 10.386
Kemper Global Income Subaccount**** 10.755
Kemper Aggressive Growth Subaccount***** --
Kemper Technology Growth Subaccount***** --
Kemper Global Blue Chip Subaccount 10.103
Kemper International Growth and Income
Subaccount 9.130
Kemper-Dreman High Return Equity
Subaccount 10.491
Kemper-Dreman Financial Services
Subaccount 9.998
Scudder VLIF Global Discovery Subaccount 10.043
Scudder VLIF Growth and Income
Subaccount 9.651
Scudder VLIF International Subaccount 9.837
Scudder VLIF Capital Growth Subaccount 10.823
Janus Aspen Growth Subaccount 11.943
Janus Aspen Growth and Income Subaccount 12.038
Warburg Emerging Markets Subaccount 7.994
Warburg Post-Venture Capital Subaccount 9.720
</TABLE>
13
<PAGE> 20
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1998
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF PERIOD (000'S OMITTED) ----
<S> <C>
Kemper Money Market Subaccount #1 82
Kemper Money Market Subaccount #2 21
Kemper Total Return Subaccount 123
Kemper High Yield Subaccount 361
Kemper Growth Subaccount 50
Kemper Government Securities Subaccount 77
Kemper International Subaccount 56
Kemper Small Cap Growth Subaccount** 106
Kemper Investment Grade Bond Subaccount*** 66
Kemper Contrarian Value Subaccount*** 110
Kemper Small Cap Value Subaccount*** 125
Kemper Value+Growth Subaccount*** 56
Kemper Horizon 20+ Subaccount*** 46
Kemper Horizon 10+ Subaccount*** 62
Kemper Horizon 5 Subaccount*** 22
Kemper Blue Chip Subaccount**** 125
Kemper Global Income Subaccount**** 7
Kemper Aggressive Growth Subaccount***** --
Kemper Technology Growth Subaccount***** --
Kemper Global Blue Chip Subaccount 29
Kemper International Growth and Income Subaccount 25
Kemper-Dreman High Return Equity Subaccount 518
Kemper-Dreman Financial Services Subaccount 121
Scudder VLIF Global Discovery Subaccount 74
Scudder VLIF Growth and Income Subaccount 175
Scudder VLIF International Subaccount 88
Scudder VLIF Capital Growth Subaccount 56
Janus Aspen Growth Subaccount 252
Janus Aspen Growth and Income Subaccount 173
Warburg Emerging Markets Subaccount 7
Warburg Post-Venture Capital Subaccount 9
</TABLE>
* Commencement of Offering on June 1, 1998.
** 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.
***** Commencement of Offering on May 1, 1999 at initial accumulation unit value
of 1.000.
14
<PAGE> 21
KILICO, THE MVA OPTION,
THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
Kemper Corporation is a majority owned (76.4 percent) subsidiary of Zurich
Holding Company of America ("ZHCA"), which is a wholly-owned subsidiary of
Zurich Insurance Company ("Zurich"). Zurich is a wholly-owned subsidiary of
Zurich Financial Services ("ZFS"). ZFS was formed in the September, 1998 merger
of the Zurich Group with the financial services business of B.A.T. Industries.
ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c., fifty-seven percent
and forty-three percent, respectively.
THE MVA OPTION
An Owner may allocate amounts in the Market Value Adjustment ("MVA") Option to
one or more Guarantee Periods with durations of one to ten years during the
Accumulation Period. At Our discretion, We may offer additional Guarantee
Periods or limit, for new Contracts, the number of Guarantee Periods available
to three.
The amounts allocated to the MVA Option under the Contracts are invested under
the laws regulating Our General Account. Assets supporting the amounts allocated
to Guarantee Periods are held in a "non-unitized" separate account. However, Our
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 Our guaranteed obligations. 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 We
may conduct.
State insurance laws concerning the nature and quality of investments regulate
Our General Account investments and any non-unitized separate account
investments. 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.) Our affiliate, Scudder Kemper Investments, Inc.
("SKI"), manages Our General Account.
We consider the return available on the instruments in which Contract proceeds
are invested when establishing Guaranteed Interest Rates. This return is only
one of many factors considered in establishing Guaranteed Interest
15
<PAGE> 22
Rates. (See "The Accumulation Period--4. Establishment of Guaranteed Interest
Rates.")
Our investment strategy for the non-unitized separate account is generally to
match Guarantee Period liabilities with assets, such as debt instruments. We
expect to invest in debt instruments such as:
- 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;
- debt securities which have an investment grade, at the time of purchase,
within the four (4) highest grades assigned by Moody's Investors
Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other
nationally recognized rating service;
- other debt instruments including 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 Our management to have an
investment quality comparable to securities which may be otherwise
purchased; and
- options and futures transactions on fixed income securities.
Our invested assets portfolio at December 31, 1998 included approximately 82.7
percent in U.S. Treasuries, investment grade corporate, foreign and municipal
bonds, and commercial paper, 2.3 percent in below investment grade (high risk)
bonds, 3.9 percent in mortgage loans and other real estate-related investments
and 11.1 percent in all other investments. (See "Management's Discussion and
Analysis--INVESTMENTS.")
We are not obligated to invest the amounts allocated to the MVA Option according
to any particular strategy, except as state insurance laws may require. (See
"Management's Discussion and Analysis--INVESTMENTS.")
THE SEPARATE ACCOUNT
We established the KILICO Variable Annuity Separate Account on May 29, 1981
pursuant to Illinois law as the KILICO Money Market Separate Account. KILICO
Money Market Separate Account was initially registered with the Securities and
Exchange Commission ("SEC") as an open-end, diversified management investment
company. On November 2, 1989, contract owners approved a Reorganization under
which the Separate Account was restructured as a unit investment trust. The SEC
does not supervise the management, investment practices or policies of the
Separate Account or KILICO.
Benefits provided under the Contracts are Our obligations. Although the assets
in the Separate Account are Our property, they are held separately from Our
other assets and are not chargeable with liabilities arising out of any other
business We may conduct. Income, capital gains and capital losses, whether or
16
<PAGE> 23
not realized, from the assets allocated to the Separate Account are credited to
or charged against the Separate Account without regard to the income, capital
gains and capital losses arising out of any other business We may conduct.
Thirty-one Subaccounts of the Separate Account are currently available. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios.
We may add or delete Subaccounts in the future.
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges 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 are reinvested in that Portfolio at net
asset value and retained as assets of the corresponding Subaccount.
The Separate Account's financial statements appear in the Statement of
Additional Information.
THE FUNDS
The Separate Account invests in shares of the following open-end, management
investment companies:
- Kemper Variable Series (formerly Investors Fund Series)
- Scudder Variable Life Investment Fund
- Janus Aspen Series
- Warburg Pincus Trust
The Funds provide investment vehicles for variable life insurance and variable
annuity contracts and, in the case of Janus Aspen Series and Warburg Pincus
Trust, certain qualified retirement plans. Shares of the Funds are sold only to
insurance company separate accounts and qualified retirement plans. Shares of
the Funds may be sold to separate accounts of other insurance companies, whether
or not affiliated with Us. 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 Us, or for variable
life insurance separate accounts, variable annuity separate accounts and
qualified retirement plans to invest simultaneously in the Funds. Currently, We
do not foresee disadvantages to variable life insurance owners, variable annuity
owners or qualified retirement plans. The Funds monitor events for material
conflicts between owners and determine what action, if any, should be taken. In
addition, if We believe that a Fund's response to any of those events or
conflicts insufficiently protects Owners, We will take appropriate action.
A Fund may consist of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio.
17
<PAGE> 24
The thirty Portfolios are summarized below:
KEMPER VARIABLE SERIES (FORMERLY INVESTORS FUND SERIES)
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments. The Portfolio seeks to maintain a net asset value of $1.00
per share but there is no assurance that the Portfolio will be able to do so.
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income.
KEMPER GLOBAL INCOME PORTFOLIO seeks to provide high current income consistent
with prudent total return asset management.
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 HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
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 TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, consistent with reasonable risk.
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 VALUE+GROWTH PORTFOLIO seeks growth of capital. A secondary objective of
the Portfolio is the reduction of risk over a full market cycle compared to a
portfolio of only growth stocks or only value stocks.
KEMPER BLUE CHIP PORTFOLIO seeks growth of capital and of income.
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER CONTRARIAN VALUE PORTFOLIO seeks to achieve a high rate of total return.
KEMPER SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation.
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
18
<PAGE> 25
KEMPER AGGRESSIVE GROWTH PORTFOLIO seeks capital appreciation through the use of
aggressive investment techniques.
KEMPER TECHNOLOGY GROWTH PORTFOLIO seeks growth of capital.
KEMPER GLOBAL BLUE CHIP PORTFOLIO seeks long-term growth of capital through a
diversified worldwide portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO seeks long-term growth of
capital and current income primarily from foreign equity securities.
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO seeks to achieve a high rate of total
return.
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO seeks long-term capital appreciation.
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF GLOBAL DISCOVERY PORTFOLIO seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
SCUDDER VLIF GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
SCUDDER VLIF CAPITAL GROWTH PORTFOLIO seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
JANUS ASPEN SERIES
JANUS ASPEN GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital.
JANUS ASPEN GROWTH AND INCOME PORTFOLIO seeks long-term capital growth and
current income.
WARBURG PINCUS TRUST
WARBURG EMERGING MARKETS PORTFOLIO seeks long-term growth of capital by
investing in equity securities of emerging markets.
WARBURG POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities of issuers in their
post-venture-capital stage of development and pursues an aggressive investment
strategy.
------------------
19
<PAGE> 26
The Portfolios may not achieve their stated objective. More detailed
information, including a description of risks involved in investing in the
Portfolios is found in the Funds' prospectuses accompanying this Prospectus and
Statements of Additional Information, available from Us upon request.
Scudder Kemper Investments, Inc. ("SKI") is the investment manager for the
twenty-two available Portfolios of Kemper Variable Series (formerly Investors
Fund Series) and the four available Portfolios of Scudder Variable Life
Investment Fund. Scudder Investments (U.K.) Limited ("Scudder U.K."), an
affiliate of SKI, is the sub-adviser for the Kemper International Portfolio and
the Kemper Global Income Portfolio. Under the terms of the Sub-Advisory
Agreement with SKI, Scudder U.K. renders investment advisory and management
services with regard to that portion of this Portfolio's assets as may be
allocated by SKI to Scudder U.K. from time to time for management, including
services related to foreign securities, foreign currency transactions and
related investments. Dreman Value Management L.L.C. ("DVM") serves as sub-
adviser for the Kemper-Dreman High Return Equity and Kemper-Dreman Financial
Services Portfolios. Under the terms of the sub-advisory agreement between SKI
and DVM for each such Portfolio, DVM manages the investment and reinvestment of
each Portfolio's assets in accordance with the investment objectives, policies
and limitations and subject to the supervision of SKI and the Board of Trustees.
Janus Capital Corporation is the investment adviser for the two available
Portfolios of the Janus Aspen Series. Warburg Pincus Asset Management, Inc. is
the investment adviser for the two available Portfolios of the Warburg Pincus
Trust. The investment advisers are paid fees for their services by the Funds
they manage. KILICO may receive compensation from the Funds or the investment
advisers of the Funds for services related to the Funds. Such compensation will
be consistent with the services rendered or the cost savings resulting from the
arrangement.
For their services to the Portfolios, the managers receive compensation at the
following rates:
KEMPER VARIABLE SERIES (FORMERLY INVESTORS FUND SERIES)
For its services, SKI is paid a management fee based upon the average daily net
assets of each Portfolio, as follows: Kemper Money Market (.50 of 1%), Kemper
Government Securities (.55 of 1%), Kemper Investment Grade Bond (.60 of 1%),
Kemper Global Income (.75 of 1%), Kemper Horizon 5 (.60 of 1%), Kemper High
Yield (.60 of 1%), Kemper Horizon 10+ (.60 of 1%), Kemper Total Return (.55 of
1%), Kemper Horizon 20+ (.60 of 1%), Kemper Value+Growth (.75 of 1%), Kemper
Blue Chip (.65 of 1%), Kemper International (.75 of 1%), Kemper Contrarian Value
(.75 of 1%), Kemper Small Cap Value (.75 of 1%), Kemper Small Cap Growth (.65 of
1%), Kemper Growth (.60 of 1%), Kemper Aggressive Growth (.75 of 1%), Kemper
Technology Growth (.75 of 1%), Kemper Global Blue Chip (1.00% for the first $250
million, .95% for the next $750 million and .90% over $1 billion), Kemper
International Growth and Income (.70 of 1%), Kemper-Dreman High Return Equity
and Kemper-Dreman Financial Services (.75% for the first $250 million,
20
<PAGE> 27
.72% for the next $750 million, .70% for the next $1.5 billion, .68% for the
next $2.5 billion, .65% for the next $2.5 billion, .64% for the next $2.5
billion, .63% for the next $2.5 billion and .62% over $12.5 billion). SKI pays
Scudder U.K. for its services as sub-adviser for the Kemper International
Portfolio and the Kemper Global Income Portfolio a sub-advisory fee, payable
monthly, at an annual rate of .35 of 1% and .30 of 1%, respectively, of the
average daily net assets of such Portfolios. SKI pays DVM for its services as
sub-adviser for the Kemper-Dreman High Return Equity and Kemper-Dreman Financial
Services Portfolios a sub-advisory fee, payable monthly, at the annual rate of
.24% of the first $250 million of each Portfolio's average daily net assets,
.23% of the average daily net assets between $250 million and $1 billion, .224%
of average daily net assets between $1 billion and $2.5 billion, .218% of
average daily net assets between $2.5 billion and $5 billion, .208% of average
daily net assets between $5 billion and $7.5 billion, .205% of average daily net
assets between $7.5 billion and $10 billion, .202% of average daily net assets
between $10 billion and $12.5 billion and .198% of each Portfolio's average
daily net assets over $12 billion.
SCUDDER VARIABLE LIFE INVESTMENT FUND
For its advisory services to the Portfolios, SKI receives compensation monthly
at the following annual rate for each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF THE AVERAGE
DAILY NET ASSET VALUES
PORTFOLIO OF EACH PORTFOLIO
--------- ----------------------
<S> <C>
Scudder VLIF Global Discovery....................... .975%
Scudder VLIF Growth and Income...................... .475%
Scudder VLIF International
First $500,000,000................................ .875%
Over $500,000,000................................. .725%
Scudder VLIF Capital Growth
First $500,000,000................................ .475%
Next $500,000,000................................. .450%
Over $1,000,000,000............................... .425%
</TABLE>
JANUS ASPEN SERIES
Janus Capital Corporation receives a monthly advisory fee for the Janus Aspen
Growth Portfolio and Janus Aspen Growth and Income Portfolio based on the
following schedule (expressed as an annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
------------------- -----------
<S> <C>
First $300,000,000.......... .75%
Next $200,000,000........... .70%
Over $500,000,000........... .65%
</TABLE>
However, Janus Capital Corporation has agreed to reduce each of the above
Portfolios' advisory fees to the extent that such fee exceeds the effective rate
of
21
<PAGE> 28
a fund managed by Janus Capital Corporation with similar investment objective
and policies.
WARBURG PINCUS TRUST
Warburg Pincus Asset Management, Inc. receives a monthly advisory fee based upon
the average daily net assets of each Warburg Portfolio, as follows: Emerging
Markets 1.25% (.20% after waivers and/or reimbursements) and Post-Venture
Capital 1.25% (1.08% after waivers and/or reimbursements).
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We may eliminate the shares of any of the Portfolios and to substitute
shares of another Portfolio or of another investment company, if the shares of a
Portfolio are no longer available for investment, or if in Our judgment further
investment in any Portfolio becomes inappropriate in view of the purposes of the
Separate Account. We will not substitute any shares attributable to an Owner's
interest in a Subaccount without prior notice and the SEC's prior approval, if
required. The Separate Account may purchase other securities for other series or
classes of policies, or may permit a conversion between series or classes of
policies on the basis of requests made by Owners.
We may establish additional subaccounts of the Separate Account, each of which
would invest in a new portfolio of the Funds, or in shares of another investment
company. New subaccounts may be established when, in Our discretion, marketing
needs or investment conditions warrant. New subaccounts may be made available to
existing Owners as We determine. We may also eliminate or combine one or more
subaccounts, transfer assets, or substitute one subaccount for another
subaccount, if, in Our discretion, marketing, tax, or investment conditions
warrant. We will notify all Owners of any such changes.
If We deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be: (a) operated as a management company
under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with Our other separate
accounts. To the extent permitted by law, We may transfer the assets of the
Separate Account to another separate account or to the General Account.
PERFORMANCE INFORMATION
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 and Kemper Investment Grade
Bond Subaccount may also advertise "yield". The Kemper Money Market Subaccount
may advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of a Subaccount's
future performance.
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<PAGE> 29
Standardized average annual total return and nonstandardized total return
calculations measure a Subaccount's net income plus the effect of any realized
or unrealized appreciation or depreciation of the Subaccount's underlying
investments. 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. In addition, We will show standardized average
annual total return for the life of the Subaccount, meaning the time the
underlying Portfolio has been held in the Subaccount. We will show
nonstandardized total return for the life of the Portfolio, meaning the time the
underlying Portfolio has been in existence. Standardized average annual total
return will be current to the most recent calendar quarter. Nonstandardized
total return will be current to the most recent calendar month. Standardized
average annual total return figures are annualized and, therefore, represent the
average annual percentage change in the value of a Subaccount investment 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 Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period, compounded on a semi-annual basis. The effective yield for the
Kemper Money Market Subaccount is calculated similarly, but includes the effect
of assumed compounding calculated under rules prescribed by the SEC. The Kemper
Money Market Subaccount's effective yield will be slightly higher than its yield
due to this compounding effect.
The Subaccounts' units are sold at Accumulation Unit value. The Subaccounts'
performance figures and Accumulation Unit values fluctuate. Subaccount units are
redeemable by an Owner at Accumulation Unit value, which may be more or less
than original cost. The standardized performance figures reflect the deduction
of all expenses and fees, including a prorated portion of the Records
Maintenance Charge. Redemptions within the first seven years may be subject to a
Withdrawal Charge that ranges from 7% the first year to 0% after seven years.
Yield, effective yield and nonstandardized total return figures do not include
the effect of any Withdrawal Charge that may be imposed upon the redemption of
units. In addition, nonstandardized total return figures do not include the
effect of the Records Maintenance Charge. Thus yield, effective yield and
nonstandardized total return figures 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.
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,
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<PAGE> 30
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.
FIXED ACCOUNT OPTION
Amounts allocated or transferred to the Fixed Account are part of Our General
Account, supporting insurance and annuity obligations. Interests in the Fixed
Account are not registered under the Securities Act of 1933 ("1933 Act"), and
the Fixed Account is not registered as an investment company under the
Investment Company Act of 1940 ("1940 Act"). Accordingly, neither the Fixed
Account nor any interests therein generally are subject to the provisions of the
1933 or 1940 Acts. We have been advised that the staff of the SEC has not
reviewed the disclosures in this Prospectus relating to the Fixed Account.
Disclosures regarding the Fixed Account, however, may be subject to the general
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
Under the Fixed Account Option, We pay a fixed interest rate for stated periods.
This Prospectus describes only the aspects of the Contract involving the
Separate Account, unless we refer to fixed accumulation and annuity elements.
We guarantee that payments allocated to the Fixed Account earn a minimum fixed
interest rate of 3%. At Our discretion, We may credit interest in excess of 3%.
We reserve the right to change the rate of excess interest credited. We also
reserve the right to declare different rates of excess interest depending on
when amounts are allocated or transferred to the Fixed Account. As a result,
amounts at any designated time may be credited with a different rate of excess
interest than the rate previously credited to such amounts and to amounts
allocated or transferred at any other designated time.
THE CONTRACTS
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $1,000, and the minimum subsequent
payment is $500. The minimum subsequent payment is $100 if an Owner authorizes
Us to draw on an account via check or electronic debit. Cumulative Purchase
Payments in excess of $1,000,000 require Our prior approval. The Internal
Revenue Code may also limit the maximum annual amount of Purchase Payments. An
allocation to a Subaccount, the Fixed Account or a Guarantee Period must be at
least $500.
We may, at any time, amend the Contract in accordance with changes in the law,
including applicable tax laws, regulations or rulings, and for other purposes.
24
<PAGE> 31
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period depends upon the state in which
the Contract is issued. However, it will be at least 10 days from the date the
Owner receives the Contract. The amount of the refund depends on the state in
which the Contract is issued. Generally, it will be an amount at least equal to
the Separate Account Contract Value plus amounts allocated to the General
Account and the Guarantee Periods on the date We receive the returned Contract,
without any deduction for Withdrawal Charges or Records Maintenance Charges.
Some states require the return of the Purchase Payment. In addition, a special
free look period applies in some circumstances to Contracts issued as Individual
Retirement Annuities, Simplified Employee Pensions--IRAs or as Roth Individual
Retirement Annuities.
During the Accumulation Period, the Owner may assign the Contract or change a
Beneficiary at any time by signing Our form. No assignment or Beneficiary change
is binding on Us until We receive it. We assume no responsibility for the
validity of the assignment or Beneficiary change. An assignment will subject the
Owner to immediate tax liability and may subject the Owner to a 10% tax penalty.
(See "Tax Treatment of Withdrawals, Loans and Assignments.")
Amounts payable during the Annuity Period may not be assigned or encumbered. In
addition, to the extent permitted by law, annuity payments are not subject to
levy, attachment or other judicial process for the payment of the payee's debts
or obligations.
The Owner designates the Beneficiary. If the Annuitant or Owner dies, and no
designated Beneficiary or contingent beneficiary is alive at that time, We will
pay the Annuitant's or Owner's estate.
Under a Qualified Plan Contract, the provisions of the applicable plan may
prohibit a change of Beneficiary. Generally, an interest in a Qualified Plan
Contract may not be assigned.
B. THE ACCUMULATION PERIOD.
1. APPLICATION OF PURCHASE PAYMENTS.
The Owner selects the allocation of Purchase Payments to the Subaccount(s),
Guarantee Periods, or Fixed Account. The amount of each Purchase Payment
allocated to a Subaccount is based on the value of an Accumulation Unit, as
computed after We receive the Purchase Payment. Generally, We determine the
value of an Accumulation Unit by 3:00 p.m. Central time on each day that the New
York Stock Exchange is open for trading. Purchase Payments allocated to a
Guarantee Period or to the Fixed Account begin earning interest one day after We
receive them. However, with respect to initial Purchase Payments, the amount is
credited only after We determine to issue the Contract, but no later than the
second day after We receive the Purchase Payment. After the initial purchase, We
determine the number of Accumulation Units credited by dividing the Purchase
Payment allocated to a Subaccount by the Subaccount's Accumulation Unit value,
as computed after We receive the Purchase Payment.
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<PAGE> 32
The number of Accumulation Units will not change due to investment experience.
Accumulation Unit value varies to reflect the investment experience of the
Subaccount and the assessment of charges against the Subaccount, other than the
Records Maintenance Charge and Guaranteed Retirement Income Benefit Charge. The
number of Accumulation Units is reduced when the Records Maintenance Charge and
Guaranteed Retirement Income Benefit Charge are assessed.
If We are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, We will promptly request the
necessary information. If the requested information is not furnished within five
(5) business days after We receive the initial Purchase Payment, or if We
determine that We cannot issue the Contract within the five (5) day period, We
will return the initial Purchase Payment to the Owner, unless the Owner consents
to Our retaining the Purchase Payment until the application is completed.
We will issue a Contract without a signed application if:
- a dealer provides us with application information, electronically or in
writing
- We receive the initial Purchase Payment and
- the Owner confirms in writing, after the Contract is delivered, that all
information in the Contract is correct.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units purchased is based on
the Subaccount's Accumulation Unit value at the end of the current Valuation
Period. 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 Valuation Period times the Accumulation
Unit value for the preceding Valuation Period. Each Valuation Period has a
single Accumulation Unit value which applies to each day in the Valuation
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 any Valuation Period is
determined by the following formula:
(1 / 2) - 3, where:
(1) is the net result of:
- the net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period; plus
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<PAGE> 33
- 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
- a charge or credit for any taxes reserved for the current Valuation
Period which We determine 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 preceding Valuation Period;
(3) is the factor representing the mortality and expense risk and
administration charges.
3. GUARANTEE PERIODS OF THE MVA OPTION.
An Owner may allocate Purchase Payments to one or more Guarantee Periods with
durations of one to ten years. Each Guarantee Period has a Guaranteed Interest
Rate which will not change during the Guarantee Period. Interest is credited
daily at the effective annual rate.
The following example illustrates how we credit Guarantee Period interest.
EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 4.0% Effective Annual Rate
</TABLE>
<TABLE>
<CAPTION>
INTEREST CREDITED CUMULATIVE
YEAR DURING YEAR INTEREST CREDITED
- ---- ----------------- -----------------
<S> <C> <C>
1........................ $1,600.00 $1,600.00
2........................ 1,664.00 3,264.00
3........................ 1,730.56 4,994.56
4........................ 1,799.78 6,794.34
5........................ 1,871.77 8,666.11
</TABLE>
Accumulated value at the end of 5 years is:
$40,000 + $8,666.11 = $48,666.11
NOTE: THIS EXAMPLE ASSUMES THAT NO WITHDRAWALS ARE MADE DURING THE FIVE-YEAR
PERIOD. IF THE OWNER MAKES WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET
VALUE ADJUSTMENTS AND WITHDRAWAL CHARGES APPLY.
THE HYPOTHETICAL INTEREST RATE IS NOT INTENDED TO PREDICT FUTURE GUARANTEED
INTEREST RATES. ACTUAL GUARANTEED INTEREST RATES FOR ANY GUARANTEE PERIOD MAY BE
MORE OR LESS THAN THOSE SHOWN.
At the end of any Guarantee Period, We send written notice of the beginning of a
new Guarantee Period. A new Guarantee Period for the same duration starts unless
the Owner elects another Guarantee Period within thirty days after the end of
the terminating Guarantee Period. The Owner may choose a different Guarantee
Period by preauthorized telephone instructions or by giving Us
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<PAGE> 34
written notice. An Owner should not select a new Guarantee Period extending
beyond the Annuity Date. Otherwise, the guarantee period amount available for
annuitization is subject to Market Value Adjustments and may be subject to
Withdrawal Charges. (See "Market Value Adjustment" and "Withdrawal Charge"
below.)
The amount reinvested at the beginning of a new Guarantee Period is the
Guarantee Period Value for the Guarantee Period just ended. The Guaranteed
Interest Rate in effect when the new Guarantee Period begins applies for the
duration of the new Guarantee Period.
An Owner may call Us at 1-800-621-5001 or write Kemper Investors Life Insurance
Company, Customer Service, at 1 Kemper Drive, Long Grove, Illinois 60049 for the
new Guaranteed Interest Rates.
4. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
We declare the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate. Once
established, rates are guaranteed for the respective Guarantee Periods. We
advise an Owner of the Guaranteed Interest Rate for a chosen Guarantee Period
when We receive a Purchase Payment, when a transfer is effectuated or when a
Guarantee Period renews. Withdrawals of Accumulated Guarantee Period Value are
subject to Withdrawal Charges and Records Maintenance Charges and may be subject
to a Market Value Adjustment. (See "Market Value Adjustment" below.)
We have no specific formula for establishing the Guaranteed Interest Rates. The
determination may be influenced by, but not necessarily correspond to, the
current interest rate environment. (See "The MVA Option".) We may also consider,
among other factors, the duration of a Guarantee Period, regulatory and tax
requirements, sales commissions and administrative expenses We bear, and general
economic trends.
WE MAKE THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED.
WE CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE GUARANTEED INTEREST RATES.
5. CONTRACT VALUE.
On any Valuation Date, Contract Value equals the total of:
- the number of Accumulation Units credited to each Subaccount times
- the value of a corresponding Accumulation Unit for each Subaccount plus
- the Owner's Accumulated Guarantee Period Value in the MVA Option plus
- the Owner's interest in the Fixed Account.
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<PAGE> 35
6. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, an Owner may transfer the Contract Value among
the Subaccounts, the Guarantee Periods and the Fixed Account subject to the
following provisions:
- the amount transferred must be at least $100 unless the total Contract
Value attributable to a Subaccount, Guarantee Period or Fixed Account is
transferred;
- the Contract Value remaining in a Subaccount, Guarantee Period or Fixed
Account must be at least $500 unless the total value is transferred;
- transfers may not be made from any Subaccount to the Fixed Account over
the six months following any transfer from the Fixed Account into one or
more Subaccounts;
- transfers from the Fixed Account may be made one time during the Contract
Year during the thirty days following an anniversary of a Contract Year.
We may charge a $25 fee for each transfer in excess of 12 transfers per calendar
year. However, transfers made pursuant to the Asset Allocation and Dollar Cost
Averaging programs do not count toward these 12 transfers. In addition,
transfers of Guarantee Period Value are subject to Market Value Adjustment
unless the transfer is made within thirty days of the end of the Guarantee
Period. Because a transfer before the end of a Guarantee Period is subject to a
Market Value Adjustment, the amount transferred from the Guarantee Period may be
more or less than the requested dollar amount.
We make transfers pursuant to written or telephone instructions specifying in
detail the requested changes. Transfers involving a Subaccount are based upon
the Accumulation Unit values, as calculated after We receive transfer
instructions. We may suspend, modify or terminate the transfer provision. We
disclaim all liability if We follow in good faith instructions given in
accordance with Our procedures, including requests for personal identifying
information, that are designed to limit unauthorized use of the privilege.
Therefore, an Owner bears the risk of loss in the event of a fraudulent
telephone transfer.
If an Owner authorizes a third party to transact transfers on the Owner's
behalf, We will reallocate the Contract Value pursuant to the authorized asset
allocation program. However, We do not offer or participate in any asset
allocation program and We take no responsibility for any third party asset
allocation program. We may suspend or cancel acceptance of a third party's
instructions at any time and may restrict the investment options available for
transfer under third party authorizations.
An Owner may elect to have transfers made automatically among the Subaccounts on
an annual, semiannual or quarterly basis so that Contract Value is reallocated
to match the percentage allocations in the Owner's predefined allocation
elections. Transfers under this program are not be subject to the $100 minimum
transfer limitation. An election to participate in the automatic asset
reallocation program must be in writing on Our form and returned to Us.
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<PAGE> 36
7. WITHDRAWAL DURING ACCUMULATION PERIOD.
The Owner may redeem some or all of the Contract Value minus previous
withdrawals, plus or minus any applicable Market Value Adjustment and minus any
Withdrawal Charge. Withdrawals will have tax consequences. (See "Federal Tax
Matters.") A withdrawal of the entire Contract Value is called a surrender.
Partial withdrawals and surrenders are subject to the following:
In any Contract Year, an Owner may withdraw or surrender the Contract, without
Withdrawal Charge, up to the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of the Contract Value.
See "Contract Charges and Expenses -- Withdrawal Charge" for a discussion of
charges applicable to partial withdrawals and surrenders.
If Contract Value is allocated to more than one investment option, an Owner must
specify the source of the partial withdrawal. If an Owner does not specify the
source, We redeem Accumulation Units on a pro rata basis from all investment
options in which the Owner has an interest. Accumulation Units attributable to
the earliest Contribution Years are redeemed first.
Partial withdrawals are subject to the following:
- Partial withdrawals are not permitted from the Fixed Account in the first
Contract Year.
- The minimum withdrawal is $100 (before any Market Value Adjustment), or
the Owner's entire interest in the investment option(s) from which
withdrawal is requested.
- The Owner must leave at least $500 in each investment option from which
the withdrawal is requested, unless the total value is withdrawn.
Election to withdraw shall be made in writing to Us at Suite 102, 1290 Silas
Deane Highway, Wethersfield, CT 06109 and should be accompanied by the Contract
if surrender is requested. Withdrawal requests are processed only on days when
the New York Stock Exchange is open. The Withdrawal Value attributable to the
Subaccounts is determined on the basis of the Accumulation Unit values, as
calculated after We receive the request. The Withdrawal Value attributable to
the Subaccounts is paid within seven (7) days after We receive the request.
However, We may suspend withdrawals or delay payment:
- during any period when the New York Stock Exchange is closed
- when trading in a Portfolio is restricted or the SEC determines that an
emergency exists
- as the SEC by order may permit.
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<PAGE> 37
For withdrawal requests from the MVA Option and the Fixed Account, We may defer
any payment for up to six months, as permitted by state law. During the deferral
period, We will continue to credit interest at the current Guaranteed Interest
Rate for the same Guarantee Period.
8. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected during the "free look" period or within 30 days after a Guarantee
Period ends, may be adjusted up or down by a Market Value Adjustment. The Market
Value Adjustment applies before deduction of a Withdrawal Charge.
The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, the Market Value Adjustment
reduces Market Adjusted Value and results in a lower payment. Thus, if interest
rates increase, the withdrawal could be less than the original Purchase Payment
or the original amount allocated to a Guarantee Period. Conversely, if the
Guaranteed Interest Rate is higher than the applicable Current Interest Rate,
the Market Value Adjustment increases Market Adjusted Value and results in a
higher payment.
The Market Value Adjustment (MVA) uses this formula:
(1 + I) (t/365)
MVA = MPV X [ [-------] -1 ]
(1 + J)
Where I is the Guaranteed Interest Rate being credited to the Guarantee
Period Value (MPV) subject to the Market Value Adjustment,
J is the Current Interest Rate We declare, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
Guarantee Period the length of which is equal to the balance of the
Guarantee Period for the Guarantee Period Value subject to the Market Value
Adjustment, rounded to the next higher number of complete years, and
t is the number of days remaining in the Guarantee Period.
For an illustration showing an upward and a downward adjustment, see Appendix A.
31
<PAGE> 38
9. GUARANTEED DEATH BENEFIT.
We pay a death benefit to the Beneficiary if any of the following occurs during
the Accumulation Period:
- the Owner, or a joint owner, dies
- the Annuitant dies with no living contingent annuitant
- the contingent annuitant dies after the Annuitant
The amount of the death benefit depends on the age of the deceased Owner or
Annuitant when the death benefit becomes payable. If the deceased Owner or
Annuitant dies before age 91, We will pay the Beneficiary the greatest of the
following:
- Contract Value
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the deceased's age 80 or the date of
death, plus Purchase Payments minus all withdrawals from age 80 to the
date of death; and
- the greatest anniversary value before death
The greatest anniversary value equals:
- the Contract Values on each Contract anniversary prior to the deceased's
age 81, plus the dollar amount of any Purchase Payments made since that
anniversary, minus
- withdrawals since that anniversary.
We pay Contract Value to the Beneficiary if the Owner or Annuitant dies after
age 91. The Owner or Beneficiary, as appropriate, may elect to have all or a
part of the death proceeds paid to the Beneficiary under one of the Annuity
Options described under "Annuity Options" below.
For Non-Qualified Plan Contracts, if the Beneficiary is the Owner's surviving
spouse, the surviving spouse may elect to be treated as the successor Owner of
the Contract with no requirement to begin Death Benefit distribution.
10. GUARANTEED RETIREMENT INCOME BENEFIT.
Guaranteed Retirement Income Benefit (GRIB) is an optional Contract benefit.
GRIB provides a minimum fixed annuity guaranteed lifetime income to the
Annuitant as described below. The Owner must elect GRIB on the initial Contract
application. GRIB may be discontinued after the seventh Contract anniversary by
written notice to Us. Once discontinued, GRIB may not be elected again.
GRIB may be exercised only within thirty days after the seventh or later
Contract anniversary. In addition, GRIB must be exercised between the
Annuitant's 60th and 91st birthdays. Therefore, GRIB may not be appropriate for
Annuitants age 80 and older. If the Annuitant is younger than age 44 on the Date
of Issue, GRIB may be exercised after the Contract's 15th Anniversary.
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<PAGE> 39
GRIB payments are based on the greater of:
- the income provided by applying the GRIB base to the guaranteed annuity
factors; and
- the income provided by applying Contract Value to the current annuity
factors.
The GRIB base is the greatest of:
- Contract Value
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the Annuitant's age 80 or the GRIB
exercise date plus Purchase Payments minus all withdrawals from age 80 to
the GRIB exercise date; and
- the greatest anniversary value before the exercise date
The greatest anniversary value equals:
- the highest of the Contract Values on each Contract anniversary prior to
the Annuitant's age 81, plus
- the dollar amount of any Purchase Payments made since that anniversary,
minus
- withdrawals since that anniversary.
The guaranteed annuity factors are based on the 1983a table projected using
projection scale G, with interest at 2.5% (the "Annuity 2000" table). However,
if GRIB is exercised on or after the 10th Contract anniversary, interest at
3.50% is assumed.
Because GRIB is based on conservative actuarial factors, the income guaranteed
may often be less than the income provided by applying Contract Value to current
annuity factors.
GRIB is paid for the life of a single Annuitant or the lifetimes of two
Annuitants. If paid for the life of a single Annuitant, GRIB is paid in the
amount determined above. If paid for the lifetimes of two Annuitants, GRIB is
paid in the amount determined above, but the age of the older Annuitant is used
to determine the GRIB base.
If the Owner elects GRIB payable for the life of a single Annuitant, the Owner
may elect a period certain of 5, 10, 15, or 20 years. If the Annuitant dies
before GRIB has been paid for the period elected, the remaining GRIB payments
are paid as they fall due to the Beneficiary, if the Beneficiary is a natural
person. If the Beneficiary is not a natural person, the remaining payments may
be commuted at a minimum 2.50% interest rate and paid in a lump sum.
If the Owner elects GRIB payable for the lifetimes of two Annuitants, the period
certain is 25 years. The full GRIB is payable as long as at least one of the two
Annuitants is alive, but for no less than 25 years. If both Annuitants die
before GRIB has been paid for 25 years, the remaining GRIB payments are paid as
they fall due to the Beneficiary, if the Beneficiary is a natural person. If the
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<PAGE> 40
Beneficiary is not a natural person, the remaining payments may be commuted at a
minimum 2.50% interest rate and paid in a lump sum.
GRIB payments are also available on a quarterly, semi-annual or annual basis. We
may make other annuity options available.
CONTRACT CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk
- administrative expenses
- Records Maintenance Charge
- Withdrawal Charge
- Guaranteed Retirement Income Benefit charge, if elected
Subject to certain expense limitations, investment management fees and other
Fund expenses are indirectly borne by the Owner.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
1. MORTALITY AND EXPENSE RISK CHARGE.
We assess each Subaccount a daily asset charge for mortality and expense risks
at a rate of 1.25% per annum. Variable Annuity payments reflect the investment
experience of each Subaccount but are not affected by changes in actual
mortality experience or by actual expenses incurred by Us.
The mortality risk We assume arises from two contractual obligations. First, if
the Owner or Annuitant dies before age 91 and before the Annuity Date, We may,
in some cases, pay more than Contract Value. (See "Guaranteed Death Benefit",
page 29) Second, when Annuity Options involving life contingencies are selected,
We assume the risk that Annuitants will live beyond actuarial life expectancies.
We also assume an expense risk. Actual expenses of administering the Contracts
may exceed the amounts We recover from the Records Maintenance Charge or the
administrative cost portion of the daily asset charge.
2. ADMINISTRATIVE COSTS.
We assess each Subaccount a daily asset charge for administrative costs at a
rate of .15% per annum. This charge reimburses Us for expenses incurred for
administering the Contracts. These expenses include Owner inquiries, changes in
allocations, Owner reports, Contract maintenance costs, and data processing
costs. The administrative charge covers the average anticipated administrative
expenses incurred while the Contracts are in force. There is not necessarily a
direct relationship between the amount of the charge and the administrative
costs of a particular Contract
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3. RECORDS MAINTENANCE CHARGE.
We deduct an annual Records Maintenance Charge of $30 during the Accumulation
Period. The charge is assessed:
- at the end of each Contract Year,
- on Contract surrender and
- upon annuitization.
However, We do not deduct the Records Maintenance Charge for Contracts with
Contract Value of at least $50,000 on the assessment date.
This charge reimburses us for the expenses of establishing and maintaining
Contract records. The Records Maintenance Charge reduces the net assets of each
Subaccount, Guarantee Period and the Fixed Account.
The Records Maintenance Charge is assessed equally among all investment options
in which the Owner has an interest.
4. WITHDRAWAL CHARGE.
We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal
Charge covers Contract sales expenses, including commissions and other promotion
and acquisition expenses.
Each Contract Year, an Owner may withdraw or surrender the Contract, without
Withdrawal Charge, up to the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of the Contract Value.
If the Owner withdraws a larger amount, the excess Purchase Payments withdrawn
are subject to a Withdrawal Charge. The Withdrawal Charge applies in the first
seven Contribution Years following each Purchase Payment as follows:
<TABLE>
<CAPTION>
CONTRIBUTION WITHDRAWAL
YEAR CHARGE
- ------------ ----------
<S> <C>
First............................. 7%
Second............................ 6%
Third............................. 5%
Fourth............................ 5%
Fifth............................. 4%
Sixth............................. 3%
Seventh........................... 2%
Eighth and following.............. 0%
</TABLE>
Purchase Payments are deemed surrendered in the order in which they were
received.
When a withdrawal is requested, the Owner receives a check in the amount
requested. If a Withdrawal Charge applies, Contract Value is reduced by the
Withdrawal Charge, plus the dollar amount sent to the Owner.
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Because Contribution Years are based on the date each Purchase Payment is made,
Owners may be subject to a Withdrawal Charge, even though the Contract may have
been issued many years earlier. (For additional details, see "Withdrawal During
Accumulation Period.")
Subject to certain exceptions and state approvals, withdrawal charges are not
assessed on withdrawals:
- 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;
- within thirty days following an Owner's discharge from a hospital or
skilled health care facility after a confinement of at least thirty days;
or
- if the Owner or Annuitant becomes disabled after the Contract is issued
and before age 65.
Restrictions and provisions related to the nursing care or hospitalization
disability waivers are described in Contract endorsements.
The Withdrawal Charge compensates Us for Contract distribution expense.
Currently, We anticipate Withdrawal Charges will not fully cover distribution
expenses. Unrecovered distribution expenses may be recovered from Our general
assets. Those assets may include proceeds from the mortality and expense risk
charge.
The Withdrawal Charge also applies at annuitization to amounts attributable to
Purchase Payments in their seventh Contribution Year or earlier. No Withdrawal
Charge applies upon annuitization if the Owner selects Annuity Options 2, 3 or 4
or if payments under Annuity Option 1 are scheduled to continue for at least
five years. See "The Annuity Period--Annuity Options" for a discussion of the
Annuity Options available.
We may reduce or eliminate the Withdrawal Charge if We anticipate that We will
incur lower sales expenses or perform fewer services because of economies due to
the size of a group, the average contribution per participant, or the use of
mass enrollment procedures. No Withdrawal Charge applies to Contracts sold to
officers, directors and employees of KILICO and Kemper Variable Series (formerly
Investors Fund Series) ("KVS"), KVS investment advisers and principal
underwriter or certain affiliated companies, or to any trust, pension,
profit-sharing or other benefit plan for such persons.
5. GUARANTEED RETIREMENT INCOME BENEFIT CHARGE.
The annual charge for GRIB is 0.25% of Contract Value. We deduct a pro rata
portion of the charge on each Contract Quarter anniversary. The quarterly charge
is deducted pro rata from the investment options in which the Owner has an
interest. We no longer charge for GRIB after the Annuitant's 91st birthday.
6. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deduction of investment management
fees and certain general operating expenses. Subject to limitations,
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Owners indirectly bear these fees and expenses. Investment management fees
appear on page 7. Further detail is provided in the attached prospectuses for
the Portfolios and the Funds' Statements of Additional Information.
7. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If We pay state premium taxes, We may charge the amount
paid against Contract Value upon annuitization. See "Appendix--State Premium Tax
Chart" in the Statement of Additional Information.
8. EXCEPTIONS.
We may decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, We guarantee
that they will not increase. We bear the risk that such charges will not cover
Our costs. On the other hand, should such charges exceed Our costs, We will not
refund any charges. Any profit is available for corporate purposes including,
among other things, payment of distribution expenses.
We may also offer reduced fees and charges, including but not limited to,
Records Maintenance Charge and mortality and expense risk and administrative
charges, for certain sales that may result in cost savings. We may also reduce
or waive fees and charges and/or credit additional amounts on Contracts issued
to:
- employees of ZFS
- employees and registered representatives (and their families) of broker-
dealers (or their affiliated financial institutions) that have entered
into selling group agreements with IBS.
Reductions in these fees and charges will not unfairly discriminate against any
Owner.
THE ANNUITY PERIOD
In addition to GRIB, Contracts may be annuitized under one of several Annuity
Options. Annuity payments begin on the Annuity Date and under the selected
Annuity Option. The Annuity Date must be at least one year after the Date of
Issue. Subject to state variation, the Annuity Date may not be deferred beyond
the later of the Annuitant's 91st birthday (100th birthday if the Contract is
part of a Charitable Remainder Trust) or ten (10) years after the Date of Issue.
However, annuitization is delayed beyond the Annuity Date if We are making
systematic withdrawals based on the Owner's life expectancy. In this case,
annuitization begins when life expectancy withdrawals are stopped.
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
- the selected Annuity Option, and
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- the investment performance of the selected Subaccount(s) (if variable
annuitization is elected).
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly. Annuity payments may be subject to a Withdrawal Charge. (For
additional details, see "Withdrawal Charge.")
2. ANNUITY OPTIONS.
The Owner may elect one of the Contract's Annuity Options. The Owner may decide
at any time (subject to the provisions of any applicable retirement plan and
state variations) to begin annuity payments before the Annuitant's 91st birthday
(100th birthday if the Contract is part of a Charitable Remainder Trust) or
within ten (10) years after the Date of Issue, whichever is later. The Owner may
change the Annuity Option before the Annuity Date. If no other Annuity Option is
elected, monthly annuity payments are made in accordance with Option 3 below
with a ten (10) year period certain. Generally, annuity payments are made in
monthly installments. However, We may make a lump sum payment if the net
proceeds available to apply under an Annuity Option are less than $2,000. In
addition, if the first monthly payment is less than $25, We may change the
frequency of payments to quarterly, semiannual or annual intervals so that the
initial payment is at least $25.
The amount of periodic annuity payments may depend upon:
- the Annuity Option selected;
- the age and sex of the payee; and
- the investment experience of the selected Subaccount(s).
For example:
- if Option 1, income for a specified period, is selected, shorter
periods result in fewer payments with higher values.
- if Option 2, life income, is selected, it is likely that each payment
will be smaller than would result if income for a short period were
specified.
- if Option 3, life income with installments guaranteed, is selected,
each payment will probably be smaller than would result if the life
income option were selected.
- if Option 4, the joint and survivor annuity, is selected, each payment
is smaller than those measured by an individual life income option.
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. The sex of the payee influences the amount of periodic payments
because females live longer than males, resulting in smaller payments. Finally,
if the Owner participates in a Subaccount with higher investment performance, it
is likely the Owner will receive a higher periodic payment.
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If the Owner dies before the Annuity Date, available Annuity Options are
limited. Unless the Owner has imposed restrictions, the Annuity Options
available are:
- Option 2 or
- 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, unless a later date is prescribed
by federal regulation.
OPTION 1--INCOME FOR SPECIFIED PERIOD.
Option 1 provides an annuity payable monthly for a selected number of years
ranging from five to thirty. Upon the payee's death, if the Beneficiary is an
individual, We automatically continue payments to the Beneficiary for the
remainder of the period specified. If the Beneficiary is not an individual
(e.g., an estate or trust), We pay the discounted value of the remaining
payments in the specified period. Although there is no life contingency risk
associated with Option 1, We continue to deduct the daily asset charges for
mortality and expense risks and administrative costs.
Payees may elect to cancel all or part of the remaining payments due under
Option 1. We will then pay the discounted value of the remaining payments.
OPTION 2--LIFE INCOME.
Option 2 provides for an annuity over the lifetime of the payee. If Option 2 is
elected, annuity payments terminate automatically and immediately on the payee's
death 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.
Option 3 provides an annuity payable monthly during the payee's lifetime.
However, Option 3 also provides for the automatic continuation of payments for
the remainder of the specified period if the Beneficiary is an individual and
payments have been made for less than the specified period. The period specified
may be five, ten, fifteen or twenty years. If the Beneficiary is not an
individual, We pay the discounted value of the remaining payments in the
specified period.
OPTION 4--JOINT AND SURVIVOR ANNUITY.
Option 4 provides an annuity payable monthly while both payees are living. Upon
either payee's death, the monthly income payable continues over the life of the
surviving payee at a percentage specified when Option 4 is elected. Annuity
payments terminate automatically and immediately upon the surviving payee's
death without regard to the number or total amount of payments received.
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3. ALLOCATION OF ANNUITY.
The Owner may elect payments on a fixed or variable basis, or a combination. Any
Fixed Account Contract Value or Guarantee Period Value is annuitized on a fixed
basis. Any Separate Account Contract Value is annuitized on a variable basis.
The MVA Option is not available during the Annuity Period. An Owner may exercise
the transfer privilege during the Accumulation Period. Transfers during the
Annuity Period are subject to certain limitations.
4. TRANSFER DURING ANNUITY PERIOD.
During the Annuity Period, the payee may, by written request, transfer
Subaccount Value from one Subaccount to another Subaccount or to the Fixed
Account, subject to the following limitations:
- Transfers to a Subaccount are prohibited during the first year of the
Annuity Period; subsequent transfers are limited to one per year.
- All interest in a Subaccount must be transferred.
- If We receive notice of transfer to a Subaccount more than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the date we receive the notice.
- If We receive notice of transfer to a Subaccount less than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the annuity payment date.
- Transfers to the Fixed Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least thirty (30) days
prior to the anniversary.
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
5. ANNUITY UNIT VALUE.
Annuity Unit value is determined independently for each Subaccount.
Annuity Unit value for any Valuation Period is:
- Annuity Unit value for the preceding Valuation Period times
- the net investment factor for the current Valuation Period times
- an interest factor which offsets the 2.5% per annum rate of investment
earnings assumed by the Contract's annuity tables.
The net investment factor for a Subaccount for any Valuation Period is:
- the Subaccount's Accumulation Unit value at the end of the current
Valuation Period, plus or minus the per share charge or credit for taxes
reserved; divided by
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- the Subaccount's Accumulation Unit value at the end of the preceding
Valuation Period, plus or minus the per share charge or credit for taxes
reserved.
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
When annuity payments begin, the value of the Owner's Contract interest is:
- Accumulation Unit values at the end of the Valuation Period falling on
the 20th or 7th day of the month before the first annuity payment is due
times
- the number of Accumulation Units credited at the end of the Valuation
Period minus
- premium taxes and Withdrawal Charges
The first annuity payment is determined by multiplying the benefit per $1,000 of
value shown in the applicable annuity table by the number of thousands of
dollars of Contract Value.
A 2.5% per annum rate of investment earnings is assumed by the Contract's
annuity tables. If the actual net investment earnings rate exceeds 2.5% per
annum, payments increase accordingly. Conversely, if the actual rate is less
than 2.5% per annum, annuity payments decrease.
7. SUBSEQUENT PERIODIC PAYMENTS UNDER VARIABLE ANNUITY.
Subsequent annuity payments are determined by multiplying the number of Annuity
Units by the Annuity Unit value at the Valuation Period before each annuity
payment is due. The first annuity payment is divided by the Annuity Unit value
as of the Annuity Date to establish the number of Annuity Units representing
each annuity payment. This number does not change.
8. FIXED ANNUITY PAYMENTS.
Each Fixed Annuity payment is determined from tables We prepare. These tables
show the monthly payment for each $1,000 of Contract Value allocated to a Fixed
Annuity. Payment is based on the Contract Value at the date before the annuity
payment is due. Fixed Annuity payments do not change regardless of investment,
mortality or expense experience.
9. DEATH PROCEEDS.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, depend upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
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FEDERAL INCOME TAXES
A. INTRODUCTION
This discussion is not exhaustive 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
buying a Contract. In addition, WE MAKE NO GUARANTEE REGARDING ANY TAX
TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CONTRACT OR OF ANY TRANSACTION
INVOLVING A CONTRACT.
B. OUR TAX STATUS
We are taxed as a life insurance company and the operations of the Separate
Account are treated as a part of Our total operations. The Separate Account is
not separately taxed as a "regulated investment company". Investment income and
capital gains of the Separate Account are not taxed to the extent they are
applied under a Contract. We do not anticipate that We will incur federal income
tax liability attributable to the income and gains of the Separate Account, and
therefore We do not intend to provide for these taxes. If We are taxed on
investment income or capital gains of the Separate Account, then We may impose a
charge against the Separate Account to provide for these taxes.
C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under the Code, except as described below, increases in the Contract Value of a
Non-Qualified Plan Contract are generally not taxable to the Owner or Annuitant
until received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
- the Contract must be owned by an individual
- Separate Account investments must be "adequately diversified"
- We, rather than the Owner, must be considered the owner of Separate
Account assets for federal tax purposes, and
- annuity payments must appropriately amortize Purchase Payments and
Contract earnings.
NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons", such as corporations, trusts or similar entities, are not
annuity contracts for federal income tax purposes. The investment income on
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these contracts is taxed as ordinary income received or accrued by the non-
natural owner. There are exceptions to this general rule for non-natural owners.
Contracts are generally treated as held by a natural person if the nominal owner
is a trust or other entity holding the contract as an agent for a natural
person. However, this special exception does not apply to an employer who is the
nominal owner of a contract under a non-qualified deferred compensation plan for
its employees.
Additional exceptions to this rule include:
- contracts acquired by a decedent's estate
- certain Qualified Plan Contracts
- Contracts purchased by employers at termination of certain qualified
plans
- Contracts used with structured settlement agreements
- Contracts purchased with a single premium when the annuity starting date
is no later than a year from Contract purchase and substantially equal
periodic payments are made at least annually.
DIVERSIFICATION REQUIREMENTS. For a contract to be treated as an annuity for
federal income tax purposes, separate account investments must be "adequately
diversified". The Treasury Secretary issued regulations prescribing standards
for adequately diversifying separate account investments. If the Separate
Account failed to comply with these diversification standards, the Contract
would not be treated as an annuity contract for federal income tax purposes and
the Owner would generally be taxed on the difference between Contract Value and
Purchase Payments.
Although We do not control Fund investments, We expect the Fund will comply with
these 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 of the assets of the separate account supporting the
contract. Then, income and gains from separate account assets are includible in
the owner's gross income. The IRS, in published rulings, stated that a variable
contract owner will be considered the owner of separate account assets if the
owner possesses the ability to exercise investment control over the assets. As
of the date of this Prospectus, no investor control guidance is available.
We may modify the Contract as necessary to attempt to prevent the Owner from
being considered the owner of the Separate Account assets.
DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur)
when the Annuitant has reached an advanced age, E.G., past age 85, the Contract
might not be treated as an annuity for federal income tax purposes. In that
event, the income and gains under the Contract could be currently includible in
the Owner's income.
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The following discussion assumes that the Contract is treated as an annuity
contract for tax purposes and that We are treated as the owner of Separate
Account assets.
2. TAXATION OF PARTIAL AND FULL WITHDRAWALS
Partial withdrawals from a Non-Qualified Plan Contract are includible in income
if the withdrawal includes investment gain. Full withdrawals are also includible
in income if they exceed the "investment in the contract." Investment in the
contract equals the total of Purchase Payments minus amounts previously received
from the Contract.
Any assignment or pledge (or agreement to assign or pledge) of Contract Value,
is treated as a withdrawal. Investment in the contract is increased by the
amount includible in income with respect to such assignment or pledge. If an
individual transfers a Contract interest without adequate consideration to
someone other than the Owner's spouse (or to a former spouse incident to
divorce), the Owner is taxed on the difference between Contract Value and the
"investment in the contract." In this case, the transferee's investment in the
contract is increased to reflect the increase in the transferor's income.
The Contract's death benefit may exceed Purchase Payments or Contract Value. As
described in this Prospectus, We impose certain charges with respect to the
death benefit. It is possible that those charges (or some portion) could be
treated as a partial withdrawal.
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
adviser should be consulted in those situations.
3. TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as income equals the
payment minus the exclusion amount. The exclusion amount for variable annuity
payments is the "investment in the contract" allocated to the variable annuity
option and adjusted for any period certain or refund feature, divided by the
number of payments expected to be made. The exclusion amount for fixed annuity
payments is the payment times the ratio of the investment in the contract
allocated to the fixed annuity option and adjusted for any period certain or
refund feature, to expected value of all annuity payments.
Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments stop because
the Annuitant dies before the total amount of the investment in the contract is
recovered, the unrecovered amount generally is allowed as a deduction to the
Annuitant in the last taxable year.
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4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon the Owner's or Annuitant's death. Before the
Annuity Date, death benefits are includible in income and:
- if distributed in a lump sum are taxed like a full withdrawal, or
- if distributed under an annuity option are taxed like annuity payments.
After the Annuity Date, where a guaranteed period exists 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 and:
- if received in a lump sum are includible in income if they exceed the
unrecovered investment, or
- if distributed in accordance with the selected annuity option are fully
excludable from income until the remaining investment in the contract is
deemed to be recovered.
Thereafter, all annuity payments are fully includible in income.
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
A 10% penalty tax applies to a taxable payment from a Non-Qualified Plan
Contract unless:
- received on or after the Owner reaches age 59 1/2,
- attributable to the Owner's disability,
- made to a Beneficiary after the Owner's death or, for non-natural Owners,
after the primary Annuitant's death,
- made as a series of substantially equal periodic payments (at least
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,
- made under a Contract purchased with a single premium when the annuity
starting date is no later than a year from Contract purchase and
substantially equal periodic payments are made at least annually, or
- made with annuities used with structured settlement agreements.
6. AGGREGATION OF CONTRACTS
The taxable amount of an annuity payment or withdrawal from a Non-Qualified Plan
Contract is determined by combining some or all of the Non-Qualified Plan
Contracts owned by an individual. For example, if a person purchases a Contract
and also purchases an immediate annuity at approximately the same time, the IRS
may treat the two contracts as one contract. In addition, if a person purchases
two or more deferred annuity contracts from the same company (or its affiliates)
during any calendar year, these contracts are treated
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as one contract. The effects of this aggregation are not clear. However, it
could affect the taxable amount of an annuity payment or withdrawal and the
amount which might be subject to the 10% penalty tax.
7. LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
For Contracts issued after June 8, 1997 to a non-natural owner, otherwise
deductible interest may no longer be deductible by the owner. However, this
interest deduction disallowance does not affect Contracts generating taxable
income. Entities considering purchasing the Contract, or entities that will be
beneficiaries under a Contract, should consult a tax adviser.
D. QUALIFIED PLANS
The Contracts 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 contracts are referred to as "Qualified
Contracts." Numerous special tax rules apply to the participants in Qualified
Plans and to Qualified Plan Contracts. We make no attempt in this Prospectus to
provide more than general information about use of the Contract with the various
types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of plan
and the terms and conditions of the plan. For example, for both withdrawals and
annuity payments under certain Qualified Contracts, there may be no "investment
in the contract" and the total amount received may be taxable. Also, loans from
Qualified Contracts, where allowed, are subject to a variety of limitations,
including restrictions as to the amount that may be borrowed, the duration of
the loan, the number of allowable loans and the manner in which the loan must be
repaid. (Owners should always consult their tax advisers and retirement plan
fiduciaries prior to exercising their loan privileges.) Both the amount of the
contribution that may be made, and the tax deduction or exclusion that the Owner
may claim for such contribution, are limited under Qualified Plans. If this
Contract is used 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 their ages. Furthermore, the
length of any Guarantee Period may be limited in some circumstances to satisfy
certain minimum distribution requirements under the Code.
Under a Qualified Contract, rules specify the form of distribution and start
dates. An excise tax is imposed for failure to comply with the minimum
distribution requirements. 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
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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 of April 1 of the calendar year following the calendar year in which
the employee retires.
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Plan Contracts. For Individual Retirement Annuities, the penalty tax does not
apply to a payment:
- received after the Owner reaches age 55 and has separated from service,
- received after the Owner reaches age 59 1/2,
- received after the Owner's death or because of the Owner's disability, or
- made as a series of substantially equal periodic payments (at least
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.
In addition, the penalty tax does not apply to certain distributions taken after
December 31, 1997 used for qualified first time home purchases or for higher
education expenses. Special conditions must be met to qualify for these
exceptions. Owners wishing to take a distribution for these purposes should
consult their tax adviser. Other exceptions may apply.
Qualified Plan Contracts are amended to conform to plan requirements. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, We are not bound by terms and conditions of Qualified
Plans if they are inconsistent with the Contract.
1. QUALIFIED PLAN TYPES
We issue Contracts for the following types of Qualified Plans.
INDIVIDUAL RETIREMENT ANNUITIES. The Code permits eligible individuals to
contribute to an individual retirement annuity known as an "IRA." IRAs limit the
amounts contributed, the persons eligible and the time when distributions start.
Also, subject to direct rollover and mandatory withholding requirements,
distributions from other types of Qualified Plans may be "rolled over" on a tax-
deferred basis into an IRA. The Contract may not fund an "Education IRA."
IRAs generally may not provide life insurance coverage, but they may provide a
death benefit that equals the greater of the premiums paid and the contract
value. The Contract's death benefit may exceed Purchase Payments or Contract
Value. It is possible that the death benefit could be viewed as violating the
prohibition on investment in life insurance contracts and failing IRA
requirements.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). The Code allows employers to establish
simplified employee pension plans, using the employees' IRAs. Under these plans
the employer may make limited deductible contributions on behalf
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of the employees to IRAs. Employers and employees intending to use the Contract
in connection with these plans should seek tax competent advice.
SIMPLE IRAS. 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 Contract's death benefit for purposes of the tax rules governing IRAs (which
would include SIMPLE IRAs). Employers and employees intending to use the
Contract in connection with such plans should seed competent advice.
ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth
IRAs differ from other IRAs in that:
- Roth IRA contributions are never deductible,
- "qualified distributions" from a Roth IRA are excludable from income,
- different eligibility and mandatory distribution requirements apply,
- a rollover to a Roth IRA must be a "qualified rollover contribution,"
under the Code.
A rollover from an IRA to a Roth IRA is includible in gross income but the 10
percent penalty tax does not apply.
An IRA may be converted into a Roth IRA without taking a distribution. An
individual may convert by notifying the IRA issuer or trustee. The conversion of
an IRA to a Roth IRA is a special type of qualified rollover distribution.
Hence, the IRA participant must be eligible for a qualified rollover
distribution to convert an IRA to a Roth IRA. A conversion typically results in
the inclusion of some or all of the IRA value in gross income. 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
-- made after the Owner attains age 59 1/2,
-- made after the Owner's death,
-- attributable to the Owner being disabled, or
-- made to a qualified first-time homebuyer.
- a payment or distribution made in a taxable year that is five years or
more after
-- the first taxable year for which a contribution was made to the
Owner's Roth IRA, or
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-- the first taxable year for which rollover was made to the Owner's
Roth IRA. A non-qualified distribution from a Roth IRA is generally
taxed like a distribution from an IRA. Distributions from a Roth IRA
need not commence at age 70 1/2.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT-SHARING
PLANS. The Code permits 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 Contracts in order to provide benefits under the
plans. The Contract provides a death benefit that in certain circumstances may
exceed the greater of the Purchase Payments and the Contract 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 Contract in connection with such plans should seek
competent advice.
TAX-SHELTERED ANNUITIES. Code Section 403(b) permits public school employees
and employees of certain types of charitable, educational and scientific
organizations to have their employers purchase annuity contracts for them and,
subject to certain limitations, to exclude the amount of purchase payments from
taxable gross income. These annuity contracts are commonly referred to as
"tax-sheltered annuities". Purchasers of the Contracts for such purposes should
seek competent advice as to eligibility, limitations on permissible amounts of
purchase payments and other tax consequences associated with the Contracts. In
particular, purchasers should consider that the Contract provides a death
benefit that in certain circumstances may exceed the greater of the Purchase
Payments and the Contract 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
Contract were characterized as an incidental death benefit, it is unlikely to
violate those limits unless the Contract Owner also purchases a life insurance
contract as part of his or her tax-sheltered annuity plan.
Tax-sheltered annuity contracts must contain restrictions on withdrawals of
- contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988,
- earnings on those contributions, and
- earnings after December 31, 1988 on amounts attributable to salary
reduction contributions held as of December 31, 1998. These amounts can
be paid only if the employee has reached age 59 1/2, separated from
service, died, or becomes disabled, or in the case of hardship. Amounts
permitted to be distributed in the event of hardship are limited to
actual
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<PAGE> 56
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.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. 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 Contract 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 Contracts
in connection with such plans should seek competent advice.
2. DIRECT ROLLOVERS
If the Contract 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 Contract 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
- minimum distributions required under section 401(a)(9) of the Code, and
- 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 Contract,
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
We withhold and send to the U.S. Government a part of the taxable portion of
each distribution unless the payee notifies Us before distribution of an
available election not to have any amounts withheld. In certain circumstances,
We may be required to withhold tax. The withholding rates for the taxable
portion of periodic annuity payments are the same as the withholding rates for
wage payments. In addition, the withholding rate for 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%. The
withholding rate for eligible rollover distributions is 20%.
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DISTRIBUTION OF CONTRACTS
The Contracts are sold by licensed insurance agents in those states where the
Contract may be lawfully sold. The agents are also registered representatives of
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc. Sales commissions may vary, but are not expected to
exceed 6.25% of Purchase Payments. In addition to commissions, We may pay
additional promotional incentives, in the form of cash or other compensation, to
selling broker-dealers. These incentives may be offered to certain licensed
broker-dealers that sell or are expected to sell certain minimum amounts during
specified time periods. The Contracts are distributed through the principal
underwriter for the Separate Account:
Investors Brokerage Services, Inc. ("IBS")
1 Kemper Drive
Long Grove, Illinois, 60049
IBS is Our wholly-owned subsidiary. IBS enters into selling group agreements
with affiliated and unaffiliated broker-dealers. All of the investment options
are not available to all Owners. The investment options are available only under
Contracts that are sold or serviced by broker-dealers having a selling group
agreement with IBS authorizing the sale of Contracts with the investment options
specified in this Prospectus. Other distributors may sell and service contracts
with different investment options.
VOTING RIGHTS
Proxy materials in connection with any Fund shareholder meeting are delivered to
each Owner with Subaccount interests invested in the Fund as of the record date.
Proxy materials include a voting instruction form. We vote all Fund shares
proportionately in accordance with instructions received from Owners. We will
also vote any Fund shares attributed to amounts We have accumulated in the
Subaccounts in the same proportion that Owners vote. A Fund is not required to
hold annual shareholders' meetings. Funds hold special meetings as required or
deemed desirable for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement.
Owners have voting rights in a Portfolio based upon the Owner's proportionate
interest in the corresponding Subaccount as measured by units. Owners have
voting rights before surrender, the Annuity Date or the death of the Annuitant.
Thereafter, the payee entitled to receive Variable Annuity payments has voting
rights. During the Annuity Period, Annuitants' voting rights decrease as Annuity
Units decrease.
REPORTS TO CONTRACT OWNERS AND INQUIRIES
After each Contract anniversary, We send Owners a statement showing amounts
credited to each Subaccount and to the Fixed Account Option. In addition, Owners
transferring amounts among the investment options or
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<PAGE> 58
making additional payments receive written confirmation of these transactions.
We will also send a current statement upon Owner request. Owners are also sent
annual and semi-annual reports for the Portfolios that correspond to the
Subaccounts in which the Owner invests and a list of the securities held by that
Portfolio. In addition, We 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 selling agent 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
Under Our Dollar Cost Averaging program, a predesignated portion of Subaccount
Value is automatically transferred monthly, quarterly, semiannually or annually
for a specified duration to other Subaccounts, Guarantee Periods and the Fixed
Account. The Dollar Cost Averaging program is available only during the
Accumulation Period. An Owner may also elect transfers from the Fixed Account on
a monthly or quarterly basis for a minimum duration of one year. An Owner may
enroll any time by completing Our Dollar Cost Averaging form. Transfers are made
on the second Tuesday of the month. We must receive the enrollment form at least
five (5) business days before the transfer date.
An Owner participating in the Dollar Cost Averaging program may allocate all or
a portion of the initial Purchase Payment to the Kemper Money Market Subaccount
#2. This is the only Subaccount with no deduction for the 1.40% charge for
mortality and expense risks and administrative costs. The Owner must transfer
all Subaccount Value out of Kemper Money Market Subaccount #2 within one year
from the initial Purchase Payment. If an Owner terminates Dollar Cost Averaging
or does not deplete all Subaccount Value in Kemper Money Market Subaccount #2
within one year, We automatically transfer any remaining Subaccount Value to
Kemper Money Market Subaccount #1.
The minimum transfer amount is $100 per Subaccount, Guarantee Period or Fixed
Account. The total Contract Value in an account at the time Dollar Cost
Averaging is elected must be at least equal to the amount designated to be
transferred on each transfer date times the duration selected.
Dollar Cost Averaging ends if:
- the number of designated monthly transfers has been completed
- Contract Value in the transferring account is insufficient to complete
the next transfer; the remaining amount is transferred
- We receive the Owner's written termination at least five (5) business
days before the next transfer date
- the Contract is surrendered or annuitized.
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If the Fixed Account balance is at least $10,000, an Owner may elect automatic
calendar quarter transfers of interest accrued in the Fixed Account to one or
more of the Subaccounts or Guarantee Periods. An Owner may enroll in this
program any time by completing Our Dollar Cost Averaging form. Transfers are
made within five business days of the end of the calendar quarter. We must
receive the enrollment form at least ten (10) days before the end of the
calendar quarter.
Dollar Cost Averaging is not available during the Annuity Period.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing Owners to pre-authorize
periodic withdrawals during the Accumulation Period. Owners instruct us to
withdraw selected amounts, or amounts based on the Owner's life expectancy, from
the Fixed Account, or from any of the Subaccounts or Guarantee Periods on a
monthly, quarterly, semi-annual or annual basis. The SWP is available to Owners
who request a minimum $100 periodic payment. A market value adjustment applies
to any withdrawals under the SWP from a Guarantee Period, unless effected within
30 days after the Guarantee Period ends. SWP withdrawals from the Fixed Account
are not available in the first Contract Year and are limited to the amount not
subject to Withdrawal Charges. If the amounts distributed under the SWP from the
Subaccounts or Guarantee Periods exceed the free withdrawal amount, the
Withdrawal Charge is applied on any amounts exceeding the free withdrawal
amount. WITHDRAWALS TAKEN UNDER THE SWP MAY BE SUBJECT TO THE 10% TAX PENALTY ON
EARLY WITHDRAWALS AND TO INCOME TAXES AND WITHHOLDING. Owners interested in SWP
may obtain an application and information concerning this program and its
restrictions from Us or their agent. We give thirty days' notice if We amend the
SWP. The SWP may be terminated at any time by the Owner or Us.
EXPERTS
The consolidated balance sheets of KILICO as of December 31, 1998 and 1997 and
the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1998 and
1997 have been included herein and in the registration statement in reliance
upon the report of PricewaterhouseCoopers LLP, independent public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of KILICO and
subsidiaries for the period from January 4, 1996 to December 31, 1996 and the
financial statement schedules as of December 31, 1996, have been included herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
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LEGAL MATTERS
Legal matters with respect to Our organization, Our authority to issue annuity
contracts and the validity of the Contract have been passed upon by Frank
Julian, Our Associate General Counsel. Jorden Burt Boros Cicchetti Berenson &
Johnson, Washington, D.C., has advised Us on certain legal matters concerning
federal securities laws applicable to the issue and sale of the Contracts.
SPECIAL CONSIDERATIONS
We reserve the right to amend the Contract to meet the requirements of federal
or state laws or regulations. We will notify the Owner in writing of these
amendments.
An Owner's rights under a Contract may be assigned as provided by law. An
assignment will not be binding upon Us until We receive 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 adviser
regarding the tax consequences, as an assignment may be a taxable event.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934 and file reports and other information with the SEC. These reports and
other information can be inspected and copied at the SEC's public reference
facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500 West
Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies also
can be obtained from the SEC's Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
We have filed registration statements (the "Registration Statements") relating
to the Contracts with the SEC under the Securities Act of 1933. This Prospectus
has been filed as part of the Registration Statements and does not contain all
of the information set forth in the Registration Statements. These Registration
Statements contain further information about Us and the Contracts. The
Registration Statements may be inspected and copied, and copies can be obtained
at prescribed rates, as mentioned above.
BUSINESS
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. We are licensed
in the District of Columbia and all states except New York. We are a wholly-
owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company.
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CORPORATE CONTROL EVENTS
Effective January 4, 1996, Zurich Insurance Company ("Zurich"), Insurance
Partners, L.P. ("IP") and Insurance Partners Offshore (Bermuda), L.P. (together
with IP, "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.
Effective September 7, 1998, the businesses of Zurich merged with the financial
services business of B.A.T. Industries forming Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG, representing
the financial interest of the former Zurich Group, is listed on the Swiss Market
Index, replacing Zurich. Allied Zurich p.l.c., representing the financial
interest of B.A.T. Industries, is included in the FTSE-100 Share Index in
London.
The acquisition of KILICO on January 4, 1996, was accounted for using the
purchase method of accounting. Our consolidated financial statements prior to
January 4, 1996, were prepared on a historical cost basis and have been labeled
as "preacquisition" where appropriate in this Prospectus. Our included
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles.
We originally began to amortize goodwill resulting from the acquisition on a
straight-line basis over twenty-five years. However, in the fourth quarter of
1997, We changed Our amortization period to twenty years. The change in
amortization periods was made to conform to Zurich's accounting practices and
policies. The change resulted in an increase in goodwill amortization of $5.1
million in 1997.
STRATEGIC INITIATIVES
Our management, operations and strategic directions are integrated 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.
Over the last several years, We increased the competitiveness of Our variable
annuity products by adding multiple variable subaccount investment options and
investment managers to existing variable annuity products. In 1996, We
introduced a registered flexible individual variable life insurance product. In
1997, We introduced a non-registered individual and group variable bank-owned
life insurance contract ("BOLI") and a series of individual variable life
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insurance contracts. In 1998, We introduced a new registered individual variable
annuity product with 29 variable subaccount investment options and various
investment managers.
NARRATIVE DESCRIPTION OF BUSINESS
We offer 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. We offer 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
Our products. Our 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.
Our 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, We have increased Our emphasis on marketing Our existing and new
separate account products. Unlike the fixed-rate annuity business where We
manage spread revenue, such variable products pose minimal investment risk for
Us, as policyholders direct their premium to one or more subaccounts that invest
in underlying investment funds. We, in turn, receive administrative fee revenue
on such variable products which compensates Us for providing death benefits
potentially in excess of cash surrender values. In addition, on variable life
insurance contracts, cost of insurance charges compensate Us for providing death
benefit coverage substantially in excess of surrender values.
As a result of this strategy, Our separate account assets and related sales of
Our variable annuity and life products have increased as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Separate account assets................. $7,099.2 $5,122.0 $2,127.2
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Variable annuity sales.................. $ 300.4 $ 259.8 $ 254.6
Variable life sales..................... 1,523.0 2,708.6 .2
-------- -------- --------
Total separate account sales.......... $1,823.4 $2,968.4 $ 254.8
======== ======== ========
</TABLE>
In 1996, We added several new subaccounts and new investment managers as
investment portfolio choices for certain purchasers of the Kemper Advantage III
variable annuity product. During mid-1998, We introduced Destinations, a
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registered individual variable annuity product. Destinations offers 29 variable
subaccount investment options with various investment managers, ten guarantee
period accounts and a fixed account, dollar cost averaging and a guaranteed
retirement income benefit option.
During late 1996, We introduced Power V, a registered flexible premium variable
life insurance product. During mid-1997, We also introduced variable BOLI, a
group variable life insurance contract that is primarily marketed to banks and
other large corporate entities. Also in 1997, We issued a series of
non-registered variable individual universal life insurance contracts that are
marketed primarily to high net worth individuals. Significant fluctuations in
Our sales of the variable life products are due mainly to the nature of the BOLI
product -- high dollar volume per sale, low frequency of sales--and the
uncertainty surrounding BOLI's tax advantaged status since the release of the
Clinton Administration's Fiscal Year 1998 Budget, continuing with the release of
the 1999 Budget.
Investors Brokerage Services, Inc. ("IBS"), Our wholly-owned subsidiary, is the
principal underwriter and distributor of the variable annuity and variable life
products. Another Zurich affiliate is the principal underwriter and distributor
for the BOLI and high net worth products.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted Our general account annuity sales over the last
several years. Our general account fixed annuity sales were as follows (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
General account fixed annuity sales.......... $179.9 $145.7 $140.6
====== ====== ======
</TABLE>
Strong stock and bond markets during 1996 and most of 1997, which influenced
potential buyers of fixed annuity products to purchase variable annuity
products, caused sales of general account annuities to increase only slightly in
1997, compared with 1996. Sales of general account annuities increased in 1998,
compared with 1997, as certain investors opted for fixed crediting rates rather
than other investment alternatives available during a period of market
uncertainty, primarily in the second half of 1998.
During 1998 and 1997, We assumed $21.6 million and $21.1 million, respectively,
of term life insurance premiums from FKLA. Excluding the amounts assumed from
FKLA, Our total term life sales, including new and renewal premiums, net of
reinsurance ceded, amounted to $846 thousand in 1998, compared with $1.1 million
in 1997 and $565 thousand in 1996.
FEDERAL INCOME TAX DEVELOPMENTS
In early 1999, the Clinton Administration's Fiscal Year 1999 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not such proposals will
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be accepted, amended or omitted in the final 1999 Budget approved by Congress.
If the current Budget proposals are accepted, BOLI contracts may no longer be
tax advantaged products and therefore less attractive to those customers who
purchase them in recognition of their favorable tax attributes. Additionally,
sales of these products during 1999 may also be negatively impacted until the
likelihood of the current proposals being enacted into law has been 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 for any transaction with a date of January 1, 2000, or later.
Many companies must undertake major projects to address the year 2000 issue.
Each company's 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.
We have taken substantial steps over the last several years to ensure that Our
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, We replaced Our investment accounting system, and, in 1997, We replaced
Our general ledger and accounts payable system. We have also ensured that new
systems developed to support new product introductions in 1997, 1998 and beyond
are already year 2000 compliant. Data processing expenses related solely to
bringing Our systems in compliance with the year 2000 amounted to $1.3 million
in 1998. We anticipate that it will cost an additional $662 thousand to bring
all remaining systems into compliance.
Our policy administration systems have been completely renovated to be year 2000
compliant and are currently running in a test environment. Approximately 75
percent of Our ancillary systems confirmed to be year 2000 compliant were in
production at December 31, 1998. We anticipate that all such systems will be in
production at April 30, 1999 or sooner. Testing procedures have confirmed the
performance, functionality, and integration of converted or replaced platforms,
applications, databases, utilities, and interfaces in an operational
environment. Our testing and verification for year 2000 compliance has
encompassed the following:
- mainframe computing systems
- mainframe hardware and systems software
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- PC/LAN computing systems
- PC/LAN hardware and systems software
- end-user computing systems
- interfaces to and from third parties, and
- other miscellaneous electronic non-information systems
We have also taken steps requiring all other entities with which We
electronically interact, including suppliers and other financial services
institutions, to attest to Us in writing that their systems are year 2000
compliant.
If We do not successfully address Our year 2000 issues, We could face material
adverse consequences from lawsuits, lost business, erroneous results and
substantial operating problems after January 1, 2000. Although We fully expect
to be year 2000 compliant by the close of 1999, We are currently developing
contingency plans to handle the most reasonably likely worst case scenarios.
These contingency plans are scheduled for completion in the third quarter of
1999.
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. Currently, twelve IRIS ratios are
calculated. The primary purpose of the ratios is to provide an "early warning"
of any negative developments. The NAIC reports a company's ratios to state
regulators who may then contact the company if three or more ratios fall outside
the NAIC's "usual ranges".
Based on statutory financial data as of December 31, 1998, We had two ratios
outside the usual ranges, the change in reserving ratio and the change in
premium ratio. Our change in reserving ratio reflected the level of interest-
sensitive life surrenders and withdrawals during 1998, as well as the effects of
a reinsurance agreement with FKLA. Our change in premium ratio reflected the
$1.2 billion decrease in BOLI premiums received during 1998, compared with 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 Our IRIS ratios for 1998 or earlier years.
RISK-BASED CAPITAL, ASSET ADEQUACY AND CODIFICATION
Under Illinois' asset adequacy and risk-based capital rules, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to assure that
assets supporting reserves are adequate to cover liabilities under a variety of
economic scenarios. The focus of risk-based 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. We have capital
levels
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<PAGE> 66
substantially exceeding any that would mandate action under the risk-based
capital rules and is in compliance with applicable asset adequacy rules.
In March 1998, the NAIC approved the codification of statutory accounting
principles. Codification is effective January 1, 2001; however, Our domiciliary
state of Illinois has yet to adopt codification. In any event, We have not
quantified the impact that codification will have on Our statutory financial
position or results of operations.
RESERVES AND REINSURANCE
The following table provides a breakdown of Our reserves for future policy
benefits by product type (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
General account annuities................ $2,864 $3,137
Interest-sensitive life insurance and
other.................................. 688 709
Term life reserves....................... 9 10
Ceded future policy benefits............. 345 383
------ ------
Total.......................... $3,906 $4,239
====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions where We insured liabilities of approximately $516
million in 1992 and $416 million in 1991 with our affiliate Fidelity Life
Association, A Mutual Legal Reserve Company ("FLA"). 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, 1998 and 1997, Our reinsurance reserve credit from FLA related to these
coinsurance transactions totaled approximately $344.8 million and $382.6
million, respectively. Utilizing FKLA's employees, We are the servicing company
for this coinsured business and We are reimbursed by FLA for the related
servicing expenses.
During December 1997, We entered into a funds withheld reinsurance agreement
with a Zurich affiliated company, ZC Life Reinsurance Limited ("ZC Life"),
formerly EPICENTRE Reinsurance (Bermuda) Limited. Under the terms of this
agreement, We 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 BOLI, which is held in Our
separate accounts. During 1998, We modified the reinsurance agreement to
increase the reinsurance from ninety percent to one hundred percent. During 1998
and 1997, We issued $6.9 billion (face amount) and $59.3 billion (face amount),
respectively, of new BOLI business and ceded $11.1 billion (face amount) and
$51.5 billion (face amount), respectively, to ZC Life under the terms of the
treaty. During 1998 and 1997, We also ceded $175.5 million and $24.3 million,
respectively, of separate account fees (cost of insurance charges) to ZC Life.
We have also withheld approximately
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<PAGE> 67
$170.9 million and $23.4 million of the funds due to ZC Life under the terms of
the reinsurance agreement as a component of benefits and funds payable in the
accompanying consolidated balance sheets in this Prospectus as of December 31,
1998 and 1997, respectively.
We have a large and growing funds withheld account ("FWA") supporting reserve
credits on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA is now marked-to-market based upon the
Total Return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, We recorded a $2.5 million increase to the FWA
related to this mark-to-market. In November 1998, to properly match revenue and
expenses, We placed assets supporting the FWA in a segmented portion of its
General Account. This portfolio is classified as "trading" under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, KILICO recorded a realized capital gain of $2.8 million upon
transfer of these assets from "available for sale" to the trading portfolio as
required by FAS 115. In addition, KILICO recorded realized capital losses of
$151 thousand related to the changes in fair value of this portfolio during
1998. The fair value of this portfolio was $101.8 million at December 31, 1998,
and the amortized cost was $99.1 million. We periodically purchase assets into
this segmented portfolio to support changes in the FWA.
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, We also recorded reserves in 1998 and 1997 of approximately $8.5
million and $7.9 million, respectively.
COMPETITION
We are in a highly competitive business. We compete 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. With Our emphasis on annuity
products, We also compete 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.
Our 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.
To address Our competition, We have adopted certain business strategies. These
include:
- systematic review of investment risk and its capital position
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<PAGE> 68
- 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, 1998, We used the services of approximately 861 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
We are generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions where We are 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, policy forms
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 Our variable life insurance and annuity products, and
the related separate accounts, are subject to regulation by the Securities and
Exchange Commission (the "SEC").
We believe We are in compliance in all material respects with all applicable
regulations.
INVESTMENTS
A changing marketplace has affected the life insurance industry. To accommodate
customers' increased preference for safety over higher yields, We have
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<PAGE> 69
systematically reduced Our investment risk and strengthened Our 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") and
its subsidiaries and affiliates. Our real estate-related investments are handled
by a majority-owned Kemper real estate subsidiary. Investment policy is directed
by KILICO's board of directors. Our 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.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
Prospectus and elsewhere (such as in Our filings with the SEC, press releases,
presentations by KILICO or its management or oral statements) about markets for
Our products and trends in Our 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. These factors include,
among other things:
(i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect Our
ability to sell Our products, the market value of Our investments and the
lapse rate and profitability of KILICO's contracts
(ii) Our 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 Our insurance products
(v) changes in the federal income tax laws and regulations which may affect the
relative tax advantages of some of Our products
(vi) increasing competition which could affect the sale of Our 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
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<PAGE> 70
(viii) the risk factors or uncertainties listed from time to time in Our filings
with the SEC
PROPERTIES
We primarily share 84,270 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois. We also share 74,000 sq. ft. of office space leased by FKLA and
ZLICA from Zurich American Insurance Company, an affiliate, located in
Schaumburg, Illinois.
LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to Our
insurance business. Based upon the advice of legal counsel, Our management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.
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<PAGE> 71
SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1998, and for the opening balance sheet as of the
acquisition date, January 4, 1996. This 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 DECEMBER 31 JANUARY 4 -----------------------
1998 1997 1996 1996(2) 1995 1994
----------- ----------- ----------- --------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE........................ $ 419.7 $ 425.5 $ 356.2 $ -- $ 68.1(1) $ 330.5
========= ========= ======== ======== ======== ========
NET INCOME EXCLUDING REALIZED
INVESTMENT RESULTS................. $ 31.4 $ 31.9 $ 25.6 $ -- $ 74.2 $ 61.9
========= ========= ======== ======== ======== ========
NET INCOME (LOSS).................... $ 65.1 $ 38.7 $ 34.4 $ -- $ (133.0)(1) $ 26.4
========= ========= ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account assets........ $ 7,099.2 $ 5,122.0 $2,127.2 $1,761.1 $1,761.1 $1,508.0
========= ========= ======== ======== ======== ========
Total assets......................... $12,239.7 $10,589.7 $7,717.9 $7,682.7 $7,581.7 $7,537.1
========= ========= ======== ======== ======== ========
Future policy benefits............... $ 3,561.6 $ 3,856.9 $4,256.5 $4,585.1 $4,573.2 $4,843.7
========= ========= ======== ======== ======== ========
Stockholder's equity................. $ 853.9 $ 865.6 $ 751.0 $ 745.6 $ 605.9 $ 434.0
========= ========= ======== ======== ======== ========
</TABLE>
- ---------------
(1) Real estate-related investment losses adversely impacted total revenue and
net income (loss) for 1995. These losses reflect a change in KILICO's
strategy with respect to its real estate-related investments resulting from
the January 4, 1996 acquisition of Kemper by the Zurich-led investor group.
(2) The consolidated information presented as of the acquisition on January 4,
1996 is accounted for using the purchase method of accounting.
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<PAGE> 72
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.
RESULTS OF OPERATIONS
KILICO recorded net income of $65.1 million in 1998, compared with net income of
$38.7 million in 1997 and $34.4 million in 1996. The increase in net income in
1998, compared with 1997, was due to a significant increase in net realized
capital gains and a decrease in goodwill amortization, offset by a slight
decline in operating earnings before amortization of goodwill.
The following table reflects the components of net income:
NET INCOME
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating earnings before amortization of
goodwill................................ $ 44.1 $ 47.2 $ 35.8
Amortization of goodwill.................. (12.7) (15.3) (10.2)
Net realized investment gains............. 33.7 6.8 8.8
------ ------ ------
Net income...................... $ 65.1 $ 38.7 $ 34.4
====== ====== ======
</TABLE>
The following table reflects the major components of realized investment results
included in net income above.
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Real estate-related gains................. $ 26.9 $ 12.8 $ 11.4
Fixed maturity write-downs................ (2.0) (2.8) (.9)
Other gains (losses), net................. 8.8 (3.2) (1.7)
------ ------ ------
Total........................... $ 33.7 $ 6.8 $ 8.8
====== ====== ======
</TABLE>
The real estate-related gains over the last three years, reflect Our adoption of
Zurich's strategy for disposition of real estate-related investments. This
strategy to reduce exposure to real estate-related investments, as well as
improving real estate market conditions in most areas of the country, generated
the increasing
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<PAGE> 73
real estate-related gains during the last three years. Fixed maturity
write-downs in 1998 and 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, as well as other U.S.
dollar denominated securities that had other-than-temporary declines in value in
1998. Other realized investment gains and losses for 1998, 1997 and 1996 relate
primarily to the sale of fixed maturity investments, as well as gains from
equity securities in 1998. The 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 Our 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.
Operating earnings before the amortization of goodwill decreased to $44.1
million in 1998, compared with $47.2 million in 1997. Operating earnings
decreased in 1998 before the amortization of goodwill, compared with 1997,
primarily due to:
- a decrease in separate account fees and charges
- an increase in commissions and operating expenses
- an increase in the amortization of insurance acquisition costs, offset by
- a decrease in taxes, licenses and fees
- an increase in the deferral of insurance acquisition costs, and
- a decrease in the amortization of the value of business acquired
Operating earnings before the amortization of goodwill increased to $47.2
million in 1997, compared with $35.8 million in 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
- an increase in the deferral of insurance acquisition costs, offset by
- an increase in claims incurred and other policyholder benefits
- an increase in taxes, licenses and fees, and
- an increase in commissions and operating expenses
Investment income and interest credited declined in 1998, compared with 1997 and
1996, 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
also decreased in 1998, compared with 1997, due to reinvestment of 1998 fixed
maturity sales proceeds at lower yields than in 1997 and higher amortization of
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bond premium. This amortization was due to an increase in certain collateralized
mortgage obligation prepayments due to the low interest rate environment in
1998.
Investment income was also reduced over the last three years 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 the
investments. The difference between the new cost basis and original par is then
amortized against investment income over the remaining effective lives of the
fixed maturity investments. As a result of the interest rate environment as of
January 4, 1996, the market value of KILICO's fixed maturity investments was
approximately $133.9 million greater than original par. Premium amortization
decreased investment income by approximately $14.4 million in 1998, compared
with $15.3 million in 1997 and $22.7 million in 1996.
Investment income was also negatively impacted during 1996 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 negatively impacted by dividends paid to Kemper in 1998.
Investment income was positively impacted in 1997 and 1996 from the benefits of
capital contributions to KILICO and from the above-mentioned repositionings of
Our investment portfolio.
The following table reflects KILICO's sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Annuities:
General account........................ $ 179.9 $ 145.7 $140.6
Separate account....................... 300.4 259.8 254.6
-------- -------- ------
Total annuities..................... 480.3 405.5 395.2
-------- -------- ------
Life Insurance:
Separate account bank-owned variable
universal life ("BOLI")............. 1,501.0 2,700.0 --
Separate account variable universal
life................................ 22.0 8.6 .2
Term life.............................. 22.4 22.2 7.8
Interest-sensitive life................ .2 -- .6
-------- -------- ------
Total life.......................... 1,545.6 2,730.8 8.6
-------- -------- ------
Total sales............... $2,025.9 $3,136.3 $403.8
======== ======== ======
</TABLE>
Sales of annuity products consist of total deposits received. General account
annuity sales increased in 1998, compared with 1997, as certain investors opted
for fixed crediting rates rather than other investment alternatives available
during
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<PAGE> 75
a period of market uncertainty, primarily in the second half of 1998. The slight
increase in 1997 general account (fixed annuity) sales, compared with 1996,
reflected the low interest rate environment and the strong equity market during
1997.
The increase in separate account (variable sales) in 1998, compared with 1997
and 1996, was in part due to:
- the addition of new separate account investment fund options
- the addition of new investment fund managers
- a strong overall underlying stock and bond market, and
- a new variable annuity product introduced during 1998
Sales of variable annuities increase administrative fees earned. In addition,
they pose minimal investment risk for KILICO, as policyholders direct their
premium to one or more subaccounts that invest in underlying investment funds
which invest in stocks and bonds. We believe that the increase in Our financial
strength and performance ratings in January 1996, together with Our association
with Zurich, will continue to assist in Our future sales efforts.
In 1997, We 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 direct their premium to
one or more subaccounts that invest in underlying investment funds which invest
in stocks and bonds. We receive premium tax and DAC tax expense loads from
certain contract holders, as well as administrative fees and cost of insurance
charges. These fees and charges compensate Us 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 $7.7
billion in 1998, compared with $59.6 billion in 1997. The decrease in face
amount issued in 1998, compared to 1997 is due to a significant portion of
renewal premiums in 1998 and higher funded policies issued in 1998, compared to
those issued in 1997.
In early 1999, the Clinton Administration's Fiscal Year 1999 Budget ("Budget")
was released and contained certain proposals to change the taxation of 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, BOLI contracts may no longer be tax advantaged products
and therefore no longer attractive to those customers who purchase them because
of their favorable tax attributes. Sales of these products during 1999 may be
negatively impacted until the likelihood of the current proposals being enacted
into law has been determined.
In 1998 and 1997, KILICO assumed $21.6 million and $21.1 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,
amounted to $846 thousand in 1998, compared with $1.1 million in
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<PAGE> 76
1997 and $565 thousand in 1996. The face amounts of new term business issued
during 1998, 1997 and 1996 totaled approximately $276 million, $278 million and
$187 million, respectively.
Included in separate account fees and charges are administrative fees received
from Our separate account products of $38.3 million in 1998, compared with $31.0
million and $25.3 million in 1997 and 1996, 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 1998 and 1997 are cost of
insurance ("COI") charges related to variable universal life insurance,
primarily BOLI, of $167.6 million and $27.6 million, respectively. Of these COI
charges, $175.5 million and $24.3 million of such fees were ceded in 1998 and
1997, respectively, to a Zurich affiliated company, ZC Life Reinsurance Limited
("ZC Life"), formerly EPICENTER Reinsurance (Bermuda) Limited. In 1998, KILICO
ceded in excess of 100 percent of the COI charges received due to changes to the
reinsurance agreement with ZC Life. Separate account fees and charges in 1998
and 1997 also include BOLI-related premium tax expense loads of $29.1 million
and $51.1 million, respectively.
Other income includes surrender charge revenue of $4.0 million in 1998, compared
with $5.2 million and $5.4 million in 1997 and 1996, respectively. The decrease
in surrender charge revenue in 1998, compared with 1997, primarily reflects a
decrease in total general account and separate account policyholder surrenders
and withdrawals. The slight decrease in surrender charge revenue in 1997,
compared with 1996, reflects that 46 percent of KILICO's fixed and variable
annuity liabilities, excluding BOLI, at December 31, 1997 are subject to minimal
(5 percent or less) or no surrender charges, compared with 57 percent in 1996.
This decrease in surrender charge revenue in 1997 was offset somewhat by an
increase in total general account and separate account policyholder surrenders
and withdrawals.
POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
(in millions)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
General account................... $645.5 $703.1 $652.0
Separate account.................. 260.9 236.2 196.7
------ ------ ------
Total........................ $906.4 $939.3 $848.7
====== ====== ======
</TABLE>
Reflecting the current interest rate environment and other competitive market
factors, We adjust Our crediting rates on interest-sensitive products over time
in order to manage spread revenue and policyholder surrender and withdrawal
activity. We can also improve spread revenue over time by increasing investment
income. The current interest rate environment during 1997 and 1998, has
mitigated at present, competitive pressures to increase existing renewal
crediting rates.
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<PAGE> 77
General account surrenders, withdrawals and death benefits decreased $57.6
million in 1998, compared with 1997. This decrease primarily reflects a decrease
in surrenders and withdrawals due to uncertainty with alternative investment
options because of market instability during the second half of 1998.
Taxes, licenses and fees decreased $22.3 million in 1998 to $30.3 million,
reflecting the decrease in premium taxes on BOLI. Excluding the taxes due on
BOLI, for which We received a corresponding expense load in separate account
fees and other charges, taxes, licenses and fees amounted to $1.5 million,
compared with $1.5 million in 1997 and $2.2 million in 1996.
Commission expense was higher in 1998, compared with both 1997 and 1996, due to
an increase in total sales, excluding BOLI.
Operating expenses increased in 1998 and 1997, compared with 1996, as a result
of:
- restaffing after the completion of the acquisition and for new business
initiatives
- an increase in various outside consulting fees
- an increase in printing and stationary expenses for sales materials, and
- an increase in data processing expenses
Data processing expenses increased to $12.9 million in 1998, compared with $10.8
million in 1997 and $4.1 million in 1996, primarily due to:
- infrastructure improvements related to new product development
- new systems implemented and put into production
- system conversion projects
- development of a data warehouse, and
- costs related to bringing Our systems in compliance with the year 2000
Data processing expenses related to bringing Our systems in compliance with the
year 2000 amounted to $1.3 million in 1998. We currently anticipate that it will
cost an additional $662 thousand to bring all remaining systems in compliance.
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1998, compared with 1997 and 1996. The deferral of
insurance acquisition costs increased in 1998, compared with both 1997 and 1996.
This reflects 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 in 1998 and 1997, compared with 1996, with the most dramatic
increase occurring in 1998. The increase in amortization of insurance
acquisition costs in 1998, compared with 1997, was primarily due to the
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<PAGE> 78
increase in production of new business in 1998, as well as increased profits in
1998. These increases tend to accelerate amortization. Deferred insurance
acquisition costs, and their related amortization, 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. Deferred insurance acquisition costs are
established on all new policies sold after January 4, 1996.
The amortization of the value of business acquired decreased in 1998, compared
with 1997, as a result of:
- a significant increase in separate account assets, which increases
estimated future gross profits and shifts amortization to later years
- a decreasing block of business previously acquired, resulting in less
amortization as gross profits on this business decrease, offset by
- a significant increase in realized capital gains which tend to accelerate
the amortization of the value of business acquired as the gains tend to
decrease Our 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, We began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, We changed Our 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, We recorded an increase in
amortization expense of $5.1 million during 1997.
INVESTMENTS
Our principal investment strategy is to maintain a balanced, well-diversified
portfolio supporting the insurance contracts written. We make shifts in Our
investment portfolio depending on, among other factors:
- its evaluation of risk and return in various markets
- consistency with Our business strategy and investment guidelines approved
by the board of directors
- the interest rate environment
- liability durations, and
- changes in market and business conditions
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<PAGE> 79
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
--------------- ---------------
<S> <C> <C> <C> <C>
Cash and short-term
investments.................. $ 72 1.7% $ 260 5.8%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1........... 2,663 63.7 3,004 67.1
NAIC(1) Class 2........... 724 17.3 651 14.5
Below investment grade:
Performing................ 96 2.3 14 .3
Nonperforming............. -- -- -- --
Trading account securities..... 102 2.4 -- --
Joint venture mortgage loans... 66 1.6 73 1.6
Third-party mortgage loans..... 76 1.8 103 2.3
Other real estate-related
investments.................. 22 .5 44 1.0
Policy loans................... 271 6.5 282 6.3
Equity securities.............. 67 1.6 25 .6
Other.......................... 24 .6 21 .5
------ ----- ------ -----
Total(2)............. $4,183 100.0% $4,477 100.0%
====== ===== ====== =====
</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
We are carrying Our fixed maturity investment portfolio, which We consider
available for sale, at estimated fair value. The aggregate unrealized
appreciation or depreciation is recorded as a component of accumulated other
comprehensive income, net of any applicable income tax expense. The aggregate
unrealized appreciation (depreciation) on fixed maturities at December 31, 1998
and 1997 was $61.3 million and $24.6 million, respectively. Fair values are
sensitive to movements in interest rates and other economic developments and can
be expected to fluctuate, at times significantly, from period to period.
At December 31, 1998, investment-grade fixed maturities and cash and short-term
investments accounted for 82.7 percent of Our invested assets and cash, compared
with 87.4 percent at December 31, 1997. Approximately 53.4 percent of Our NAIC
Class 1 bonds were rated AAA or equivalent at year-end 1998, compared with 54.0
percent at December 31, 1997.
Approximately 28.0 percent of Our investment-grade fixed maturities at December
31, 1998 were mortgage-backed securities, down from 35.1 percent at December 31,
1997, due to sales and paydowns during 1998. These investments consist primarily
of marketable mortgage pass-through securities issued by the
73
<PAGE> 80
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. We have not made any investments in interest-only or
other similarly volatile tranches of mortgage-backed securities. Our mortgage-
backed investments are generally of AAA credit quality, and the markets for
these investments have been and are expected to remain liquid. We plan to
continue to reduce Our holding of these investments over time.
As a result of the previously discussed repositionings of Our fixed maturity
portfolio, approximately 15.4 percent and 10.8 percent of Our investment-grade
fixed maturities at December 31, 1998 and 1997, respectively, consisted of
corporate asset-backed securities. The majority of Our investments in asset-
backed securities were backed by home equity loans (21.9%), auto loans (8.2%),
manufactured housing loans (14.8%), equipment loans (5.2%), and commercial
mortgage backed securities ("CMBs") (22.1%).
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 Our 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. Accelerated amortization would
result in reductions of investment income related to such securities.
At December 31, 1998 and 1997 We had unamortized premiums and discounts related
to mortgage-backed and asset-backed securities as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1998 1997
----- -----
<S> <C> <C>
Unamortized premiums.................................. $15.8 $19.6
===== =====
Unamortized discounts................................. $ 4.6 $ 5.2
===== =====
</TABLE>
Amortization of the discount or premium from mortgage-backed and asset-backed
securities is recognized using a level effective yield method. This method
considers the estimated timing and amount of prepayments of the underlying loans
and is adjusted to reflect differences between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. To
the extent that the estimated lives of these securities change as a result of
changes in prepayment rates, the adjustment is also included in net investment
income.
74
<PAGE> 81
The table below provides information about Our 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) 1998 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds........ $ 946.7 $137.2 $85.7 $48.3 $47.7 $149.6 $478.2 $ 946.7 $ 946.7
Average yield.............. 6.45% 6.46% 6.42% 6.43% 6.42% 6.42% 6.42% 6.45% 6.45%
Asset-backed bonds........... $ 407.4 $ 17.9 $36.1 $49.8 $36.1 $ 31.9 $235.6 $ 407.4 $ 407.4
Average yield.............. 6.67% 6.73% 6.75% 6.82% 6.90% 6.90% 6.95% 6.67% 6.67%
CMBs......................... $ 115.5 $ 1.3 $ 1.2 $ 1.4 $ 1.5 $ 12.3 $ 97.8 $ 115.5 $ 115.5
Average yield.............. 6.25% 6.28% 6.28% 6.28% 6.28% 6.28% 6.28% 6.25% 6.25%
-------- -------- --------
$1,469.6 $1,469.6 $1,469.6
======== ======== ========
</TABLE>
<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>
75
<PAGE> 82
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1998, is 4.0 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately .65
of a year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.45 years.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1997, was 3.8 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately 1.0
year, 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, 1998, We had $29.9 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 $3.5 million of these securities were from Korea, $17.6 million
were from Hong Kong, China, $2.9 million were from South Korea and the remainder
were from a United Kingdom bank with most of its loans issued to countries in
Southeast Asia. Write-downs on these securities, which were considered to be
other-than-temporary, as of December 31, 1998 and 1997 amounted to $1.1 million
and $3.1 million, respectively. 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.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 40 issuers at December 31, 1998, totaled 2.3 percent
of cash and invested assets at December 31, 1998 and .3 percent at December 31,
1997. 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. Our strategy of limiting
exposure to below investment-grade securities takes into account the more
conservative nature of today's consumer and the resulting demand for higher-
quality investments in the life insurance and annuity marketplace.
REAL ESTATE-RELATED INVESTMENTS
The $164.4 million real estate-related portfolio We hold consists of joint
venture and third-party mortgage loans and other real estate-related
investments. The real estate-related portfolio constituted 3.9 percent of cash
and invested assets at December 31, 1998, compared with $220.0 million, or 4.9
percent, at December 31, 1997. The decrease in real estate-related investments
during 1998 was primarily due to asset sales and a net increase of $16.1 million
in real estate-related reserves during 1998.
As reflected in the "Real estate portfolio" table below, We have continued to
fund both existing projects and legal commitments. The future legal commitments
were $64.4 million at December 31, 1998. This amount represented a net decrease
of $10.9 million since December 31, 1997, primarily due to sales in
76
<PAGE> 83
1998. As of December 31, 1998, We expect to fund approximately $.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. We do not currently expect to fund
these commitments. The total legal commitments, along with estimated working
capital requirements, are considered in Our evaluation of reserves and
write-downs.
Excluding the $1.2 million of net equity investments in joint ventures, Our
real estate loans totaled $163.2 million at December 31, 1998, after reserves
and write-downs. Of this amount, $131.3 million are on accrual status with a
weighted average interest rate of approximately 8.79 percent. Of these accrual
loans:
- 17.0 percent have terms requiring current periodic payments of their full
contractual interest
- 46.1 percent require only partial payments or payments to the extent of
borrowers' cash flow, and
- 36.9 percent defer all interest to maturity
The equity investments in real estate at December 31, 1998 consisted of Our
other equity investments in joint ventures. These equity investments include Our
share of periodic operating results. As an equity owner or affiliate of an
equity owner, We have the ability to fund, and historically have elected to
fund, operating requirements of certain joint ventures.
77
<PAGE> 84
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
OTHER REAL ESTATE-RELATED
MORTGAGE LOANS INVESTMENTS
---------------- ------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ -------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... $ 72.7 $103.0 $ 21.1 $ 4.0 $ 19.2 $220.0(1)
Additions (deductions):
Fundings................. 13.1 -- -- .2 -- 13.3
Interest added to
principal.............. 6.3 2.8 -- -- -- 9.1
Sales/paydowns/
distributions.......... (11.8) (30.1) (.3) (6.6) (27.0) (75.8)
Operating gain........... -- -- -- -- .2 .2
Transfers................ -- -- -- (.7) -- (.7)
Net realized investments
gains (losses)......... (3.0) 32.4 .4 3.1 8.5 41.4(4)
Other transactions,
net.................... (11.5) (31.6) (.3) -- .3 (43.1)(4)
------ ------ ------ ----- ------ ------
Balance at December 31,
1998................... $ 65.8 $76.5 $ 20.9 $ 0 $ 1.2 $164.4(3)
====== ====== ====== ===== ====== ======
</TABLE>
- ---------------
(1) Net of $9.2 million reserve and write-downs. Excludes $9.5 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 $25.3 million reserve and write-downs. Excludes $8.7 million of real
estate-related accrued interest.
(4) Included in this amount is $37.0 million of contingent interest payments
related to a 1995 real estate sale. These payments were recorded as
realized investment gains and then deducted from other transactions because
they did not affect the carrying value.
REAL ESTATE CONCENTRATIONS AND OUTLOOK
Our real estate portfolio is distributed by geographic location and property
type. However, We have concentration exposures in certain states and in certain
types of properties. In addition to these exposures, We also have exposures to
certain real estate developers and partnerships.
As a result of Our ongoing strategy to reduce Our exposure to real
estate-related investments, as of December 31, 1998, We had three remaining
properties which account for approximately 87.2 percent of Our $164.4 million
real estate-related portfolio.
The largest of these investments at December 31, 1998 amounted to $64.5 million
and consisted of second mortgages on nine hotel properties and two office
buildings. Patrick M. Nesbitt or his affiliates, a third-party real estate
developer, have ownership interests in these properties. These hotels and office
buildings are geographically dispersed and the current market values of the
underlying
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<PAGE> 85
properties substantially exceed the balances due on Our mortgages. These loans
are on accrual status.
Our loans to a master limited partnership (the "MLP") between subsidiaries of
Kemper and subsidiaries of Lumbermens, amounted to $51.6 million at December 31,
1998. The MLP's underlying 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. Loans to the MLP are on accrual status.
The remaining significant real estate-related investment amounted to $27.3
million at December 31, 1998 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, We have placed these real estate-related investments on nonaccrual
status as of December 31, 1996. We are 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,
We anticipate that it could be several additional years until We completely
dispose of all investments in Hawaii.
We evaluate Our real estate-related investments (including accrued interest)
using an estimate of the investments observable market price, net of estimated
selling costs. Because Our real estate review process includes estimates
involving changing economic conditions and other factors, there can be no
assurance that current estimates will prove accurate over time. Our real
estate-related investments are expected to continue to decline further through
future sales. Our net income could be materially reduced in future periods if:
- real estate market conditions worsen in areas where Our portfolio is
located
- Kemper's and KILICO's plans with respect to certain projects change, or
- necessary construction or zoning permits are not obtained
79
<PAGE> 86
The following table is a summary of Our 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
1998 1997
----------- -----------
<S> <C> <C>
Potential problem loans(1)............... $ -- $ --
Past due loans(2)........................ -- --
Nonaccrual loans (primarily Hawaiian
properties)(3)......................... 37.4 47.4
Real estate owned........................ -- 4.0
----- -----
Total.......................... $37.4 $51.4
===== =====
</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 We anticipate may go into nonaccrual,
past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) We do not accrue interest on real estate-related investments when We judge
that the likelihood of interest collection is doubtful. Loans on nonaccrual
status after reserves and write-downs amounted to $31.8 million and $41.8
million at December 31, 1998 and December 31, 1997, respectively.
NET INVESTMENT INCOME
Our pre-tax net investment income totaled $273.5 million in 1998, compared with
$296.2 million in 1997 and $299.7 million in 1996. This includes Our 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 which are on nonaccrual status. As previously
discussed, Our net investment income in 1998 and 1997, compared with 1996, has
been negatively impacted by purchase accounting adjustments.
80
<PAGE> 87
Our 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
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturities......................... $.3 $.5 $ .7
Real estate-related investments.......... 3.2 3.9 .5
---- ---- ----
Total............................. $3.5 $4.4 $1.2
==== ==== ====
Basis points............................. 8 10 3
==== ==== ====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of Our share of interest expense on these loans excluded from
Our share of joint venture operating results. Any increase in nonperforming
securities, and either worsening or stagnant real estate conditions, would
increase the expected adverse effect on Our future investment income and
realized investment results.
REALIZED INVESTMENT RESULTS
Net income reflects after-tax realized investment gains of $33.7 million, $6.8
million and $8.8 million in 1998, 1997 and 1996, respectively. Included in the
after-tax realized investment gains are trading account security gains of $1.7
million in 1998. As previously discussed, We segregated a portion of Our General
Account investment portfolio in 1998 into a "trading" account under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
Unrealized gains and losses on fixed maturity investments which are available
for sale are not reflected in KILICO's net income. These changes in unrealized
value are recorded as a component of accumulated other comprehensive income, net
of any applicable income taxes. If and to the extent a fixed maturity investment
suffers an other-than-temporary decline in value, however, the security is
written down to net realizable value, and the write-down adversely impacts net
income.
We regularly monitor Our investment portfolio and as part of this process
reviews Our assets for possible impairments of carrying value. Because the
review process includes estimates involving changing economic conditions and
other factors, there can be no assurance that current estimates will prove
accurate over time.
A valuation allowance has been established to reduce the deferred tax asset for
investment losses to the amount that, based upon available evidence, is in
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<PAGE> 88
management's judgment more likely than not to be realized. The valuation
allowance is evaluated as of each balance sheet date.
INTEREST RATES
Interest rates remained relatively stable during 1996 and 1997, before declining
in 1998. The Federal Reserve Board lowered rates 3 times during the second half
of 1998, resulting in a steeper yield curve due to the lower short-term interest
rates.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, We can adjust Our 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. This 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. 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. We mitigate this risk somewhat by charging surrender
fees, which decrease over time, when annuity holders withdraw funds prior to
maturity on certain annuity products. Approximately 46 percent of KILICO's fixed
and variable annuity liabilities as of December 31, 1998, however, were no
longer subject to significant surrender fees.
LIQUIDITY AND CAPITAL RESOURCES
We carefully monitor 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 Our
liquidity are deposits for fixed annuities, premium income, investment income,
separate account fees, other operating revenue and cash provided from maturing
or sold investments.
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 Our claims-paying ability or
financial strength ratings could result in Our products being less attractive to
consumers. Any reductions in Our parent's ratings could also adversely impact
Our 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.
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<PAGE> 89
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating.
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $853.9 million at December 31, 1998, compared with
$865.6 million at December 31, 1997, and $751.0 million at December 31, 1996.
The 1998 decrease in stockholder's equity was primarily due to dividends of
$95.0 million paid to Kemper during 1998. This decrease was offset by 1998 net
income of $65.1 million and an increase of $20.3 million in accumulated other
comprehensive income. The increase in accumulated other comprehensive income was
primarily related to the change in unrealized appreciation related to Our fixed
maturity investment portfolio due to falling interest rates during 1998. 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 accumulated
other comprehensive income related to the change in unrealized appreciation of
$60.1 million related to Our fixed maturity investment portfolio. These
increases were offset by a dividend of $29.2 million to Kemper.
EMERGING ISSUE
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement is effective for fiscal years
beginning after June 15, 1999. Full implementation of SFAS No. 133 is expected
in December 1999. The impact of implementation is not expected to be material to
KILICO.
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<PAGE> 90
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
John B. Scott (54) Chief Executive Officer, President
Chief Executive Officer since and Director of Federal Kemper Life
February 1992. President since Assurance Company (FKLA) and Fidelity
November 1993. Director since 1992. Life Association (FLA) since 1988.
Chief Executive Officer, President
and Director of Zurich Life Insurance
Company of America (ZLICA) and Zurich
Direct, Inc. (ZD) since March 1996.
Chairman of the Board and Director of
Investors Brokerage Services, Inc.
(IBS) and Investors Brokerage
Services Insurance Agency, Inc.
(IBSIA) since 1993. Chairman of the
Board of FKLA and FLA from April 1988
to January 1996. Chairman of the
Board of KILICO from February 1992 to
January 1996. Executive Vice
President and Director of Kemper
Corporation (Kemper) since 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 (51) Executive Vice President of FKLA and
Executive Vice President since 1995. FLA since 1995. Executive Vice
Director since May 1998. President of ZLICA and ZD since March
1996. Director of FLA since December
1997. Director of FKLA and ZLICA
since May 1998. 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.
</TABLE>
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<PAGE> 91
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
Frederick L. Blackmon (47) Senior Vice President and Chief
Senior Vice President and Chief Financial Officer of FKLA since
Financial Officer since December December 1995. Senior Vice President
1995. and Chief Financial Officer of FLA
since January 1996. Senior Vice
President and Chief Financial Officer
of ZLICA since March 1996. Senior
Vice President and Chief Financial
Officer of ZD since March 1996.
Director of FLA since May 1998.
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 (40) Senior Vice President of FKLA and FLA
Senior Vice President since January since January 1996. Senior Vice
1996. President of ZLICA since 1995. Senior
Vice President of ZD since 1995.
Director of ZD from April 1993 to
March 1997 and since March 1998. 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 (43) Senior Vice President of FKLA since
Senior Vice President since December December 1995. Chief Actuary of FKLA
1995. Director since May 1998. and KILICO from December 1995 to
January 1999. Senior Vice President
of FLA since January 1996. Chief
Actuary of FLA from January 1996 to
January 1999. Senior Vice President
of ZLICA and ZD since March 1996.
Chief Actuary of ZLICA and ZD from
March 1996 to January 1999. Director
of FLA since June 1997. Director of
FKLA and ZLICA since May 1998.
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>
85
<PAGE> 92
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
Edward K. Loughridge (44) Senior Vice President and Corporate
Senior Vice President and Corporate Development Officer of FKLA and FLA
Development Officer since January since January 1996. Senior Vice
1996. President and Corporate Development
Officer for ZLICA and ZD since March
1996. Senior Vice President of Human
Resources of Zurich-American
Insurance Group from February 1992 to
March 1996.
Debra P. Rezabek (43) Senior Vice President of FKLA and FLA
Senior Vice President since 1996. since March 1996. Corporate Secretary
General Counsel since 1992. Corporate of FKLA and FLA since January 1996.
Secretary since January 1996. Director of FLA since May 1998. Vice
President of KILICO, FKLA and FLA
since 1995. General 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 (53) Senior Vice President of FKLA, FLA
Senior Vice President since January and ZLICA since January 1998.
1998. Director of IBS since May 1998.
Director of IBSIA since September
1998. Vice President--Aetna Life
Brokerage of Aetna Life & Annuity
Company from February 1992 to January
1998.
</TABLE>
86
<PAGE> 93
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
George Vlaisavljevich (56) Senior Vice President of FKLA, FLA
Senior Vice President since October and ZLICA since October 1996. Senior
1996. Vice President of ZD since March
1997. Director of IBS and IBSIA since
October 1996. Executive Vice
President of The Copeland Companies
from April 1983 to September 1996.
Loren J. Alter (60) Director of FKLA, FLA and Scudder
Director since January 1996. Kemper Investments, Inc. (SKI) since
January 1996. Director of ZLICA since
May 1979. Executive Vice President
and Chief Financial Officer of Zurich
U.S. since 1979. President, Chief
Executive Officer and Director of
Kemper since January 1996.
William H. Bolinder (55) Chairman of the Board and Director of
Chairman of the Board and Director FKLA and FLA since January 1996.
since January 1996. Chairman of the Board of ZLICA and ZD
since March 1995. Chairman of the
Board and Director of Kemper since
January 1996. Director of SKI since
January 1996. Vice Chairman of SKI
from January 1996 to 1998. Member of
the Group Executive Board of Zurich
Financial Services Group since 1998.
Member of the Corporate Executive
Board of Zurich Insurance Group from
October 1994 to 1998. Chairman of
Zurich American Insurance Company
since 1998. 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 and
American Zurich Insurance Company
from 1986 to June 1995. President of
Zurich Holding Company of America
since 1986. Manager of Zurich
Insurance Company, U.S. Branch from
1986 to 1998. Underwriter for Zurich
American Lloyds since 1986.
</TABLE>
87
<PAGE> 94
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
David A. Bowers (52) Director of FKLA and ZLICA since May
Director since May 1997. 1997. Director of FLA since June
1997. Executive Vice President,
Corporate Secretary and General
Counsel of Zurich U.S. since August
1985. Vice President, General Counsel
and Secretary of Kemper since January
1996.
Gunther Gose (54) Director of FKLA, FLA and ZLICA since
Director since November 1998. November 1998. Chief Financial
Officer and Member of the Group
Executive Board of Zurich Financial
Services since October 1998. Member
of the Corporate Executive Board of
Zurich Insurance Group from April
1990 to October 1998.
</TABLE>
88
<PAGE> 95
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C> <C>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-----------------------------------------------------------
LONG TERM
OTHER INCENTIVE
ANNUAL PLAN
NAME AND COMPENSATION PAYOUTS
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) ($)(3) ($)(2)
- ----------------------------------------------------------------------------------------------------------------------
John B. Scott................................... 1998 $171,000 $ -- $ -- $ --
Chief Executive Officer(1) 1997 171,000 112,100 -- 239,400
1996 212,500 94,000 -- 212,500
Eliane C. Frye.................................. 1998 107,160 -- -- --
Executive Vice President(1) 1997 98,040 47,515 -- 91,590
1996 105,000 41,750 -- 69,750
Frederick L. Blackmon........................... 1998 94,160 -- -- --
Senior Vice President and Chief Financial 1997 96,300 54,225 -- 112,500
Officer(1) 1996 100,583 47,000 27,924 71,250
George Vlaisavljevich........................... 1998 260,000 -- -- --
Senior Vice President(1)........................ 1997 252,500 146,000 39,922 243,000
James E. Hohmann................................ 1998 88,400 -- -- --
Senior Vice President and 1997 79,333 45,500 -- 80,150
Chief Actuary(1) 1996 113,333 -- -- --
<CAPTION>
<S> <C>
----------------
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION ($)(4)(5)(6)
- ----------------------------------------------------------------------------------------------------
John B. Scott................................... $ 38,326
Chief Executive Officer(1) 64,089
142,498
Eliane C. Frye.................................. 18,024
Executive Vice President(1) 30,311
58,520
Frederick L. Blackmon........................... 8,977
Senior Vice President and Chief Financial 19,543
Officer(1) 11,226
George Vlaisavljevich........................... 23,236
Senior Vice President(1)........................ 9,165
James E. Hohmann................................ 7,823
Senior Vice President and 1,063
Chief Actuary(1) 11,333
</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.
89
<PAGE> 96
(2) Annual bonuses are paid pursuant to annual incentive plans. The amounts of
the bonuses earned in 1998 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 for Mr. Vlaisavljevich in 1997.
(4) The amounts in this column include:
(a) The amounts of employer contributions allocated to the accounts of the
named persons under profit sharing plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.
(b) Distributions from the Kemper and FKLA supplemental plans.
(5) 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
90
<PAGE> 97
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 entitled 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, 1996, were Mr. Scott 12,600 phantom units and Ms.
Frye 1,680 phantom units. 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.
(6) 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.
91
<PAGE> 98
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. Please read the Statement of Additional
Information in conjunction with this Prospectus.
FINANCIAL STATEMENTS
Our included financial statements should be considered primarily as bearing on
our ability to meet Our obligations under the Contracts. The Contracts are not
entitled to participate in earnings, dividends or surplus of KILICO.
CHANGE OF ACCOUNTANTS
On September 12, 1997, KILICO appointed the accounting firm of
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), formerly Coopers &
Lybrand, L.L.P., as independent accountants for the year ended December 31, 1997
to replace KPMG LLP effective with such appointment. Our Board of Directors
approved the selection of PricewaterhouseCoopers as the new independent
accountants. Management had not consulted with PricewaterhouseCoopers on any
accounting, auditing or reporting matter, prior to that time.
During the fiscal year ended December 31, 1996, there were no disagreements with
KPMG LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure or any reportable events.
KPMG LLP's report on the financial statements for 1996 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 PricewaterhouseCoopers on accounting or
financial disclosures for the years ended December 31, 1998 or 1997.
92
<PAGE> 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the accompanying consolidated balance sheets as of December 31,
1998 and 1997 and the related consolidated statements of operations,
comprehensive income, stockholder's equity and cash flows present fairly, in all
material respects, the financial position of Kemper Investors Life Insurance
Company and subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. The financial
statements of the Company for the period from January 4, 1996 to December 31,
1996 were audited by other independent accountants whose report, dated March 21,
1997, expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 12, 1999
93
<PAGE> 100
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of Kemper Investors
Life Insurance Company and subsidiaries for the period from January 4, 1996 to
December 31, 1996. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as of
December 31, 1996 as listed in the accompanying index. These financial statement
schedules are incorporated by reference to a previously filed Form 10-K. 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
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 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 aforementioned consolidated financial statements present
fairly, in all material respects, the results of operations and the cash flows
of Kemper Investors Life Insurance Company and subsidiaries for the period from
January 4, 1996 to December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the aforementioned supplementary
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.
KPMG LLP
Chicago, Illinois
March 21, 1997
94
<PAGE> 101
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair
value (amortized cost: December 31, 1998,
$3,421,535; December 31, 1997, $3,644,075)... $3,482,820 $ 3,668,643
Trading account securities at fair value
(amortized cost: December 31, 1998,
$99,095)..................................... 101,781 --
Short-term investments......................... 58,334 236,057
Joint venture mortgage loans................... 65,806 72,663
Third-party mortgage loans..................... 76,520 102,974
Other real estate-related investments.......... 22,049 44,409
Policy loans................................... 271,540 282,439
Equity securities.............................. 66,854 24,839
Other invested assets.......................... 23,645 20,820
----------- -----------
Total investments..................... 4,169,349 4,452,844
Cash........................................... 13,486 23,868
Accrued investment income...................... 124,213 117,789
Goodwill....................................... 216,651 229,393
Value of business acquired..................... 118,850 138,482
Deferred insurance acquisition costs........... 91,543 59,459
Deferred income taxes.......................... 35,059 39,993
Reinsurance recoverable........................ 344,837 382,609
Receivable on sales of securities.............. 3,500 20,076
Other assets and receivables................... 23,029 3,187
Assets held in separate accounts............... 7,099,204 5,121,950
----------- -----------
Total assets.......................... $12,239,721 $10,589,650
=========== ===========
LIABILITIES
Future policy benefits......................... $3,906,391 $ 4,239,480
Benefits and funds payable..................... 318,369 150,524
Other accounts payable and liabilities......... 61,898 212,133
Liabilities related to separate accounts....... 7,099,204 5,121,950
----------- -----------
Total liabilities..................... 11,385,862 9,724,087
----------- -----------
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..................... 804,347 806,538
Accumulated other comprehensive income......... 32,975 12,637
Retained earnings.............................. 14,037 43,888
----------- -----------
Total stockholder's equity............ 853,859 865,563
----------- -----------
Total liabilities and stockholder's
equity.............................. $12,239,721 $10,589,650
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
95
<PAGE> 102
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE
Net investment income................. $273,512 $296,195 $299,688
Realized investment gains............. 51,868 10,546 13,602
Premium income........................ 22,346 22,239 7,822
Separate account fees and charges..... 61,982 85,413 25,309
Other income.......................... 10,031 11,087 9,786
-------- -------- --------
Total revenue............... 419,739 425,480 356,207
-------- -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholders.... 176,906 199,782 223,094
Claims incurred and other policyholder
benefits............................ 28,029 28,372 14,255
Taxes, licenses and fees.............. 30,292 52,608 2,173
Commissions........................... 39,046 32,602 25,962
Operating expenses.................... 44,575 36,837 24,678
Deferral of insurance acquisition
costs............................... (46,565) (38,177) (27,820)
Amortization of insurance acquisition
costs............................... 12,082 3,204 2,316
Amortization of value of
business acquired................... 17,677 24,948 21,530
Amortization of goodwill.............. 12,744 15,295 10,195
-------- -------- --------
Total benefits and
expenses.................. 314,786 355,471 296,383
-------- -------- --------
Income before income tax expense...... 104,953 70,009 59,824
Income tax expense.................... 39,804 31,292 25,403
-------- -------- --------
Net income.................. $ 65,149 $ 38,717 $ 34,421
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
96
<PAGE> 103
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME............................... $ 65,149 $ 38,717 $ 34,421
-------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE
TAX:
Unrealized holding gains (losses) on
investments arising during period:
Unrealized holdings gains (losses) on
investments....................... 25,372 60,802 (84,036)
Adjustment to value of business
acquired.......................... (9,332) (28,562) 16,735
Adjustment to deferred insurance
acquisition costs................. (2,862) (2,680) 1,307
-------- -------- --------
Total unrealized holding gains
(losses) on investments
arising during period......... 13,178 29,560 (65,994)
-------- -------- --------
Less reclassification adjustments for
items included in net income:
Adjustment for (gains) losses
included in realized investment
gains............................. 6,794 (9,016) 3,963
Adjustment for amortization of
premium on fixed maturities
included in net investment
income............................ (17,064) (17,866) (26,036)
Adjustment for (gains) losses
included in amortization of value
of business acquired.............. (7,378) (2,353) (4,212)
Adjustment for (gains) losses
included in amortization of
insurance acquisition costs....... (463) (355) --
-------- -------- --------
Total reclassification
adjustments for items included
in net income................. (18,111) (29,590) (26,285)
-------- -------- --------
Other comprehensive income (loss), before
related income tax expense (benefit)... 31,289 59,150 (39,709)
Related income tax expense (benefit)..... 10,952 (985) 7,789
-------- -------- --------
Other comprehensive income
(loss), net of tax............ 20,337 60,135 (47,498)
-------- -------- --------
Comprehensive income (loss)..... $ 85,486 $ 98,852 $(13,077)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
97
<PAGE> 104
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of
period............................ $ 2,500 $ 2,500 $ 2,500
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL,
beginning of period............... 806,538 761,538 743,104
Capital contributions from parent... 4,261 45,000 18,434
Adjustment to prior period capital
contribution from parent.......... (6,452) -- --
-------- -------- --------
End of period............. 804,347 806,538 761,538
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS), beginning of
period............................ 12,637 (47,498) --
Other comprehensive income (loss),
net of tax........................ 20,338 60,135 (47,498)
-------- -------- --------
End of period............. 32,975 12,637 (47,498)
-------- -------- --------
RETAINED EARNINGS, beginning of
period............................ 43,888 34,421 --
Net income.......................... 65,149 38,717 34,421
Dividends to parent................. (95,000) (29,250) --
-------- -------- --------
End of period............. 14,037 43,888 34,421
-------- -------- --------
Total stockholder's
equity.................. $853,859 $865,563 $750,961
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
98
<PAGE> 105
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 65,149 $ 38,717 $ 34,421
Reconcilement of net income to net cash
provided:
Realized investment gains.................... (51,868) (10,546) (13,602)
Net change in trading account securities..... (6,727) -- --
Interest credited and other charges.......... 173,958 198,206 230,298
Deferred insurance acquisition costs......... (34,483) (34,973) (25,504)
Amortization of value of business acquired... 17,677 24,948 21,530
Amortization of goodwill..................... 12,744 15,295 10,195
Amortization of discount and premium on
investments................................ 17,353 17,866 25,743
Deferred income taxes........................ (12,469) (99,370) (897)
Net change in current federal income taxes... (73,162) 97,386 108,806
Benefits and premium taxes due related to
separate account bank-owned life
insurance.................................. 123,884 180,546 --
Other, net................................... (41,477) 17,168 (22,283)
----------- --------- -----------
Net cash provided from operating
activities............................. 190,579 445,243 368,707
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity............ 491,699 229,208 264,383
Fixed maturities sold prior to maturity...... 882,596 633,872 891,995
Equity securities............................ 107,598 -- --
Mortgage loans, policy loans and other
invested assets............................ 180,316 131,866 168,727
Cost of investments purchased or loans
originated:
Fixed maturities............................. (1,319,119) (606,028) (1,369,091)
Equity securities............................ (83,303) -- --
Mortgage loans, policy loans and other
invested assets............................ (66,331) (76,350) (119,044)
Short-term investments, net.................... 177,723 (164,361) 300,819
Net change in receivable and payable for
securities transactions...................... (677) 29,746 (31,667)
Net change in other assets..................... -- 244 115
----------- --------- -----------
Net cash provided by investing
activities............................. 370,502 178,197 106,237
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits..................................... 180,124 145,687 141,159
Withdrawals.................................. (649,400) (745,510) (700,084)
Capital contributions from parent.............. 4,261 45,000 18,434
Dividends to parent............................ (95,000) (29,250) --
Other.......................................... (11,448) (18,275) 42,512
----------- --------- -----------
Net cash used in financing activities.... (571,463) (602,348) (497,979)
----------- --------- -----------
Net increase (decrease) in cash...... (10,382) 21,092 (23,035)
CASH, beginning of period........................ 23,868 2,776 25,811
----------- --------- -----------
CASH, end of period.............................. $ 13,486 $ 23,868 $ 2,776
=========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
99
<PAGE> 106
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"). Effective January 4, 1996, Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "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.
Effective September 7, 1998, the businesses of Zurich merged with the financial
services business of B.A.T. Industries forming Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG, representing
the financial interest of the former Zurich Group, is listed on the Swiss Market
Index, replacing Zurich. Allied Zurich p.l.c., representing the financial
interest of B.A.T. Industries, is included in the FTSE-100 Share Index in
London.
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 1997 and 1996
consolidated financial statements in order for them to conform to the 1998
presentation.
BASIS OF ACCOUNTING
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
consolidated financial statements of the Company as of and for the years ended
December 31, 1996, 1997 and 1998, have been prepared in conformity with
generally accepted accounting principles.
100
<PAGE> 107
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.
GOODWILL
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, 1998, the Company
believes that no such adjustment is necessary.
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.
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.
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
101
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2003 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 (actual)........... 143,744 (26,807) 9,129 126,066
1999.................... 126,066 (24,926) 7,741 108,881
2000.................... 108,881 (22,649) 6,619 92,851
2001.................... 92,851 (20,736) 5,577 77,692
2002.................... 77,692 (17,096) 4,695 65,291
2003.................... 65,291 (15,504) 3,948 53,735
</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 accumulated other comprehensive income, net of income tax. As of
December 31, 1998 and 1997, this adjustment decreased the value of business
acquired by $7.2 million and $5.3 million, respectively, and accumulated other
comprehensive income by approximately $4.7 million and $3.4 million,
respectively.
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.
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.
102
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 accumulated other comprehensive income,
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 7.5 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 2.5 percent to 12.0
percent.
Liabilities for future term life policy benefits have been computed principally
by a net level premium method. Anticipated rates of mortality are based on the
1975-1980 Select and Ultimate Table modified by Company experience, including
withdrawals. Estimated future investment yields are a level 6.8 percent.
GUARANTY FUND ASSESSMENTS
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1998 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.
103
<PAGE> 110
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 reserves and write-downs, include: (1) notes
receivable from real estate ventures; (2) investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures, and
(3) real estate owned at December 31, 1997, carried at fair value. Real estate
reserves are established when declines in collateral values, estimated in light
of current economic conditions, indicate a likelihood of loss.
Investments in policy loans and other invested assets, consisting primarily of
venture capital investments and a leveraged lease, are carried primarily 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 accumulated other
comprehensive income. Such unrealized gains are recorded net of deferred income
tax expense, while unrealized losses are not tax benefitted.
104
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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
For the period January 1 through January 4, 1996, the Company's federal income
tax return was consolidated with Kemper and Kemper's other wholly-owned life
insurance subsidiary, Federal Kemper Life Assurance Company ("FKLA"). The Boards
of Directors of Kemper, KILICO and FKLA, adopted a written plan that provided
that federal income taxes would be paid to or recovered from Kemper on the basis
of each company's taxable income or loss as shown on its respective federal
income tax return. In the event of a federal income tax credit which is greater
than the amount recoverable from the other life insurance company or from the
Internal Revenue Service, the funds available would be apportioned among the
life companies entitled to a recovery on the basis of the relationship of each
company's tax credit to the total of all of the life insurance companies in a
deficit position. For the period January 5 through December 31, 1996, and
subsequent years, the Company has filed a separate federal income tax return.
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. The Company
paid federal income taxes of $126.0 million, $29.0 million and $28.1 million
directly to the United States Treasury Department during 1998, 1997 and 1996
respectively.
(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
105
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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, 1998
U.S. treasury securities and
obligations of U.S.
government agencies and
authorities.................. $ 7,951 $ 7,879 $ 81 $ (9)
Obligations of states and
political subdivisions,
special revenue and
nonguaranteed................ 27,039 26,768 362 (91)
Debt securities issued by
foreign governments.......... 69,357 67,239 2,266 (148)
Corporate securities........... 1,908,850 1,866,372 46,664 (4,186)
Mortgage and asset-backed
securities................... 1,469,623 1,453,277 19,063 (2,717)
---------- ---------- ------- --------
Total fixed
maturities............ $3,482,820 $3,421,535 $68,436 $ (7,151)
========== ========== ======= ========
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)
========== ========== ======= ========
</TABLE>
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1998, 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
106
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST
(in thousands) -------- ---------
<S> <C> <C>
One year or less............................. $ 44,816 $ 44,745
Over one year through five years............. 814,646 802,147
Over five years through ten years............ 891,767 866,613
Over ten years............................... 261,968 254,753
Securities not due at a single maturity date,
primarily mortgage and asset-backed
securities(1).............................. 1,469,623 1,453,277
---------- ----------
Total fixed maturities................ $3,482,820 $3,421,535
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 4.0 years.
Proceeds from sales of investments in fixed maturities prior to maturity were
$882.6 million, $633.9 million and $892.0 million during 1998, 1997 and 1996,
respectively. Gross gains of $10.1 million, $3.1 million and $9.9 million and
gross losses of $8.0 million, $13.7 million and $16.2 million were realized on
sales and write-downs of fixed maturities in 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had 12 separate asset-backed securities
included in fixed maturity investments from trusts formed to collateralize
assets underwritten by Green Tree Financial Corporation, which in aggregate
amounted to $97.7 million. No other individual investments exceeded ten percent
of stockholder's equity at December 31, 1998.
At December 31, 1998, securities carried at approximately $6.4 million were on
deposit with governmental agencies as required by law.
Upon default or indication of potential default by an issuer of fixed maturity
securities, the 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
107
<PAGE> 114
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $164.4 million real estate portfolio at December 31, 1998 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1998 and 1997, total impaired real estate-related
loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross....... $ 83.9 $39.3
Impaired loans with reserves--gross.......... 21.5 2.2
------ -----
Total gross impaired loans............ 105.4 41.5
Reserves related to impaired loans........... (18.5) (2.1)
------ -----
Net impaired loans.................... $ 86.9 $39.4
====== =====
</TABLE>
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. The Company had an average balance of $54.6 million
and $45.2 million in impaired loans for 1998 and 1997, respectively. Cash
payments received on impaired loans are generally applied to reduce the
outstanding loan balance.
At December 31, 1998 and 1997, loans on nonaccrual status, before reserves and
write-downs, amounted to $37.4 million and $47.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
108
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Interest and dividends on fixed
maturities.................... $232,707 $250,170 $250,683
Dividends on equity
securities.................... 2,143 2,123 646
Income from short-term
investments................... 5,391 4,128 9,130
Income from mortgage loans...... 14,964 16,283 20,257
Income from policy loans........ 21,096 20,549 20,700
Income from other real estate-
related investments........... 352 6,631 4,917
Income from other loans and
investments................... 2,223 2,045 2,480
-------- -------- --------
Total investment
income................ 278,876 301,929 308,813
Investment expense.............. (5,364) (5,734) (9,125)
-------- -------- --------
Net investment income.... $273,512 $296,195 $299,688
======== ======== ========
</TABLE>
Net realized investment gains (losses) for the years ended December 31, 1998,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Real estate-related.............. $ 41,362 $ 19,758 $17,462
Fixed maturities................. 2,158 (10,656) (6,344)
Trading account securities--gross
gains on transfer.............. 3,254 -- --
Trading account securities--gross
losses on transfer............. (417) -- --
Trading account
securities--holding losses..... (151) -- --
Equity securities................ 5,496 914 --
Other............................ 166 530 2,484
-------- -------- -------
Realized investment gains
before income tax expense... 51,868 10,546 13,602
Income tax expense............... (18,154) (3,691) (4,761)
-------- -------- -------
Net realized investment
gains....................... $ 33,714 $ 6,855 $ 8,841
======== ======== =======
</TABLE>
109
<PAGE> 116
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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 and other securities--the difference between
fair value and cost. The change in net unrealized investment gains (losses) by
class of investment for the years ended December 31, 1998, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-----------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1996
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities........... $36,717 $ 87,787 $(63,219)
Equity and other
securities............... (1,074) (103) 1,256
Adjustment to deferred
insurance acquisition
costs.................... (2,399) (2,325) 1,307
Adjustment to value of
business acquired........ (1,954) (26,209) 20,947
------- -------- --------
Unrealized gain (loss)
before income tax
expense (benefit)..... 31,290 59,150 (39,709)
Income tax expense
(benefit)................ 10,952 (985) 7,789
------- -------- --------
Net unrealized gain
(loss) on
investments...... $20,338 $ 60,135 $(47,498)
======= ======== ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1998 and 1997 the Company, along with other Kemper subsidiaries,
directly held partnership interests in a number of real estate joint ventures.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation
accounting methods are not utilized as the Company, in most instances, does not
own more than 50 percent in the aggregate, and in any event, major decisions of
the partnership must be made jointly by all partners.
As of December 31, 1998 and 1997, the Company's net equity investment in
unconsolidated investees amounted to $1.2 million and $19.3 million,
110
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) UNCONSOLIDATED INVESTEES (CONTINUED)
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $241 thousand, $835 thousand and $223 thousand in 1998,
1997 and 1996, respectively.
(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 28.0 percent of the Company's investment-grade fixed maturities at
December 31, 1998 were mortgage-backed securities, down from 35.1 percent at
December 31, 1997, due to sales and paydowns during 1998. 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 15.4 percent and 10.8 percent of the Company's investment-grade
fixed maturities at December 31, 1998 and 1997, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (21.9%), auto loans
(8.2%), manufactured housing loans (14.8%), equipment loans (5.2%), and
commercial mortgage backed securities (22.1%).
The Company's real estate portfolio is distributed by geographic location and
property type. The geographic distribution of a majority of the real estate
portfolio as of December 31, 1998 was as follows: California (31.5%), Hawaii
(16.2%), Washington (9.9%) and Colorado (9.4%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1998 was as
follows: hotels (39.9%), land (30.9%) and residential (15.5%).
Undeveloped land represented approximately 30.9 percent of the Company's real
estate portfolio at December 31, 1998. 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.
111
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
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. 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.
At December 31, 1998, 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 $64.5 million, or
39.3 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1998,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.
At December 31, 1998, loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company
("Lumbermens"), a former affiliate, constituted approximately $51.6 million, or
31.4 percent, of the Company's real estate portfolio. Kemper's interest is 75
percent at December 31, 1998. At December 31, 1998, MLP-related commitments
accounted for approximately $6.1 million of the Company's off-balance-sheet
legal commitments.
The remaining significant real estate-related investments amounted to $27.3
million at December 31, 1998 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, the Company has placed these real estate-related investments on
nonaccrual status as of December 31, 1996. The Company 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, the Company anticipates that it could be several additional years until
the Company completely disposes of all of its investments in Hawaii.
At December 31, 1998, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such
112
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
investments have been sold. 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, 1998.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Current............................... $ 52,274 $130,662 $26,300
Deferred.............................. (12,470) (99,370) (897)
-------- -------- -------
Total....................... $ 39,804 $ 31,292 $25,403
======== ======== =======
</TABLE>
Additionally, the deferred income tax expense (benefit) related to items
included in other comprehensive income was as follows for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Unrealized gains and losses on
investments............................. $12,475 $ 9,002 $ --
Value of business acquired................ (684) (9,173) 7,331
Deferred insurance acquisition costs...... (840) (814) 457
------- ------- ------
Total........................... $10,952 $ (985) $7,789
======= ======= ======
</TABLE>
113
<PAGE> 120
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The actual income tax expense for 1998, 1997 and 1996 differed from the
"expected" tax expense for those years as displayed below. "Expected" tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 1998, 1997, and 1996 to income before income tax expense.
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Computed expected tax expense........... $36,734 $24,503 $20,938
Difference between "expected" and actual
tax expense:
State taxes........................... (434) 1,801 913
Amortization of goodwill.............. 4,460 5,353 3,568
Dividend received deduction........... (540) -- --
Foreign tax credit.................... (250) (278) --
Other, net............................ (166) (87) (16)
------- ------- -------
Total actual tax expense...... $39,804 $31,292 $25,403
======= ======= =======
</TABLE>
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.
114
<PAGE> 121
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred federal tax assets or liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1996
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition
costs........................ $ 86,332 $ 75,522 $ 4,520
Unrealized losses on
investments.................. -- -- 16,624
Life policy reserves........... 27,240 43,337 46,452
Unearned revenue............... 42,598 37,243 --
Real estate-related............ 13,944 13,400 20,642
Other investment-related....... 5,770 3,298 5,409
Other.......................... 4,923 4,371 3,639
-------- -------- --------
Total deferred federal tax
assets.................... 180,807 177,171 97,286
Valuation allowance............ (15,201) (15,201) (31,825)
-------- -------- --------
Total deferred federal tax
assets after valuation
allowance................. 165,606 161,970 65,461
-------- -------- --------
Deferred federal tax liabilities:
Value of business acquired..... 41,598 48,469 66,373
Deferred insurance acquisition
costs........................ 32,040 20,811 9,384
Depreciation and
amortization................. 19,111 20,201 15,473
Other investment-related....... 14,337 18,774 28,855
Unrealized gains on
investments.................. 21,477 9,002 --
Other.......................... 1,984 4,720 5,738
-------- -------- --------
Total deferred federal tax
liabilities............... 130,547 121,977 125,823
-------- -------- --------
Net deferred federal tax assets
(liabilities).................. $ 35,059 $ 39,993 $(60,362)
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the tax on
deferred insurance acquisition costs ("DAC Tax") associated with $1.5 billion
and $2.7 billion of new and renewal sales in 1998 and 1997, respectively from a
non-registered individual and group variable bank-owned life insurance contract
("BOLI"). 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.
115
<PAGE> 122
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The tax returns through the year 1993 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 1994 through 1996 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received capital contributions from Kemper of $4.3 million, $45.0
million and $18.4 million during 1998, 1997 and 1996, respectively. The Company
paid cash dividends of $95.0 million and $29.3 million to Kemper during 1998 and
1997, respectively. The Company did not pay any cash dividends to Kemper during
1996.
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, 1998 and 1997, joint venture mortgage loans
totaled $65.8 million and $72.7 million, respectively, and during 1998, 1997 and
1996, the Company earned interest income on these joint venture loans of $6.8
million, $7.5 million and $9.5 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") 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 1998,
1997 and 1996, expenses allocated to the Company from SKI and KSvC amounted to
$43 thousand, $114 thousand and $1.7 million, respectively. The Company also
paid to SKI investment management fees of $3.1 million, $3.5 million and $3.6
million during 1998, 1997 and 1996, respectively. In addition, expenses
allocated to the Company from FKLA during 1998, 1997 and 1996 amounted to $35.5
million, $30.0 million and $10.5 million, respectively. The Company also paid to
Kemper real estate subsidiaries $1.5 million, $2.2 million and $1.8 million in
1998, 1997 and 1996, 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
116
<PAGE> 123
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
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.
As of December 31, 1998 and 1997, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $344.8 million
and $382.6 million, respectively.
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 ("GAAP"), of
approximately $18.4 million, was deemed to be a capital contribution from Kemper
and was recorded as additional paid-in-capital during 1996. As of the date of
this transaction, no deferred tax impact was recorded on the difference between
the statutory and GAAP reserves. This deferred tax impact of $6.5 million was
recorded in 1998 as a reduction to the original capital contribution. Premiums
assumed during 1998 under the terms of the treaty amounted to $21.6 million and
the face amount which remained outstanding at December 31, 1998 amounted to
$11.7 billion.
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 $293
thousand and $139 thousand as of December 31, 1998 and 1997, respectively.
During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, ZC Life Reinsurance Limited ("ZC
Life"), formerly EPICENTRE Reinsurance (Bermuda) Limited. 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 the new BOLI product
developed in 1997, 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 ZC Life under the terms of the treaty.
During 1997, the Company also ceded $24.3 million of
117
<PAGE> 124
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
separate account fees (cost of insurance charges) to ZC Life. The Company has
also withheld approximately $23.4 million of such funds due to ZC Life 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.
During 1998, the Company modified the reinsurance agreement to increase the
reinsurance from ninety percent to one hundred percent. During 1998, the Company
issued $6.9 billion (face amount) of new BOLI business and ceded $11.1 billion
(face amount) to ZC Life under the terms of the modified treaty. During 1998,
the Company also ceded $175.5 million of separate account fees (cost of
insurance charges) to ZC Life. The Company has also withheld approximately
$170.9 million of such funds due to ZC Life 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, 1998.
KILICO has a large and growing funds withheld account ("FWA") supporting reserve
credits on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA is now marked-to-market based upon the
Total Return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, the Company recorded a $2.5 million increase to
the FWA related to this mark-to-market. To properly match revenue and expenses,
the Company has placed assets supporting the FWA in a segmented portion of its
General Account. This portfolio is classified as "trading" under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, the Company recorded a realized capital gain of $2.8 million upon
transfer of these assets from "available for sale" to the trading portfolio as
required by FAS 115. In addition, the Company recorded realized capital losses
of $151 thousand related to the changes in fair value of this portfolio during
1998. The fair value of this portfolio was $101.8 million at December 31, 1998,
and the amortized cost was $99.1 million. The Company periodically purchases
assets into this segmented portfolio to support changes in the FWA.
(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
118
<PAGE> 125
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
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 $2.0 million and $1.9 million at December 31, 1998 and 1997,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.0 percent and 7.25 percent for 1998 and 1997, respectively. The
assumed health care trend rate used was based on projected experience for 1998,
8.0 percent for 1999, gradually declining to 6.4 percent by the year 2003 and
gradually declining 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, 1998 and 1997 by $312 thousand and $242 thousand, respectively.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company nor 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
119
<PAGE> 126
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1998, the Company had future legal loan commitments and stand-by
financing agreements totaling $64.4 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be collateralized 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. 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 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. 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
120
<PAGE> 127
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 sheets 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 in 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 sheets 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 1998 and 1997 to be 4.75 percent and 5.25 percent,
respectively, while the assumed average market crediting rate was 5.0 percent
and 6.0 percent in 1998 and 1997, respectively.
121
<PAGE> 128
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, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) -------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial instruments
recorded as assets:
Fixed maturities......... $3,482,820 $3,482,820 $3,668,643 $3,668,643
Trading account
securities............. 101,781 101,781 -- --
Cash and short-term
investments............ 71,820 71,820 259,925 259,925
Mortgage loans and other
real estate-related
assets................. 164,375 164,375 220,046 220,046
Policy loans............. 271,540 271,540 282,439 282,439
Equity securities........ 66,854 66,854 24,839 24,839
Other invested assets.... 23,645 27,620 20,820 24,404
Financial instruments
recorded as liabilities:
Life policy benefits,
excluding term life
reserves............... 3,551,050 3,657,510 3,846,023 4,050,852
Funds withheld account... 170,920 170,920 23,420 23,420
</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 1999 is $64.9 million. The
Company paid cash dividends of $95.0 million and $29.3 million to Kemper during
1998 and 1997, respectively. The Company paid no cash dividends in 1996.
The Company's net income and capital and surplus as determined in accordance
with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Net income......................... $ 64,871 $ 58,372 $ 37,287
======== ======== ========
Statutory capital and surplus...... $455,213 $476,924 $411,837
======== ======== ========
</TABLE>
122
<PAGE> 129
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>
1998 OPERATING SUMMARY
Net investment income............ $70,551 $68,467 $ 66,892 $ 67,602
Realized investment gains........ 1,854 15,673 8,951 25,390
Premium income................... 5,203 5,941 5,278 5,924
Separate account fees and other
income......................... 20,418 19,922 17,631 14,042
------- ------- -------- --------
Total revenue............. 98,026 110,003 98,752 112,958
------- ------- -------- --------
Interest credited and benefits to
policyholders.................. 57,930 57,939 54,251 34,815
Commissions, taxes, licenses and
fees........................... 13,885 13,922 12,282 29,251
Operating expenses............... 10,094 12,157 10,528 11,794
Net deferral of insurance
acquisition costs.............. (7,973) (11,983) (9,669) (4,858)
Amortization of value of business
acquired....................... 4,427 7,121 6,359 (230)
Amortization of goodwill......... 3,186 3,186 3,186 3,186
------- ------- -------- --------
Total benefits and
expenses................ 81,549 82,342 76,937 73,958
------- ------- -------- --------
Income before income tax
expense........................ 16,477 27,661 21,815 39,000
Income tax expense............... 7,247 11,774 8,828 11,955
------- ------- -------- --------
Net income................ $ 9,230 $15,887 $ 12,987 $ 27,045
======= ======= ======== ========
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
======= ======= ======== ========
</TABLE>
123
<PAGE> 130
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------
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.
(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
years.
(15) OPERATING SEGMENTS AND RELATED INFORMATION
In June 1997, the FASB 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. The Company adopted SFAS No. 131 as of December 31, 1998 and the
impact of implementation did not affect the Company's consolidated financial
position, results of operations or cash flows. In the initial year of adoption,
SFAS No. 131 requires comparative information for earlier years to be restated,
unless impracticable to do so.
In connection with the acquisition by Zurich, the Company, FKLA, ZLICA, and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, began to operate under the trade name Zurich Kemper Life. For
purposes of this operating segment disclosure, Zurich Kemper Life will also
include the operations of Zurich Direct, Inc., an affiliated direct marketing
life insurance agency and excludes FLA, as it is owned by its policyholders.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The SBU
concept employed by ZFS has each SBU concentrate on a specific customer market.
The SBU is the focal point of Zurich Kemper Life, because it is at the SBU level
that Zurich Kemper Life can clearly identify customer segments and then work to
understand and satisfy the needs of each customer. The contributions of Zurich
Kemper Life's SBU's to consolidated revenues, operating results and certain
balance sheet data pertaining thereto, are shown in the following tables on the
basis of generally accepted accounting principles. Zurich Kemper Life's SBU's
were formed in 1996, subsequent to the acquisition by Zurich, however, financial
information was not produced by SBU until 1997. Therefore, Zurich Kemper Life
has not provided segment information for 1996, as it would be impracticable to
do so.
Zurich Kemper Life is segregated into the Agency, Financial, Group Retirement
and Direct SBU's. The SBU's are not managed at the legal entity level, but
rather at the Zurich Kemper Life level. Zurich Kemper Life's SBU's cross legal
entity
124
<PAGE> 131
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
lines, as certain similar products are sold by more than one legal entity. The
vast majority of the Company's business is derived from the Financial and Group
Retirement SBU's.
Each SBU's revenue is derived from geographically dispersed areas as Zurich
Kemper Life is licensed in the District of Columbia and all states except New
York. During 1998 and 1997, Zurich Kemper Life did not derive net revenue from
one customer that exceeded 10 percent of the total revenue of Zurich Kemper
Life.
The principal products and markets of Zurich Kemper Life's SBU's are as follows:
AGENCY: The Agency SBU develops low cost term and universal life insurance, as
well as fixed annuities, to market through independent agencies and national
marketing organizations.
FINANCIAL: The Financial SBU focuses on a wide range of products that provide
for the accumulation, distribution and transfer of wealth and primarily includes
variable and fixed annuities, variable universal life and bank-owned life
insurance. These products are distributed to consumers through financial
intermediaries such as banks, brokerage firms and independent financial
planners.
GROUP RETIREMENT: The Group Retirement SBU has a sharp focus on its target
customer. This SBU markets variable annuities to K-12 schoolteachers,
administrators, and healthcare workers, along with college professors and
certain employees of selected non-profit organizations. This target market is
eligible for what the IRS designates as retirement-oriented savings or
investment plans that qualify for special tax treatment.
DIRECT: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.
125
<PAGE> 132
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information for ZKL's SBU's are as follows:
As of and for the period ending December 31, 1998:
(in thousands)
<TABLE>
<CAPTION>
GROUP
AGENCY FINANCIAL RETIREMENT DIRECT TOTAL
INCOME STATEMENT ------ --------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income..... $ 160,067 $ 56 $ -- $ 5,583 $ 165,706
Net investment
income........... 141,171 180,721 100,695 271 422,858
Realized investment
gains............ 20,335 33,691 15,659 30 69,715
Fees and other
income........... 80,831 40,421 31,074 23,581 175,907
---------- ---------- ---------- -------- -----------
Total
revenue..... 402,404 254,889 147,428 29,465 834,186
---------- ---------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder
benefits......... 243,793 117,742 73,844 2,110 437,489
Intangible asset
amortization..... 58,390 15,669 15,703 -- 89,762
Net deferral of
insurance
acquisition
costs............ (55,569) (9,444) (22,964) (22,765) (110,742)
Commissions and
taxes, licenses
and fees......... 29,539 43,919 22,227 11,707 107,392
Operating
expenses......... 61,659 24,924 20,279 35,593 142,455
---------- ---------- ---------- -------- -----------
Total benefits
and
expenses.... 337,812 192,810 109,089 26,645 666,356
---------- ---------- ---------- -------- -----------
Income before income
tax expense........ 64,592 62,079 38,339 2,820 167,830
Income tax expense... 26,774 24,340 14,794 1,001 66,909
---------- ---------- ---------- -------- -----------
Net income..... $ 37,818 $ 37,739 $ 23,545 $ 1,819 $ 100,921
========== ========== ========== ======== ===========
BALANCE SHEET
Total assets....... $3,194,530 $8,232,927 $4,172,828 $ 46,254 $15,646,539
========== ========== ========== ======== ===========
</TABLE>
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<PAGE> 133
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REVENUE NET INCOME ASSETS
------- ---------- ------
<S> <C> <C> <C>
Total revenue, net income and assets,
respectively, from above:........... $834,186 $100,921 $15,646,539
-------- -------- -----------
Less:
Revenue, net income and assets of
FKLA............................. 336,841 35,953 2,986,381
Revenue, net loss and assets of
ZLICA............................ 54,058 (1,066) 416,115
Revenue, net income and assets
Zurich Direct.................... 23,548 885 4,322
-------- -------- -----------
Totals per the Company's
consolidated financial
statements....................... $419,739 $ 65,149 $12,239,721
======== ======== ===========
</TABLE>
As of and for the period ending December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
GROUP
AGENCY FINANCIAL RETIREMENT DIRECT TOTAL
INCOME STATEMENT ------ --------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income........... $ 167,439 $ -- $ -- $ 4,249 $ 171,688
Net investment income.... 155,885 212,767 91,664 455 460,771
Realized investment
gains.................. 2,503 7,744 2,692 50 12,989
Fees and other income.... 78,668 73,823 23,663 8,007 184,161
---------- ---------- ---------- ------- -----------
Total revenue........ 404,495 294,334 118,019 12,761 829,609
---------- ---------- ---------- ------- -----------
BENEFITS AND EXPENSES
Policyholder benefits.... 247,878 153,327 60,061 2,234 463,500
Intangible asset
amortization........... 58,534 25,593 15,589 -- 99,716
Net deferral of insurance
acquisition costs...... (50,328) (18,222) (13,033) (5,242) (86,825)
Commissions and taxes,
licenses and fees...... 39,477 66,552 16,668 3,518 126,215
Operating expenses....... 55,859 20,282 14,320 19,472 109,933
---------- ---------- ---------- ------- -----------
Total benefits and
expenses........... 361,420 247,532 93,605 19,982 712,539
---------- ---------- ---------- ------- -----------
Income (loss) before income
tax expense (benefit).... 53,075 46,802 24,414 (7,221) 117,070
Income tax expense
(benefit)................ 25,554 21,144 10,545 (2,528) 54,715
---------- ---------- ---------- ------- -----------
Net income (loss).... $ 27,521 $ 25,658 $ 13,869 $(4,693) $ 62,355
========== ========== ========== ======= ===========
BALANCE SHEET
Total assets............. $2,877,854 $7,416,791 $3,759,173 $41,669 $14,095,487
========== ========== ========== ======= ===========
</TABLE>
127
<PAGE> 134
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REVENUE NET INCOME ASSETS
------- ---------- ------
<S> <C> <C> <C>
Total revenue, net income and
assets, respectively, from
above:........................... $829,609 $62,355 $14,095,487
Less:
Revenue, net income and assets of
FKLA.......................... 338,854 24,740 3,105,396
Revenue, net income and assets of
ZLICA......................... 57,233 2,193 398,786
Revenue, net loss and assets of
Zurich Direct................. 8,042 (3,295) 1,655
-------- ------- -----------
Totals per the Company's
consolidated financial
statements............... $425,480 $38,717 $10,589,650
======== ======= ===========
</TABLE>
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<PAGE> 135
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Certificate upon a withdrawal. The
5% assumed Guaranteed Interest Rate is the rate required to be used in the
"Summary of Expenses." In these examples, the withdrawal occurs one year after
the Date of Issue. The Market Value Adjustment operates in a similar manner for
transfers. No Withdrawal Charge applies to transfers.
The Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at
the end of the five-year Guarantee Period. After one year, when the withdrawals
occur in these examples, the Guarantee Period Value is $42,000.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate KILICO is then crediting
(at the time of the withdrawal) on new Certificates with the same Guarantee
Period as the time remaining in your Guarantee Period rounded to the next higher
number of complete years. One year after the Purchase Payment there would have
been four years remaining in your Guarantee Period. These examples also show the
Withdrawal Charge (if any) which would be calculated separately after the Market
Value Adjustment.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment and KILICO is then crediting 6.5%
for a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:
-.0551589* = [ (1 + .05) ] (4) -1
----------
(1 + .065)
The Market Value Adjustment is a reduction of $2,316.67 from the Guarantee
Period Value:
- 2,316.67 = -.0551589 X 42,000.00
- ---------------
* Actual calculation utilizes 10 decimal places.
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<PAGE> 136
The Market Adjusted Value would be:
$39,683.33 = $42,000.00 - $2,316.67
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 10% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$2,142.90 = $39,683.33 X .90 X .06
Thus, the amount payable on a full withdrawal would be:
$37,540.43 = $39,683.33 - $2,142.90
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,158.34 = -.0551589 X $21,000.00
The Market Adjusted Value would be:
$19,841.66 = $21,000.00 - $1,158.34
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$952.39 = ($19,841.46 - .10 X $39,683.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$18.889.07 = $19,841.46 -$952.39
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and KILICO is then crediting 4% for a four-year Guarantee Period. Upon a
full withdrawal, the market value adjustment factor would be:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
+.0390198 = 3 (1 + .05) 4 (4) -1
----------
(1 + .04)
</TABLE>
The Market Value Adjustment is an increase of $1638.83 to the Guarantee Period
Value:
$1,638.83 = $42,000.00 X .0390198
The Market Adjusted Value would be:
$43,638.33 = $42,000.00 +$1,638.83
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<PAGE> 137
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,356.47 = $43,638.33 X .90 X .06
Thus, the amount payable on withdrawal would be:
$41,281.85 = $43,638.33 - $2,356.47
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$819.42 = $21,000.00 X .0390198
The Market Adjusted Value of $21,000.00 would be:
$21,819.42 = $21,000.00 + $819.42
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$1,047.34 = ($21,819.42 - .1 X $43,638.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$20,772.08 = $21,819.42 - $1,047.34
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
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<PAGE> 138
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 Contract and receive back 100% of your money. To do so, wire Kemper
Investors Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049, or
call 1-800-621-5001.
B. STATUTORY REQUIREMENTS
This Contract is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), 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 Contract 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 Contract, and does not
represent a determination on the merits of the Contract.
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 Contract must be nontransferable by the owner.
3. The Contract 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 Contract is distributed, unless
otherwise permitted under applicable law, any remaining interest in the Contract
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
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<PAGE> 139
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
Contract will be treated as his or her own IRA, or, where applicable, Roth IRA.
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 Contract used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or tax-
sheltered annuity, or from a direct transfer from another IRA. All or part of
the premium for this Contract used as a SIMPLE IRA may be paid from a rollover
from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the extent
permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE Individual
Retirement Account.
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<PAGE> 140
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.
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 no 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.
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<PAGE> 141
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.
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.
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<PAGE> 142
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 Contract and
Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum
distribution for a particular year must be received by December 31 of that year.
However, you may delay the required minimum distribution for the year you reach
age 70 1/2 until April 1 of the following year (i.e., the required beginning
date).
Annuity payments which begin by April 1 of the year following your 70 1/2 year
satisfy the minimum distribution requirement if they provide for non-increasing
payments over the life or the lives of you and your spouse, provided that, if
installments are guaranteed, the guaranty period does not exceed the lesser of
20 years or the applicable life expectancy.
The applicable life expectancy is your remaining life expectancy or the
remaining joint life and last survivor expectancy of you and your designated
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." To
obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS
toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your
area as shown in your income tax return instructions.
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.
If the actual distribution from your Contract is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. ROTH IRAS
1. If your contract is a special type of individual retirement plan known as a
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to
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<PAGE> 143
an "IRA" are to an "individual retirement plan," within the meaning of section
7701(a)(37) of the 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 Contract 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. The Company
reserves 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
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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 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.
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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 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 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.
139
<PAGE> 146
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 Contract. Generally, an excess contribution is the amount contributed to
your Contract that is more than you can contribute. The excess is taxed for the
year of the excess contribution and for each year after that until you correct
it.
2. You will not have to pay the 6% excise tax if you withdraw the excess amount
by the date your tax return is due including extensions for the year of the
contribution. You do not have to include in your gross income an excess
contribution that you withdraw from your Contract before your tax return is due
if the income earned on the excess was also withdrawn and no deduction was
allowed for the excess contribution. You must include in your gross income the
income earned on the excess contribution.
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<PAGE> 147
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 higher education expenses, certain medical expenses, or by an
unemployed individual to pay health insurance premiums.
O. 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, SIMPLE IRA or Roth 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 Contract or use it as security for a loan, the
Contract 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
Contract 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.
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<PAGE> 148
S. FINANCIAL DISCLOSURE
1. If contributions to the Contract are made by other than rollover
contributions and direct transfers, the following information based on the
charts shown on the next pages, which assumes you were to make a level
contribution to the fixed account at the beginning of each year of $1,000 must
be completed prior to your signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- --------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- --------------------------------------------------------------------------
2 65
- --------------------------------------------------------------------------
3 70
- --------------------------------------------------------------------------
4
- --------------------------------------------------------------------------
5
- --------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
2. If contributions to the Contract are made by rollover contributions and/or
direct transfers, the following information, based on the charts shown on the
next page, and all of which assumes you make one contribution to the fixed
account of $1,000 at the beginning of this year, must be completed prior to your
signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- --------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- --------------------------------------------------------------------------
2 65
- --------------------------------------------------------------------------
3 70
- --------------------------------------------------------------------------
4
- --------------------------------------------------------------------------
5
- --------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
T. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT
(VARIABLE ACCOUNT)
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.40% per annum. If you elected the Guaranteed Retirement Income
Benefit option, an additional charge of .25% of the
142
<PAGE> 149
Contract Value will be assessed against the Separate Account, Fixed Account and
Guarantee Periods on a pro-rata basis.
2. An annual records maintenance charge of $30.00 will be assessed ratably each
quarter against the Separate Account, Fixed Account and Guarantee Periods.
3. Withdrawal (early annuitization) charges will be assessed based on the years
elapsed since the purchase payments (in a given contract year) were received by
KILICO; under 1 year, 7%; over 1 to 2 years, 6%; over 2 to 3 years, 5%; over 3
to 4 years, 5%; over 4 to 5 years, 4%; over 5 to 6 years, 3%; over 6 to 7 years,
2%; over 7 years and thereafter, 0%.
4. The method used to compute and allocate the annual earnings is contained in
the Prospectus under the heading "Accumulation Unit Value."
5. The growth in value of your contract is neither guaranteed nor projected but
is based on the investment experience of the Separate Account.
143
<PAGE> 150
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR Values*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 937.00 14 $16,798.32 27 $40,421.63 40 $ 75,113.26
2 1,913.00 15 18,310.91 28 42,642.92 41 78,375.30
3 2,928.90 16 19,868.88 29 44,930.85 42 81,735.20
4 3,976.63 17 21,473.59 30 47,287.42 43 85,195.89
5 5,066.14 18 23,126.44 31 49,714.68 44 88,760.41
6 6,198.41 19 24,828.87 32 52,214.76 45 92,431.86
7 7,374.46 20 26,582.37 33 54,789.84 46 96,213.46
8 8,604.34 21 28,388.49 34 57,442.18 47 100,108.50
9 9,871.11 22 30,248.78 35 60,174.08 48 104,120.40
10 11,175.88 23 32,164.88 36 62,987.94 49 108,252.65
11 12,519.80 24 34,138.47 37 65,886.22 50 112,508.87
12 13,904.03 25 36,171.26 38 68,871.45
13 15,329.79 26 38,265.04 39 71,946.23
</TABLE>
144
<PAGE> 151
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR Values*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 937 14 $1,000 27 $1,000 40 $1,000
2 946 15 1,000 28 1,000 41 1,000
3 955 16 1,000 29 1,000 42 1,000
4 955 17 1,000 30 1,000 43 1,000
5 964 18 1,000 31 1,000 44 1,000
6 973 19 1,000 32 1,000 45 1,000
7 982 20 1,000 33 1,000 46 1,000
8 1,000 21 1,000 34 1,000 47 1,000
9 1,000 22 1,000 35 1,000 48 1,000
10 1,000 23 1,000 36 1,000 49 1,000
11 1,000 24 1,000 37 1,000 50 1,000
12 1,000 25 1,000 38 1,000
13 1,000 26 1,000 39 1,000
</TABLE>
* Includes applicable withdrawal charges.
145
<PAGE> 152
PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET
VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
This prospectus describes Variable, Fixed and Market Value Adjusted Deferred
Annuity Contracts of Kemper Investors Life Insurance Company that are designed
to provide benefits under retirement plans which may qualify for certain federal
tax advantages. Depending on particular state requirements, the Contracts may be
issued on a group or individual basis. Contracts issued on an individual basis
are represented by a Certificate. All discussion of "Contracts" includes
Contracts issued on an individual or group basis.
(CONTINUED)
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.
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE CONTRACTS THAT YOU
SHOULD KNOW BEFORE INVESTING. YOU SHOULD READ IT BEFORE INVESTING AND KEEP IT
FOR FUTURE REFERENCE. WE HAVE FILED A STATEMENT OF ADDITIONAL INFORMATION
("SAI") WITH THE SECURITIES AND EXCHANGE COMMISSION. THE CURRENT SAI HAS THE
SAME DATE AS THIS PROSPECTUS AND IS INCORPORATED BY REFERENCE IN THIS
PROSPECTUS. YOU MAY OBTAIN A FREE COPY BY WRITING US OR CALLING (847) 550-5500.
A TABLE OF CONTENTS FOR THE SAI APPEARS ON PAGE . YOU MAY ALSO FIND THIS
PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC") AT THE SEC'S WEB SITE AT
HTTP://WWW.SEC.GOV.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1999.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 153
You may allocate purchase payments to one or more of the variable options, the
fixed option or the fixed option subject to a market value adjustment. The
Contract currently offers twelve investment options, each of which is a
Subaccount of KILICO Variable Annuity Separate Account. Currently, you may
choose among the following Portfolios:
KEMPER VARIABLE SERIES (formerly Investors Fund Series): Kemper Government
Securities; Kemper High Yield; Kemper Small Cap Growth; Kemper-Dreman High
Return Equity.
SCUDDER VARIABLE LIFE INVESTMENT FUND: Scudder VLIF Money Market; Scudder VLIF
Growth and Income (Class A Shares); Scudder VLIF International (Class A Shares);
Scudder VLIF Bond (Class A Shares).
JANUS ASPEN SERIES: Janus Aspen Capital Appreciation
PIMCO VARIABLE INSURANCE TRUST: PIMCO Low Duration Bond; PIMCO Foreign Bond.
TEMPLETON VARIABLE PRODUCTS SERIES FUND: Templeton Developing Markets Fund
(Class 2 Shares).
Subaccounts and Portfolios may be added or deleted in the future. Contract
values allocated to any of the Subaccounts vary, reflecting the investment
experience of the selected Subaccounts. Contract values allocated to the Fixed
Account or one or more Guarantee Periods of the Market Value Adjustment Option
accumulate on a fixed basis.
<PAGE> 154
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 4
SUMMARY OF EXPENSES......................................... 7
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 11
FIXED ACCOUNT OPTION........................................ 19
THE CONTRACTS............................................... 19
CONTRACT CHARGES AND EXPENSES............................... 29
THE ANNUITY PERIOD.......................................... 33
FEDERAL INCOME TAXES........................................ 37
DISTRIBUTION OF CONTRACTS................................... 46
VOTING RIGHTS............................................... 46
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 47
DOLLAR COST AVERAGING....................................... 47
SYSTEMATIC WITHDRAWAL PLAN.................................. 48
EXPERTS..................................................... 48
LEGAL MATTERS............................................... 49
SPECIAL CONSIDERATIONS...................................... 49
AVAILABLE INFORMATION....................................... 49
BUSINESS.................................................... 50
PROPERTIES.................................................. 59
LEGAL PROCEEDINGS........................................... 59
SELECTED FINANCIAL DATA..................................... 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 61
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS................... 79
EXECUTIVE COMPENSATION...................................... 84
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 87
FINANCIAL STATEMENTS........................................ 87
CHANGE OF ACCOUNTANTS....................................... 87
</TABLE>
<PAGE> 155
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATED GUARANTEE PERIOD VALUE--The sum of an Owner's Guarantee Period
Values.
ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments and upon the continuation of whose life annuity payments
involving life contingencies depend.
ANNUITY DATE--The date on which annuity payments are to commence.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person designated to receive any benefits under a Contract
upon the death of the Annuitant or the Owner prior to the Annuity Period.
COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.
CONTRACT--A Variable, Fixed and Market Value Adjusted Annuity Contract
offered by this Prospectus.
CONTRACT VALUE--The sum of the values of the Owner's Separate Account
Contract Value, Accumulated Guarantee Period Value and Fixed Account
Contract Value.
CONTRACT YEAR--Period between anniversaries of the Contract's Date of
Issue.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Contract's
Date of Issue.
CONTRIBUTION YEAR--Each one year period following the date a Purchase
Payment is made.
DATE OF ISSUE--The date on which the first Contract Year commences.
FIXED ACCOUNT--The General Account of KILICO to which a Contract Owner may
allocate all or a portion of Purchase Payments or Contract Value. We
guarantee a minimum rate of interest on Purchase Payments allocated to the
Fixed Account.
FIXED ACCOUNT CONTRACT VALUE--The value of the Owner's Contract interest in
the Fixed Account.
1
<PAGE> 156
FIXED ANNUITY--An annuity under which the amount of each annuity payment
does not vary with the investment experience of a Subaccount and is
guaranteed by KILICO.
FUND OR FUNDS--Kemper Variable Series (formerly Investors Fund Series),
Scudder Variable Life Investment Fund, Janus Aspen Series PIMCO Variable
Insurance Trust and Templeton Variable Products Series Fund including any
Portfolios thereunder.
GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
separate account.
GUARANTEED INTEREST RATE--The rate of interest We establish for a given
Guarantee Period.
GUARANTEE PERIOD--The time when an amount is credited with a Guaranteed
Interest Rate. Guarantee Period options may range from one to ten years, at
Our option.
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.
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula on any date prior to the end of a Guarantee
Period.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula prior to the end of
that Guarantee Period. The adjustment reflects the change in the value of
the Guarantee Period Value due to changes in interest rates since the date
the Guarantee Period commenced. The adjustment is computed using the market
value adjustment formula stated in the Contract.
NON-QUALIFIED PLAN CONTRACT--A Contract which does not receive favorable
tax treatment under Sections 401, 403, 408, 408A or 457 of the Internal
Revenue Code.
OWNER OR OWNER--The person designated in the Contract as having the
privileges of ownership defined in the Contract.
PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to herein as a
Fund.
PURCHASE PAYMENTS--Amounts paid to Us for an Owner.
QUALIFIED PLAN CONTRACT--A Contract issued in connection with a retirement
plan which receives favorable tax treatment under Sections 401, 403, 408,
408A or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
2
<PAGE> 157
SEPARATE ACCOUNT CONTRACT VALUE--The sum of the Owner's Contract interest
in the Subaccount(s).
SUBACCOUNTS--The thirteen subdivisions of the Separate Account, the assets
of which consist solely of shares of the corresponding Portfolios.
SUBACCOUNT VALUE--The value of the Owner's Contract interest in each
Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which the Owner's
Contract has an interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Contract Value in the first seven Contribution Years
after a Purchase Payment is made or against certain annuitizations of
Contract Value in the first seven Contribution Years after a Purchase
Payment is made.
WITHDRAWAL VALUE--Contract Value, plus or minus any applicable Market Value
Adjustment, less any premium tax payable if the Contract is being
annuitized, minus any Withdrawal Charge applicable to that Contract.
3
<PAGE> 158
SUMMARY
Because this is a summary, it does not contain all of the information that may
be important. Read the entire Prospectus and Statement of Additional Information
before deciding to invest.
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified Plan and Qualified Plan Contracts are described in
this Prospectus.
The minimum initial Purchase Payment is $1,000 and, subject to certain
exceptions, the minimum subsequent payment is $500. An allocation to a
Subaccount, Fixed Account or Guarantee Period must be at least $500. Our prior
approval is required for Purchase Payments over $1,000,000. (See "The
Contracts," page 19.)
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts selected by the Owner. Each Subaccount invests in one
of the following corresponding Portfolios:
- - Kemper Government Securities
- - Kemper High Yield
- - Kemper Small Cap Growth
- - Kemper-Dreman High Return Equity
- - Scudder VLIF Money Market
- - Scudder VLIF Growth and Income (A-Shares)
- - Scudder VLIF International (A-Shares)
- - Scudder VLIF Bond (A-Shares)
- - Janus Aspen Capital Appreciation Portfolio
- - PIMCO Low Duration Bond
- - PIMCO Foreign Bond
- - Templeton Developing Markets Fund (Class 2 Shares)
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccounts.
The Fixed Account has fixed accumulations and benefits. We guarantee that
Purchase Payments allocated to the Fixed Account earn a minimum fixed interest
rate of 3%. In Our discretion, We may credit interest in excess of 3%. (See
"Fixed Account Option," page 19.)
The MVA Option also provides fixed accumulations. The MVA Option is only
available during the Accumulation Period. An Owner may allocate amounts to one
or more Guarantee Periods. We may offer additional Guarantee Periods at Our
discretion. For new Contracts, We may limit the number of Guarantee Period
options available to three (3). We credit interest daily to amounts allocated to
the MVA Option. We declare the rate at Our sole discretion. We guarantee amounts
allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee
Periods selected by the Owner. These guaranteed amounts are subject to any
applicable Withdrawal Charge, Market Value Adjustment or Records Maintenance
Charge. We will not change a Guaranteed Interest Rate for the duration of the
Guarantee Period. However, Guaranteed Interest Rates for
4
<PAGE> 159
subsequent Guarantee Periods are set at Our discretion. At the end of a
Guarantee Period, a new Guarantee Period for the same duration starts, unless
the Owner timely elects another Guarantee Period. The interests under the
Contract relating to the MVA Option are registered under the Securities Act of
1933 but are not registered under the Investment Company Act of 1940. (See "The
MVA Option," page 11.)
The investment risk under the Contracts is borne by the Owner, unless Contract
Values are allocated to:
- the MVA Option and are guaranteed to receive the Guaranteed Interest Rate
or
- the Fixed Option and are guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization,
subject to certain limitations. A transfer from a Guarantee Period is subject to
a Market Value Adjustment unless effected within 30 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 24 and 35, respectively.)
An Owner may withdraw Contract Value subject to Withdrawal Charges, any
applicable Market Value Adjustment and other specified conditions. (See
"Withdrawal During Accumulation Period," page 25.)
We do not deduct sales charges from Purchase Payments. Each Contract Year, an
Owner may withdraw or surrender the Contract, without Withdrawal Charge, up to
the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of Contract Value. If the Owner withdraws a larger amount, the excess
Purchase Payments withdrawn are subject to a Withdrawal Charge.
The Withdrawal Charge is:
- 7% in the first Contribution Year
- 6% in the second Contribution Year
- 5% in the third and fourth Contribution Years
- 4% in the fifth Contribution Year
- 3% in the sixth Contribution Year
- 2% in the seventh Contribution Year
- 0% thereafter
5
<PAGE> 160
(See "Withdrawal Charge," page 30.) The Withdrawal Charge also applies at the
annuitization of Accumulation Units in their seventh Contribution Year or
earlier, except as set forth under "Withdrawal Charge." Withdrawals may be
subject to income tax, a 10% penalty tax, and other tax consequences.
Withdrawals from Qualified Plan Contracts may be limited by the Internal Revenue
Code (the "Code"). (See "Federal Income Taxes," page 37.)
Contract charges include:
- mortality and expense risk
- administrative expenses
- records maintenance
- applicable premium taxes
- Guaranteed Retirement Income Benefit
(See "Charges Against the Separate Account," page 29.) In addition, the
investment advisers to the Funds deduct varying charges against the assets of
the Funds for which they provide investment advisory services. (See the Funds'
prospectuses for such information.)
The Contract may be purchased in connection with retirement plans qualifying
either under Section 401 or 403(b) of the Code or as individual retirement
annuities including Roth IRAs. The Contract is also available in connection with
State and Municipal deferred compensation plans and non-qualified deferred
compensation plans. (See "Taxation of Annuities in General," page 37 and
"Qualified Plans," page 41.)
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period will depend on the state in
which the Contract is issued. However, it will be at least ten days from the
date the Owner receives the Contract. (See "The Contracts," page 19.) In
addition, a special free look period applies in some circumstances to Contracts
issued as Individual Retirement Annuities, Simplified Employee Pensions--IRAs or
as Roth Individual Retirement Annuities.
6
<PAGE> 161
- --------------------------------------------------------------------------------
SUMMARY OF EXPENSES
- --------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments).............................. None
Contingent Deferred Sales Load (as a percentage of amount surrendered)(1)
Year of Withdrawal After Purchase
First year........................... 7%
Second year.......................... 6%
Third year........................... 5%
Fourth year.......................... 5%
Fifth year........................... 4%
Sixth year........................... 3%
Seventh year......................... 2%
Eighth year and following............ 0%
Surrender Fees...................................................................................... None
Exchange Fee(2)..................................................................................... $25
ANNUAL CONTRACT FEE (Records Maintenance Charge)(3)................................................. $30
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense
Risk.................................. 1.25%
Administration.......................... .15%
Account Fees and
Expenses.............................. 0%
---------
Total Separate Account
Annual Expenses....................... 1.40%
=========
GUARANTEED RETIREMENT INCOME BENEFIT
CHARGE
Annual Expense (as a percentage of
Contract Value)....................... .25%
</TABLE>
FUND ANNUAL EXPENSES(After Fee Waivers and Expense
Reductions)
(as percentage of each Portfolio's average net assets for
the period ended December 31, 1998)
<TABLE>
<CAPTION>
MANAGEMENT RULE 12B-1 OTHER TOTAL PORTFOLIO
FEES FEES EXPENSES ANNUAL EXPENSES
---------- ---------- -------- ---------------
<S> <C> <C> <C> <C>
Kemper
Government
Securities... .55% --% .11% .66%
Kemper
High
Yield... .60 -- .05 .65
Kemper
Small
Cap
Growth... .65 -- .05 .70
Kemper-Dreman
High
Return
Equity(4)(8)... .42 -- .45 .87
Scudder
VLIF
Money
Market... .37 -- .07 .44
Scudder
VLIF
Growth
and
Income... .47 -- .09 .56
Scudder
VLIF
International... .87 -- .18 1.05
Scudder
VLIF
Bond... .47 -- .09 .56
Janus
Aspen
Capital
Appreciation(5)... .70 -- .22 .92
PIMCO
Low
Duration
Bond(6)... .63 -- .02 .65
PIMCO
Foreign
Bond(6)... .88 -- .02 .90
Templeton
Developing
Markets
Fund(7)... 1.25 .25 .41 1.91
</TABLE>
- --------------------------------------------------------------------------------
(1) A Contract Owner may withdraw up to the greater of (i) the excess of
Contract Value over total Purchase Payments subject to Withdrawal Charges
less prior withdrawals that were previously assessed a Withdrawal Charge,
and (ii) 10% of the Contract Value in any Contract Year without assessment
of any charge. In certain circumstances We may reduce or waive the
contingent deferred sales charge.
(2) We reserve the right to charge a fee of $25 for each transfer of Contract
Value in excess of 12 transfers per calendar year.
7
<PAGE> 162
(3) Applies to Contracts with a Contract Value less than $50,000 on the date of
assessment. In certain circumstances We may reduce or waive the annual
Records Maintenance Charge.
(4) Portfolio commenced operations on or after 5/1/98. "Other Expenses" have
been estimated.
(5) Based on expenses for fiscal year ended 12/31/98. The expense figures shown
are net of certain fee waivers or reductions from Janus Capital Corporation.
Without such waivers, Management Fees, Other Expenses and Total Portfolio
Annual Expenses for the Portfolio for the fiscal year ended December 31,
1998 would have been: .75%, .22% and .97%, respectively, for the Janus Aspen
Capital Appreciation Portfolio. See the prospectus and Statement of
Additional Information of Janus Aspen Series for a description of these
waivers.
(6) For the Portfolios, management fees include fixed advisory and
administrative fees. The administrative fee covers most of the expenses of
the Portfolios. However, the Portfolios are responsible for bearing certain
expenses associated with their operations that are not covered by the
administrative fee. While it is expected that these expenses generally will
not have a material effect on the Portfolio expense ratios, they may have a
material effect in certain circumstances, such as when the average net
assets of a Portfolio are lower than anticipated. Pacific Investment
Management Company has agreed to reduce its administrative fee, subject to
potential future reimbursement, to the extent that total Portfolio operating
expenses would exceed, due to organizational expenses and the payment by the
Portfolio of its pro rata portion of the Trust's Trustees' fees, 0.65% of
average daily net assets of the PIMCO Low Duration Bond Portfolio and 0.90%
of average daily net assets of the PIMCO Foreign Bond Portfolio. "Other
Expenses" are based on estimates for the current fiscal year. Without such
reductions, Management Fees, Other Expenses and Total Portfolio Expenses for
the fiscal year ended December 31, 1998 would have been: for the PIMCO Low
Duration Bond Portfolio, .65%, .02% and .67%, respectively; and for the
PIMCO Foreign Bond Portfolio, .90%, .02% and .92%, respectively.
(7) Class 2 of the Portfolio has a distribution plan or "Rule 12b-1 Plan" which
is described in the Portfolio's prospectus.
(8) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this Prospectus, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the extent necessary to limit total operating
expenses of the Kemper Aggressive Growth, Kemper Technology Growth,
Kemper-Dreman Financial Services, Kemper-Dreman High Return Equity, Kemper
International Growth and Income, Kemper Global Blue Chip and Kemper Global
Income Portfolios of Kemper Variable Series to the levels set forth in the
table above. Without taking into effect these expense caps, for the
Aggressive Growth, Technology Growth, Financial Services, High Return
Equity, International Growth and Income, Global Blue Chip and Global Income
Portfolios of Kemper Variable Series: management fees are estimated to be
.75%, .75%, .75%, .75%, 1.00%, 1.00% and .75%; Other Expenses are estimated
to be .28%, .29%, .97%, .45%, 18.54%, 11.32%, and .33%, respectively; and
total operating expenses are estimated to be 1.03%, 1.04%, 1.72%, 1.20%,
19.54%, 12.32% and 1.08%, respectively. In addition, for Kemper
International Growth and Income and Kemper Global Blue Chip, the investment
manager has agreed to limit its management fee to .70% and .85%,
respectively, of such portfolios for one year from the date of this
Prospectus.
8
<PAGE> 163
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 periods shown, you would pay
the
following expenses on a $1,000
investment, assuming 5% annual return on
assets:
Kemper Government Securities $ 93 $120 $158 $241
Kemper High Yield 93 119 157 248
Kemper Small Cap Growth 94 121 160 245
Kemper-Dreman High Return 95 126 168 263
Equity
Scudder VLIF Money Market #1(1) 91 113 147 217
Scudder VLIF Growth and Income 92 117 153 230
Scudder VLIF International 97 131 177 281
Scudder VLIF Bond 92 117 153 230
Janus Aspen Capital 96 127 171 268
Appreciation
PIMCO Law Duration Bond 93 119 157 240
PIMCO Foreign Bond 95 127 170 266
Templeton Developing Markets 105 156 218 365
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 Government Securities 21 65 112 241
Kemper High Yield 21 65 111 240
Kemper Small Cap Growth 22 66 114 245
Kemper-Dreman High Return 23 72 123 263
Equity
Scudder VLIF Money Market#1(1) 19 58 100 217
Scudder VLIF Growth and Income 20 62 107 230
Scudder VLIF International 25 77 132 281
Scudder VLIF Bond 20 62 107 230
Janus Aspen Capital 24 73 125 268
Appreciation
PIMCO Low Duration Bond 21 65 111 240
PIMCO Foreign Bond 24 73 124 260
Templeton Developing Markets 34 103 175 365
</TABLE>
9
<PAGE> 164
The purpose of the preceding table which includes the "SUMMARY OF EXPENSES" on
the prior page, is to assist Contract Owners in understanding the various costs
and expenses that a Contract Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH
MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. "Management Fees", "Rule 12b-1 Fees" and "Other Expenses"
in the "SUMMARY OF EXPENSES" for the Portfolios have been provided by Scudder
Kemper Investments, Inc., Janus Capital Corporation, Pacific Investment
Management Company and Templeton Asset Management Ltd., as applicable, and have
not been independently verified. The Example assumes a 5% annual rate of return
pursuant to requirements of the Securities and Exchange Commission. This
hypothetical rate of return is not intended to be representative of past or
future performance of any Subaccount. The Records Maintenance Charge is a single
charge, it is not a separate charge for each Subaccount. In addition, the effect
of the Records Maintenance Charge has been reflected in the Example by applying
the percentage derived by dividing the total amounts of annual Records
Maintenance Charge collected by the total net assets of all the Subaccounts in
the Separate Account. See "Contract Charges and Expenses" for more information
regarding the various costs and expenses.
(1)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 first Contribution Year.
10
<PAGE> 165
KILICO, THE MVA OPTION,
THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
Kemper Corporation is a majority-owned (76.4 percent) subsidiary of Zurich
Holding Company of America ("ZHCA"), which is a wholly-owned subsidiary of
Zurich Insurance Company ("Zurich"). Zurich is a wholly-owned subsidiary of
Zurich Financial Services ("ZFS"). ZFS was formed in the September, 1998 merger
of the Zurich Group with the financial services business of B.A.T. Industries.
ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c., fifty-seven percent
and forty-three percent, respectively.
THE MVA OPTION
An Owner may allocate amounts in the Market Value Adjustment ("MVA") Option to
one or more Guarantee Periods with durations of one to ten years during the
Accumulation Period. At Our discretion, We may offer additional Guarantee
Periods or limit, for new Contracts, the number of Guarantee Periods available
to three.
The amounts allocated to the MVA Option under the Contracts are invested under
the laws regulating Our General Account. Assets supporting the amounts allocated
to Guarantee Periods are held in a "non-unitized" separate account. However, Our
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 Our guaranteed obligations. 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 We
may conduct.
State insurance laws concerning the nature and quality of investments regulate
Our General Account investments and any non-unitized separate account
investments. 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.) Our affiliate, Scudder Kemper Investments, Inc.
("SKI"), manages Our General Account.
We consider the return available on the instruments in which Contract proceeds
are invested when establishing Guaranteed Interest Rates. This return is only
one of many factors considered in establishing Guaranteed Interest
11
<PAGE> 166
Rates. (See "The Accumulation Period--4. Establishment of Guaranteed Interest
Rates.")
Our investment strategy for the non-unitized separate account is generally to
match Guarantee Period liabilities with assets, such as debt instruments. We
expect to invest in debt instruments such as:
- 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;
- debt securities which have an investment grade, at the time of purchase,
within the four (4) highest grades assigned by Moody's Investors
Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other
nationally recognized rating service;
- other debt instruments including 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 Our management to have an
investment quality comparable to securities which may be otherwise
purchased; and
- options and futures transactions on fixed income securities.
Our invested assets portfolio at December 31, 1998 included approximately 82.7
percent in U.S. Treasuries, investment grade corporate, foreign and municipal
bonds, and commercial paper, 2.3 percent in below investment grade (high risk)
bonds, 3.9 percent in mortgage loans and other real estate-related investments
and 11.1 percent in all other investments. (See "Management's Discussion and
Analysis--INVESTMENTS.")
We are not obligated to invest the amounts allocated to the MVA Option according
to any particular strategy, except as state insurance laws may require. (See
"Management's Discussion and Analysis--INVESTMENTS.")
THE SEPARATE ACCOUNT
We established the KILICO Variable Annuity Separate Account on May 29, 1981
pursuant to Illinois law as the KILICO Money Market Separate Account. KILICO
Money Market Separate Account was initially registered with the Securities and
Exchange Commission ("SEC") as an open-end, diversified management investment
company. On November 2, 1989, contract owners approved a Reorganization under
which the Separate Account was restructured as a unit investment trust. The SEC
does not supervise the management, investment practices or policies of the
Separate Account or KILICO.
Benefits provided under the Contracts are Our obligations. Although the assets
in the Separate Account are Our property, they are held separately from Our
other assets and are not chargeable with liabilities arising out of any other
business We may conduct. Income, capital gains and capital losses, whether or
not realized, from the assets allocated to the Separate Account are credited to
12
<PAGE> 167
or charged against the Separate Account without regard to the income, capital
gains and capital losses arising out of any other business We may conduct.
Thirteen Subaccounts of the Separate Account are currently available. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios.
We may add or delete Subaccounts in the future.
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges 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 are reinvested in that Portfolio at net
asset value and retained as assets of the corresponding Subaccount.
The Separate Account's financial statements appear in the Statement of
Additional Information.
THE FUNDS
The Separate Account invests in shares of the following open-end, management
investment companies:
- Kemper Variable Series (formerly Investors Fund Series)
- Scudder Variable Life Investment Fund
- Janus Aspen Series
- PIMCO Variable Insurance Trust
- Templeton Variable Products Series Fund
The Funds provide investment vehicles for variable life insurance and variable
annuity contracts and, in the case of Janus Aspen Series and PIMCO Variable
Insurance Trust, certain qualified retirement plans. Shares of the Funds are
sold only to insurance company separate accounts and qualified retirement plans.
Shares of the Funds may be sold to separate accounts of other insurance
companies, whether or not affiliated with Us. 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 Us, or for
variable life insurance separate accounts, variable annuity separate accounts
and qualified retirement plans to invest simultaneously in the Funds. Currently,
We do not foresee disadvantages to variable life insurance owners, variable
annuity owners or qualified retirement plans. The Funds monitor events for
material conflicts between owners and determine what action, if any, should be
taken. In addition, if We believe that a Fund's response to any of those events
or conflicts insufficiently protects Owners, We will take appropriate action.
A Fund may consist of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio.
13
<PAGE> 168
The twelve Portfolios are summarized below:
KEMPER VARIABLE SERIES (FORMERLY INVESTORS FUND SERIES)
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO seeks to achieve a high rate of total
return.
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF MONEY MARKET PORTFOLIO seeks stability and current income from a
portfolio of money market instruments.
SCUDDER VLIF GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
SCUDDER VLIF BOND PORTFOLIO seeks high income from a high quality portfolio of
bonds.
JANUS ASPEN SERIES
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO seeks long-term growth of capital.
PIMCO VARIABLE INSURANCE TRUST
PIMCO LOW DURATION BOND PORTFOLIO seeks to maximize total return, consistent
with preservation of capital and prudent investment management.
PIMCO FOREIGN BOND PORTFOLIO seeks to maximize total return, consistent with
preservation of capital and prudent investment management.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND seeks long-term capital appreciation.
The Portfolios may not achieve their stated objective. More detailed
information, including a description of risks involved in investing in the
Portfolios is found in the Funds' prospectuses accompanying this Prospectus and
Statements of Additional Information, available from Us upon request.
Scudder Kemper Investments, Inc. ("SKI") is the investment manager for the four
available Portfolios of Kemper Variable Series (formerly Investors Fund Series)
and the four available Portfolios of Scudder Variable Life Investment
14
<PAGE> 169
Fund. Dreman Value Management L.L.C. ("DVM") serves as sub-adviser for the
Kemper-Dreman High Return Equity Portfolio. Under the terms of the sub-advisory
agreement between SKI and DVM manages the investment and reinvestment of that
Portfolio's assets in accordance with the investment objectives, policies and
limitations and subject to the supervision of SKI and the Board of Trustees.
Janus Capital Corporation is the investment adviser for the available Portfolio
of the Janus Aspen Series. Pacific Investment Management Company is the
investment adviser for the two available Portfolios of the PIMCO Variable
Insurance Trust. Templeton Asset Management Ltd. is the investment manager for
the available portfolio of the Templeton Variable Products Series Fund. The
investment advisers are paid fees for their services by the Funds they manage.
KILICO may receive compensation from the Funds or the investment advisers of the
Funds for services related to the Funds. Such compensation will be consistent
with the services rendered or the cost savings resulting from the arrangement.
For their services to the Portfolios, the managers receive compensation at the
following rates:
KEMPER VARIABLE SERIES (FORMERLY INVESTORS FUND SERIES)
For its services, SKI is paid a management fee based upon the average daily net
assets of each Portfolio, as follows: Kemper Government Securities (.55 of 1%),
Kemper High Yield (.60 of 1%), Kemper Small Cap Growth (.65 of 1%), and
Kemper-Dreman High Return Equity (.75% for the first $250 million, .72% for the
next $750 million, .70% for the next $1.5 billion, .68% for the next $2.5
billion, .65% for the next $2.5 billion, .64% for the next $2.5 billion, .63%
for the next $2.5 billion and .62% over $12.5 billion). SKI pays DVM for its
services as sub-adviser for the Kemper-Dreman High Return Equity Portfolio a
sub-advisory fee, payable monthly, at the annual rate of .24% of the first $250
million of the Portfolio's average daily net assets, .23% of the average daily
net assets between $250 million and $1 billion, .224% of average daily net
assets between $1 billion and $2.5 billion, .218% of average daily net assets
between $2.5 billion and $5 billion, .208% of average daily net assets between
$5 billion and $7.5 billion, .205% of average daily net assets between $7.5
billion and $10 billion, .202% of average daily net assets between $10 billion
and $12.5 billion and .198% of each Portfolio's average daily net assets over
$12 billion.
15
<PAGE> 170
SCUDDER VARIABLE LIFE INVESTMENT FUND
For its investment management services to the Portfolios, SKI receives
compensation monthly at the following annual rate for each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF THE AVERAGE
DAILY NET ASSET VALUES
PORTFOLIO OF EACH PORTFOLIO
--------- ----------------------
<S> <C>
Scudder VLIF Money Market........................... .370%
Scudder VLIF Growth and Income...................... .475%
Scudder VLIF International
First $500,000,000................................ .875%
Over $500,000,000................................. .725%
Scudder VLIF Bond................................... .475%
</TABLE>
JANUS ASPEN SERIES
Janus Capital Corporation receives a monthly advisory fee for the Janus Aspen
Capital Appreciation Portfolio based on the following schedule (expressed as an
annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
------------------- -----------
<S> <C>
First $300,000,000.......... .75%
Next $200,000,000........... .70%
Over $500,000,000........... .65%
</TABLE>
However, Janus Capital Corporation has agreed to reduce the above Portfolio's
advisory fee to the extent that such fee exceeds the effective rate of a fund
managed by Janus Capital Corporation with similar investment objective and
policies.
PIMCO VARIABLE INSURANCE TRUST
The PIMCO Low Duration Bond and PIMCO Foreign Bond Portfolios feature fixed
advisory and administrative fee rates. Pacific Investment Management Company
receives monthly advisory fees and administrative fees from each Portfolio at an
annual rate based on the average daily net assets of the Portfolio, as follows:
PIMCO Low Duration Bond .40% and .25%, respectively, and PIMCO Foreign Bond .60%
and .30%, respectively. The administrative fee covers most of the expenses of
the Portfolios, including legal, audit, custody, transfer agency and certain
other services, and is responsible for the costs of registration of PIMCO
Variable Insurance Trust shares and the printing of prospectuses and shareholder
reports for current shareholders or other appropriate parties. The Portfolios
are responsible for bearing certain expenses associated with their operations
that are not provided or procured by Pacific Investment Management Company.
While it is expected that these expenses generally will not have a material
effect on the Portfolio expense ratios, they may have a material effect in
certain circumstances, such as when the average net assets of a Portfolio are
lower than anticipated.
16
<PAGE> 171
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Asset Management Ltd. receives in management fees 1.25% of the average
net assets of the Class 2 shares of the Templeton Developing Markets Fund.
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We may eliminate the shares of any of the Portfolios and to substitute
shares of another Portfolio or of another investment company, if the shares of a
Portfolio are no longer available for investment, or if in Our judgment further
investment in any Portfolio becomes inappropriate in view of the purposes of the
Separate Account. We will not substitute any shares attributable to an Owner's
interest in a Subaccount without prior notice and the SEC's prior approval, if
required. The Separate Account may purchase other securities for other series or
classes of policies, or permit a conversion between series or classes of
policies on the basis of requests made by Owners.
We may establish additional subaccounts of the Separate Account, each of which
would invest in a new portfolio of the Funds, or in shares of another investment
company. New subaccounts may be established when, in Our discretion, marketing
needs or investment conditions warrant. New subaccounts may be made available to
existing Owners as We determine. We may also eliminate or combine one or more
subaccounts, transfer assets, or substitute one subaccount for another
subaccount, if, in Our discretion, marketing, tax, or investment conditions
warrant. We will notify all Owners of any such changes.
If We deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be: (a) operated as a management company
under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with Our other separate
accounts. To the extent permitted by law, We may transfer the assets of the
Separate Account to another separate account or to the General Account.
PERFORMANCE INFORMATION
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, Scudder VLIF Bond
Subaccount, PIMCO Low Duration Bond Subaccount and PIMCO Foreign Bond Subaccount
may also advertise "yield". The Scudder VLIF Money Market Subaccount may
advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of a Subaccount's
future performance.
17
<PAGE> 172
Standardized average annual total return and nonstandardized total return
calculations measure a Subaccount's net income plus the effect of any realized
or unrealized appreciation or depreciation of the Subaccount's underlying
investments. 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. In addition, We will show standardized average
annual total return for the life of the Subaccount, meaning the time the
underlying Portfolio has been held in the Subaccount. We will show
nonstandardized total return for the life of the Portfolio, meaning the time the
underlying Portfolio has been in existence. Standardized average annual total
return will be current to the most recent calendar quarter. Nonstandardized
total return will be current to the most recent calendar month. Standardized
average annual total return figures are annualized and, therefore, represent the
average annual percentage change in the value of a Subaccount investment 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 Scudder VLIF Money
Market Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period, compounded on a semi-annual basis. The effective yield for the
Scudder VLIF Money Market Subaccount is calculated similarly, but includes the
effect of assumed compounding calculated under rules prescribed by the SEC. The
Scudder VLIF Money Market Subaccount's effective yield will be slightly higher
than its yield due to this compounding effect.
The Subaccounts' units are sold at Accumulation Unit value. The Subaccounts'
performance figures and Accumulation Unit values fluctuate. Subaccount units are
redeemable by an Owner at Accumulation Unit value, which may be more or less
than original cost. The standardized performance figures reflect the deduction
of all expenses and fees, including a prorated portion of the Records
Maintenance Charge. Redemptions within the first seven years may be subject to a
Withdrawal Charge that ranges from 7% the first year to 0% after seven years.
Yield, effective yield and nonstandardized total return figures do not include
the effect of any Withdrawal Charge that may be imposed upon the redemption of
units. In addition, nonstandardized total return figures do not include the
effect of the Records Maintenance Charge. Thus yield, effective yield and
nonstandardized total return figures 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.
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,
18
<PAGE> 173
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.
FIXED ACCOUNT OPTION
Amounts allocated or transferred to the Fixed Account are part of Our General
Account, supporting insurance and annuity obligations. Interests in the Fixed
Account are not registered under the Securities Act of 1933 ("1933 Act"), and
the Fixed Account is not registered as an investment company under the
Investment Company Act of 1940 ("1940 Act"). Accordingly, neither the Fixed
Account nor any interests therein generally are subject to the provisions of the
1933 or 1940 Acts. We have been advised that the staff of the SEC has not
reviewed the disclosures in this Prospectus relating to the Fixed Account.
Disclosures regarding the Fixed Account, however, may be subject to the general
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
Under the Fixed Account Option, We pay a fixed interest rate for stated periods.
This Prospectus describes only the aspects of the Contract involving the
Separate Account, unless We refer to fixed accumulation and annuity elements.
We guarantee that payments allocated to the Fixed Account earn a minimum fixed
interest rate of 3%. At Our discretion, We may credit interest in excess of 3%.
We reserve the right to change the rate of excess interest credited. We also
reserve the right to declare different rates of excess interest depending on
when amounts are allocated or transferred to the Fixed Account. As a result,
amounts at any designated time may be credited with a different rate of excess
interest than the rate previously credited to such amounts and to amounts
allocated or transferred at any other designated time.
THE CONTRACTS
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $1,000, and the minimum subsequent
payment is $500. The minimum subsequent payment is $100 if an Owner authorizes
Us to draw on an account via check or electronic debit. Cumulative Purchase
Payments in excess of $1,000,000 require Our prior approval. The Internal
Revenue Code may also limit the maximum annual amount of Purchase Payments. An
allocation to a Subaccount, the Fixed Account or a Guarantee Period must be at
least $500.
We may, at any time, amend the Contract in accordance with changes in the law,
including applicable tax laws, regulations or rulings, and for other purposes.
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<PAGE> 174
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period depends upon the state in which
the Contract is issued. However, it will be at least 10 days from the date the
Owner receives the Contract. The amount of the refund depends on the state in
which the Contract is issued. Generally, it will be an amount at least equal to
the Separate Account Contract Value plus amounts allocated to the General
Account and the Guarantee Periods on the date We receive the returned Contract,
without any deduction for Withdrawal Charges or Records Maintenance Charges.
Some states require the return of the Purchase Payment. In addition, a special
free look period applies in some circumstances to Contracts issued as Individual
Retirement Annuities, Simplified Employee Pensions--IRAs or as Roth Individual
Retirement Annuities.
During the Accumulation Period, the Owner may assign the Contract or change a
Beneficiary at any time by signing Our form. No assignment or Beneficiary change
is binding on Us until We receive it. We assume no responsibility for the
validity of the assignment or Beneficiary change. An assignment will subject the
Owner to immediate tax liability and may subject the Owner to a 10% tax penalty.
(See "Tax Treatment of Withdrawals, Loans and Assignments.")
Amounts payable during the Annuity Period may not be assigned or encumbered. In
addition, to the extent permitted by law, annuity payments are not subject to
levy, attachment or other judicial process for the payment of the payee's debts
or obligations.
The Owner designates the Beneficiary. If the Annuitant or Owner dies, and no
designated Beneficiary or contingent beneficiary is alive at that time, We will
pay the Annuitant's or Owner's estate.
Under a Qualified Plan Contract, the provisions of the applicable plan may
prohibit a change of Beneficiary. Generally, an interest in a Qualified Plan
Contract may not be assigned.
B. THE ACCUMULATION PERIOD.
1. APPLICATION OF PURCHASE PAYMENTS.
The Owner selects the allocation of Purchase Payments to the Subaccount(s),
Guarantee Periods, or Fixed Account. The amount of each Purchase Payment
allocated to a Subaccount is based on the value of an Accumulation Unit, as
computed after We receive the Purchase Payment. Generally, We determine the
value of an Accumulation Unit by 3:00 p.m. Central time on each day that the New
York Stock Exchange is open for trading. Purchase Payments allocated to a
Guarantee Period or to the Fixed Account begin earning interest one day after We
receive them. However, with respect to initial Purchase Payments, the amount is
credited only after We determine to issue the Contract, but no later than the
second day after We receive the Purchase Payment. After the initial purchase, We
determine the number of Accumulation Units credited by dividing the Purchase
Payment allocated to a Subaccount by the Subaccount's Accumulation Unit value,
as computed after We receive the Purchase Payment.
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<PAGE> 175
The number of Accumulation Units will not change due to investment experience.
Accumulation Unit value varies to reflect the investment experience of the
Subaccount and the assessment of charges against the Subaccount, other than the
Records Maintenance Charge and Guaranteed Retirement Income Benefit Charge. The
number of Accumulation Units is reduced when the Records Maintenance Charge and
Guaranteed Retirement Income Benefit Charge are assessed.
If We are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, We will promptly request the
necessary information. If the requested information is not furnished within five
(5) business days after We receive the initial Purchase Payment, or if We
determine that We cannot issue the Contract within the five (5) day period, We
will return the initial Purchase Payment to the Owner, unless the Owner consents
to Our retaining the Purchase Payment until the application is completed.
We will issue a Contract without a signed application if:
- a dealer provides Us with application information, electronically or in
writing
- We receive the initial Purchase Payment and
- the Owner confirms in writing, after the Contract is delivered, that all
information in the Contract is correct.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units purchased is based on
the Subaccount's Accumulation Unit value at the end of the current Valuation
Period. 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 Valuation Period times the Accumulation
Unit value for the preceding Valuation Period. Each Valuation Period has a
single Accumulation Unit value which applies to each day in the Valuation
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.
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<PAGE> 176
The investment experience factor of a Subaccount for any Valuation Period is
determined by the following formula:
(1 / 2) - 3, where:
(1) is the net result of:
- the net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period;
plus
- 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
- a charge or credit for any taxes reserved for the current Valuation
Period which We determine 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 preceding Valuation Period;
(3) is the factor representing the mortality and expense risk and
administration charges.
3. GUARANTEE PERIODS OF THE MVA OPTION.
An Owner may allocate Purchase Payments to one or more Guarantee Periods with
durations of one to ten years. Each Guarantee Period has a Guaranteed Interest
Rate which will not change during the Guarantee Period. Interest is credited
daily at the effective annual rate.
The following example illustrates how We credit Guarantee Period interest.
EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 4.0% Effective Annual Rate
</TABLE>
<TABLE>
<CAPTION>
INTEREST CREDITED CUMULATIVE
YEAR DURING YEAR INTEREST CREDITED
- ---- ----------------- -----------------
<S> <C> <C>
1........................ $1,600.00 $1,600.00
2........................ 1,664.00 3,264.00
3........................ 1,730.56 4,994.56
4........................ 1,799.78 6,794.34
5........................ 1,871.77 8,666.11
</TABLE>
Accumulated value at the end of 5 years is:
$40,000 + $8,666.11 = $48,666.11
NOTE: THIS EXAMPLE ASSUMES THAT NO WITHDRAWALS ARE MADE DURING THE FIVE-YEAR
PERIOD. IF THE OWNER MAKES WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET
VALUE ADJUSTMENTS AND WITHDRAWAL CHARGES APPLY.
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<PAGE> 177
THE HYPOTHETICAL INTEREST RATE IS NOT INTENDED TO PREDICT FUTURE GUARANTEED
INTEREST RATES. ACTUAL GUARANTEED INTEREST RATES FOR ANY GUARANTEE PERIOD MAY BE
MORE OR LESS THAN THOSE SHOWN.
At the end of any Guarantee Period, We send written notice of the beginning of a
new Guarantee Period. A new Guarantee Period for the same duration starts unless
the Owner elects another Guarantee Period within thirty days after the end of
the terminating Guarantee Period. The Owner may choose a different Guarantee
Period by preauthorized telephone instructions or by giving Us written notice.
An Owner should not select a new Guarantee Period extending beyond the Annuity
Date. Otherwise, the guarantee period amount available for annuitization is
subject to Market Value Adjustments and may be subject to Withdrawal Charges.
(See "Market Value Adjustment" and "Withdrawal Charge" below.)
The amount reinvested at the beginning of a new Guarantee Period is the
Guarantee Period Value for the Guarantee Period just ended. The Guaranteed
Interest Rate in effect when the new Guarantee Period begins applies for the
duration of the new Guarantee Period.
An Owner may call Us at 1-800-621-5001 or write Kemper Investors Life Insurance
Company, Customer Service, at 1 Kemper Drive, Long Grove, Illinois 60049 for the
new Guaranteed Interest Rates.
4. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
We declare the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate. Once
established, rates are guaranteed for the respective Guarantee Periods. We
advise an Owner of the Guaranteed Interest Rate for a chosen Guarantee Period
when We receive a Purchase Payment, when a transfer is effectuated or when a
Guarantee Period renews. Withdrawals of Accumulated Guarantee Period Value are
subject to Withdrawal Charges and Records Maintenance Charges and may be subject
to a Market Value Adjustment. (See "Market Value Adjustment" below.)
We have no specific formula for establishing the Guaranteed Interest Rates. The
determination may be influenced by, but not necessarily correspond to, the
current interest rate environment. (See "The MVA Option".) We may also consider,
among other factors, the duration of a Guarantee Period, regulatory and tax
requirements, sales commissions and administrative expenses We bear, and general
economic trends.
WE MAKE THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED.
WE CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE GUARANTEED INTEREST RATES.
5. CONTRACT VALUE.
On any Valuation Date, Contract Value equals the total of:
- the number of Accumulation Units credited to each Subaccount times
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<PAGE> 178
- the value of a corresponding Accumulation Unit for each Subaccount plus
- the Owner's Accumulated Guarantee Period Value in the MVA Option plus
- the Owner's interest in the Fixed Account.
6. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, an Owner may transfer the Contract Value among
the Subaccounts, the Guarantee Periods and the Fixed Account subject to the
following provisions:
- the amount transferred must be at least $100 unless the total Contract
Value attributable to a Subaccount, Guarantee Period or Fixed Account is
transferred;
- the Contract Value remaining in a Subaccount, Guarantee Period or Fixed
Account must be at least $500 unless the total value is transferred;
- transfers may not be made from any Subaccount to the Fixed Account over
the six months following any transfer from the Fixed Account into one or
more Subaccounts;
- transfers from the Fixed Account may be made one time during the Contract
Year during the thirty days following an anniversary of a Contract Year.
We may charge a $25 fee for each transfer in excess of 12 transfers per calendar
year. However, transfers made pursuant to the Asset Allocation and Dollar Cost
Averaging programs do not count toward these 12 transfers. In addition,
transfers of Guarantee Period Value are subject to Market Value Adjustment
unless the transfer is made within thirty days of the end of the Guarantee
Period. Because a transfer before the end of a Guarantee Period is subject to a
Market Value Adjustment, the amount transferred from the Guarantee Period may be
more or less than the requested dollar amount.
We make transfers pursuant to written or telephone instructions specifying in
detail the requested changes. Transfers involving a Subaccount are based upon
the Accumulation Unit values, as calculated after We receive transfer
instructions. We may suspend, modify or terminate the transfer provision. We
disclaim all liability if We follow in good faith instructions given in
accordance with Our procedures, including requests for personal identifying
information, that are designed to limit unauthorized use of the privilege.
Therefore, an Owner bears the risk of loss in the event of a fraudulent
telephone transfer.
If an Owner authorizes a third party to transact transfers on the Owner's
behalf, We will reallocate the Contract Value pursuant to the authorized asset
allocation program. However, We do not offer or participate in any asset
allocation program and We take no responsibility for any third party asset
allocation program. We may suspend or cancel acceptance of a third party's
instructions at any time and may restrict the investment options available for
transfer under third party authorizations.
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<PAGE> 179
An Owner may elect to have transfers made automatically among the Subaccounts on
an annual, semiannual or quarterly basis so that Contract Value is reallocated
to match the percentage allocations in the Owner's predefined allocation
elections. Transfers under this program are not be subject to the $100 minimum
transfer limitation. An election to participate in the automatic asset
reallocation program must be in writing on Our form and returned to Us.
7. WITHDRAWAL DURING ACCUMULATION PERIOD.
The Owner may redeem some or all of the Contract Value and previous withdrawals,
plus or minus any applicable Market Value Adjustment and minus any Withdrawal
Charge. Withdrawals will have tax consequences. (See "Federal Tax Matters.") A
withdrawal of the entire Contract Value is called a surrender.
Partial withdrawals and surrenders are subject to the following:
In any Contract Year, an Owner may withdraw or surrender the Contract, without
Withdrawal Charge, up to the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of the Contract Value.
See "Contract Charges and Expenses--Withdrawal Charge" for a discussion of
charges applicable to partial withdrawals and surrenders.
If Contract Value is allocated to more than one investment option, an Owner must
specify the source of the partial withdrawal. If an Owner does not specify the
source, We redeem Accumulation Units on a pro rata basis from all investment
options in which the Owner has an interest. Accumulation Units attributable to
the earliest Contribution Years are redeemed first.
Partial withdrawals are subject to the following:
- Partial withdrawals are not permitted from the Fixed Account in the first
Contract Year.
- The minimum withdrawal is $100 (before any Market Value Adjustment), or
the Owner's entire interest in the investment option(s) from which
withdrawal is requested.
- The Owner must leave at least $500 in each investment option from which
the withdrawal is requested, unless the total value is withdrawn.
Election to withdraw shall be made in writing to Us at Suite 102, 1290 Silas
Deane Highway, Wethersfield, CT 06109 and should be accompanied by the Contract
if surrender is requested. Withdrawal requests are processed only on days when
the New York Stock Exchange is open. The Withdrawal Value attributable to the
Subaccounts is determined on the basis of the Accumulation Unit values, as
calculated after We receive the request. The Withdrawal Value
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attributable to the Subaccounts is paid within seven (7) days after We receive
the request. However, We may suspend withdrawals or delay payment:
- during any period when the New York Stock Exchange is closed
- when trading in a Portfolio is restricted or the SEC determines that an
emergency exists
- as the SEC by order may permit.
For withdrawal requests from the MVA Option and the Fixed Account, We may defer
any payment for up to six months, as permitted by state law. During the deferral
period, We will continue to credit interest at the current Guaranteed Interest
Rate for the same Guarantee Period.
8. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected during the "free look" period or within 30 days after a Guarantee
Period ends, may be adjusted up or down by a Market Value Adjustment. The Market
Value Adjustment applies before deduction of a Withdrawal Charge.
The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, the Market Value Adjustment
reduces Market Adjusted Value and results in a lower payment. Thus, if interest
rates increase, the withdrawal could be less than the original Purchase Payment
or the original amount allocated to a Guarantee Period. Conversely, if the
Guaranteed Interest Rate is higher than the applicable Current Interest Rate,
the Market Value Adjustment increases Market Adjusted Value and results in a
higher payment.
The Market Value Adjustment (MVA) uses this formula:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1 + I)
MVA = MPV X 3 3 ------- 4 (t/365) -1 4
(1 + J)
</TABLE>
Where I is the Guaranteed Interest Rate being credited to the Guarantee
Period Value (MPV) subject to the Market Value Adjustment,
J is the Current Interest Rate We declare, 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.
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For an illustration showing an upward and a downward adjustment, see Appendix A.
9. GUARANTEED DEATH BENEFIT.
We pay a death benefit is paid to the Beneficiary if any of the following occurs
during the Accumulation Period:
- the Owner, or a joint owner, dies
- the Annuitant dies with no living contingent annuitant
- the contingent annuitant dies after the Annuitant
The amount of the death benefit depends on the age of the deceased Owner or
Annuitant when the death benefit becomes payable. If the deceased Owner or
Annuitant dies before age 91, We will pay the Beneficiary the greatest of the
following:
- Contract Value
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the deceased's age 80 or the date of
death, plus Purchase Payments minus all withdrawals from age 80 to the
date of death; and
- the greatest anniversary value before death
The greatest anniversary value equals:
- the Contract Values on each Contract anniversary prior to the deceased's
age 81, plus the dollar amount of any Purchase Payments made since that
anniversary, minus
- withdrawals since that anniversary.
We pay Contract Value to the Beneficiary if the Owner or Annuitant dies after
age 91. The Owner or Beneficiary, as appropriate, may elect to have all or a
part of the death proceeds paid to the Beneficiary under one of the Annuity
Options described under "Annuity Options" below.
For Non-Qualified Plan Contracts, if the Beneficiary is the Owner's surviving
spouse, the surviving spouse may elect to be treated as the successor Owner of
the Contract with no requirement to begin Death Benefit distribution.
10. GUARANTEED RETIREMENT INCOME BENEFIT.
Guaranteed Retirement Income Benefit (GRIB) is an optional Contract benefit.
GRIB provides a minimum fixed annuity guaranteed lifetime income to the
Annuitant as described below. The Owner must elect GRIB on the initial Contract
application. GRIB may be discontinued after the seventh Contract anniversary by
written notice to Us. Once discontinued, GRIB may not be elected again.
GRIB may be exercised only within thirty days after the seventh or later
Contract anniversary. In addition, GRIB must be exercised between the
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Annuitant's 60th and 91st birthdays. Therefore, GRIB may not be appropriate for
Annuitants age 80 and older. If the Annuitant is younger than age 44 on the Date
of Issue, GRIB may be exercised after the Contract's 15th Anniversary.
GRIB payments are based on the greater of:
- the income provided by applying the GRIB base to the guaranteed annuity
factors; and
- the income provided by applying Contract Value to the current annuity
factors.
The GRIB base is the greatest of:
- Contract Value
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the Annuitant's age 80 or the GRIB
exercise date plus Purchase Payments minus all withdrawals from age 80 to
the GRIB exercise date; and
- the greatest anniversary value before the exercise date
The greatest anniversary value equals:
- the highest of the Contract Values on each Contract anniversary prior to
the Annuitant's age 81, plus
- the dollar amount of any Purchase Payments made since that anniversary,
minus
- withdrawals since that anniversary.
The guaranteed annuity factors are based on the 1983a table projected using
projection scale G, with interest at 2.5% (the "Annuity 2000" table). However,
if GRIB is exercised on or after the 10th Contract anniversary, interest at
3.50% is assumed.
Because GRIB is based on conservative actuarial factors, the income guaranteed
may often be less than the income provided by applying Contract Value to current
annuity factors.
GRIB is paid for the life of a single Annuitant or the lifetimes of two
Annuitants. If paid for the life of a single Annuitant, GRIB is paid in the
amount determined above. If paid for the lifetimes of two Annuitants, GRIB is
paid in the amount determined above, but the age of the older Annuitant is used
to determine the GRIB base.
If the Owner elects GRIB payable for the life of a single Annuitant, the Owner
may elect a period certain of 5, 10, 15, or 20 years. If the Annuitant dies
before GRIB has been paid for the period elected, the remaining GRIB payments
are paid as they fall due to the Beneficiary, if the Beneficiary is a natural
person. If the Beneficiary is not a natural person, the remaining payments may
be commuted at a minimum 2.5 interest rate and paid in a lump sum.
If the Owner elects GRIB payable for the lifetimes of two Annuitants, the period
certain is 25 years. The full GRIB is payable as long as at least one of the
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two Annuitants is alive, but for no less than 25 years. If both Annuitants die
before GRIB has been paid for 25 years, the remaining GRIB payments are paid as
they fall due to the Beneficiary, if the Beneficiary is a natural person. If the
Beneficiary is not a natural person, the remaining payments may be commuted at a
minimum 2.50% interest rate and paid in a lump sum.
GRIB payments are also available on a quarterly, semi-annual or annual basis. We
may make other annuity options available.
CONTRACT CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk
- administrative expenses
- Records Maintenance Charge
- Withdrawal Charge
- Guaranteed Retirement Income Benefit charge, if elected
Subject to certain expense limitations, investment management fees and other
Fund expenses are indirectly borne by the Owner.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
1. MORTALITY AND EXPENSE RISK CHARGE.
We assess each Subaccount a daily asset charge for mortality and expense risks
at a rate of 1.25% per annum. Variable Annuity payments reflect the investment
experience of each Subaccount but are not affected by changes in actual
mortality experience or by actual expenses incurred by Us.
The mortality risk We assume arises from two contractual obligations. First, if
the Owner or Annuitant dies before age 91 and before the Annuity Date, We may,
in some cases, pay more than Contract Value. (See "Guaranteed Death Benefit",
page 28) Second, when Annuity Options involving life contingencies are selected,
We assume the risk that Annuitants will live beyond actuarial life expectancies.
We also assume an expense risk. Actual expenses of administering the Contracts
may exceed the amounts We recover from the Records Maintenance Charge or the
administrative cost portion of the daily asset charge.
2. ADMINISTRATIVE COSTS.
We assess each Subaccount a daily asset charge for administrative costs at a
rate of .15% per annum. This charge reimburses Us for expenses incurred for
administering the Contracts. These expenses include Owner inquiries, changes in
allocations, Owner reports, Contract maintenance costs, and data processing
costs. The administrative charge covers the average anticipated administrative
expenses incurred while the Contracts are in force. There is not necessarily a
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direct relationship between the amount of the charge and the administrative
costs of a particular Contract
3. RECORDS MAINTENANCE CHARGE.
We deduct an annual Records Maintenance Charge of $30 during the Accumulation
Period. The charge is assessed:
- at the end of each Contract Year,
- on Contract surrender and
- upon annuitization.
However, We do not deduct the Records Maintenance Charge for Contracts with
Contract Value of at least $50,000 on the assessment date.
This charge reimburses Us for the expenses of establishing and maintaining
Contract records. The Records Maintenance Charge reduces the net assets of each
Subaccount, Guarantee Period and the Fixed Account.
The Records Maintenance Charge is assessed equally among all investment options
in which the Owner has an interest.
4. WITHDRAWAL CHARGE.
We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal
Charge covers Contract sales expenses, including commissions and other promotion
and acquisition expenses.
Each Contract Year, an Owner may withdraw or surrender the Contract, without
Withdrawal Charge, up to the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of the Contract Value.
If the Owner withdraws a larger amount, the excess Purchase Payments withdrawn
are subject to a Withdrawal Charge. The Withdrawal Charge applies in the first
seven Contribution Years following each Purchase Payment as follows:
<TABLE>
<CAPTION>
CONTRIBUTION WITHDRAWAL
YEAR CHARGE
------------ ----------
<S> <C>
First............................. 7%
Second............................ 6%
Third............................. 5%
Fourth............................ 5%
Fifth............................. 4%
Sixth............................. 3%
Seventh........................... 2%
Eighth and following.............. 0%
</TABLE>
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Purchase Payments are deemed surrendered in the order in which they were
received.
When a withdrawal is requested, the Owner receives a check in the amount
requested. If a Withdrawal Charge applies, Contract Value is reduced by the
Withdrawal Charge, plus the dollar amount sent to the Owner.
Because Contribution Years are based on the date each Purchase Payment is made,
Owners may be subject to a Withdrawal Charge, even though the Contract may have
been issued many years earlier. (For additional details, see "Withdrawal During
Accumulation Period.")
Subject to certain exceptions and state approvals, withdrawal charges are not
assessed on withdrawals:
- 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;
- within thirty days following an Owner's discharge from a hospital or
skilled health care facility after a confinement of at least thirty days;
or
- if the Owner or Annuitant becomes disabled after the Contract is issued
and before age 65.
Restrictions and provisions related to the nursing care or hospitalization
disability waivers are described in Contract endorsements.
The Withdrawal Charge compensates Us for Contract distribution expense.
Currently, We anticipate Withdrawal Charges will not fully cover distribution
expenses. Unrecovered distribution expenses may be recovered from Our general
assets. Those assets may include proceeds from the mortality and expense risk
charge.
The Withdrawal Charge also applies at annuitization to amounts attributable to
Purchase Payments in their seventh Contribution Year or earlier. No Withdrawal
Charge applies upon annuitization if the Owner selects Annuity Options 2, 3 or 4
or if payments under Annuity Option 1 are scheduled to continue for at least
five years. See "The Annuity Period--Annuity Options" for a discussion of the
Annuity Options available.
We may reduce or eliminate the Withdrawal Charge if We anticipate that We will
incur lower sales expenses or perform fewer services because of economies due to
the size of a group, the average contribution per participant, or the use of
mass enrollment procedures. No Withdrawal Charge applies to Contracts sold to
officers, directors and employees of KILICO and Kemper Variable Series (formerly
Investors Fund Series) ("KVS"), KVS investment advisers and principal
underwriter or certain affiliated companies, or to any trust, pension,
profit-sharing or other benefit plan for such persons.
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5. GUARANTEED RETIREMENT INCOME BENEFIT CHARGE.
The annual charge for GRIB is 0.25% of Contract Value. We deduct a pro rata
portion of the charge on each Contract Quarter anniversary. The quarterly charge
is deducted pro rata from the investment options in which the Owner has an
interest. We no longer charge for GRIB after the Annuitant's 91st birthday.
6. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deduction of investment management
fees and certain general operating expenses. Subject to limitations, Owners
indirectly bear these fees and expenses. Investment management fees appear on
page 7. Further detail is provided in the attached prospectuses for the
Portfolios and the Funds' Statements of Additional Information.
7. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If We pay state premium taxes, We may charge the amount
paid against Contract Value upon annuitization. See "Appendix--State Premium Tax
Chart" in the Statement of Additional Information.
8. EXCEPTIONS.
We may decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, We guarantee
that they will not increase. We bear the risk that such charges will not cover
Our costs. On the other hand, should such charges exceed Our costs, We will not
refund any charges. Any profit is available for corporate purposes including,
among other things, payment of distribution expenses.
We may also offer reduced fees and charges, including but not limited to,
Records Maintenance Charge and mortality and expense risk and administrative
charges, for certain sales that may result in cost savings. We may also reduce
or waive fees and charges and/or credit additional amounts on Contracts issued
to:
- employees of ZFS
- employees and registered representatives (and their families) of broker-
dealers (or their affiliated financial institutions) that have entered
into selling group agreements with IBS.
Reductions in these fees and charges will not unfairly discriminate against any
Owner.
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THE ANNUITY PERIOD
In addition to GRIB, Contracts may be annuitized under one of several Annuity
Options. Annuity payments begin on the Annuity Date and under the selected
Annuity Option. The Annuity Date must be at least one year after the Date of
Issue. Subject to state variation, the Annuity Date may not be deferred beyond
the later of the Annuitant's 91st birthday (100th birthday if the Contract is
part of a Charitable Remainder Trust) or ten (10) years after the Date of Issue.
However, annuitization is delayed beyond the Annuity Date if We are making
systematic withdrawals based on the Owner's life expectancy. In this case,
annuitization begins when life expectancy withdrawals are stopped.
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
- the selected Annuity Option, and
- the investment performance of the selected Subaccount(s) (if variable
annuitization is elected).
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly. Annuity payments may be subject to a Withdrawal Charge. (For
additional details, see "Withdrawal Charge.")
2. ANNUITY OPTIONS.
The Owner may elect one of the Contract's Annuity Options. The Owner may decide
at any time (subject to the provisions of any applicable retirement plan and
state variations) to begin annuity payments before the Annuitant's 91st birthday
(100th birthday if the Contract is part of a Charitable Remainder Trust) or
within ten (10) years after the Date of Issue, whichever is later. The Owner may
change the Annuity Option before the Annuity Date. If no other Annuity Option is
elected, monthly annuity payments are made in accordance with Option 3 below
with a ten (10) year period certain. Generally, annuity payments are made in
monthly installments. However, We may make a lump sum payment if the net
proceeds available to apply under an Annuity Option are less than $2,000. In
addition, if the first monthly payment is less than $25, We may change the
frequency of payments to quarterly, semiannual or annual intervals so that the
initial payment is at least $25.
The amount of periodic annuity payments may depend upon:
- the Annuity Option selected;
- the age and sex of the payee; and
- the investment experience of the selected Subaccount(s).
For example:
- if Option 1, income for a specified period, is selected, shorter
periods result in fewer payments with higher values.
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- if Option 2, life income, is selected, it is likely that each payment
will be smaller than would result if income for a short period were
specified.
- if Option 3, life income with installments guaranteed, is selected,
each payment will probably be smaller than would result if the life
income option were selected.
- if Option 4, the joint and survivor annuity, is selected, each payment
is smaller than those measured by an individual life income option.
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. The sex of the payee influences the amount of periodic payments
because females live longer than males, resulting in smaller payments. Finally,
if the Owner participates in a Subaccount with higher investment performance, it
is likely the Owner will receive a higher periodic payment.
If the Owner dies before the Annuity Date, available Annuity Options are
limited. Unless the Owner has imposed restrictions, the Annuity Options
available are:
- Option 2 or
- 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, unless a later date is prescribed
by federal regulation.
OPTION 1--INCOME FOR SPECIFIED PERIOD.
Option 1 provides an annuity payable monthly for a selected number of years
ranging from five to thirty. Upon the payee's death, if the Beneficiary is an
individual, We automatically continue payments to the Beneficiary for the
remainder of the period specified. If the Beneficiary is not an individual
(e.g., an estate or trust), We pay the discounted value of the remaining
payments in the specified period. Although there is no life contingency risk
associated with Option 1, We continue to deduct the daily asset charges for
mortality and expense risks and administrative costs.
Payees may elect to cancel all or part of the remaining payments due under
Option 1. We will then pay the discounted value of the remaining payments.
OPTION 2--LIFE INCOME.
Option 2 provides an annuity over the lifetime of the payee. If Option 2 is
elected, annuity payments terminate automatically and immediately on the payee's
death 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.
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OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.
Option 3 provides an annuity payable monthly during the payee's lifetime.
However, Option 3 also provides for the automatic continuation of payments for
the remainder of the specified period if the Beneficiary is an individual and
payments have been made for less than the specified period. The period specified
may be five, ten, fifteen or twenty years. If the Beneficiary is not an
individual, We pay the discounted value of the remaining payments in the
specified period.
OPTION 4--JOINT AND SURVIVOR ANNUITY.
Option 4 provides an annuity payable monthly while both payees are living. Upon
either payee's death, the monthly income payable continues over the life of the
surviving payee at a percentage specified when Option 4 is elected. Annuity
payments terminate automatically and immediately upon the surviving payee's
death without regard to the number or total amount of payments received.
3. ALLOCATION OF ANNUITY.
The Owner may elect payments on a fixed or variable basis, or a combination. Any
Fixed Account Contract Value or Guarantee Period Value is annuitized on a fixed
basis. Any Separate Account Contract Value is annuitized on a variable basis.
The MVA Option is not available during the Annuity Period. An Owner may exercise
the transfer privilege during the Accumulation Period. Transfers during the
Annuity Period are subject to certain limitations.
4. TRANSFER DURING ANNUITY PERIOD.
During the Annuity Period, the payee may, by written request, transfer
Subaccount Value from one Subaccount to another Subaccount or to the Fixed
Account, subject to the following limitations:
- Transfers to a Subaccount are prohibited during the first year of the
Annuity Period; subsequent transfers are limited to one per year.
- All interest in a Subaccount must be transferred.
- If We receive notice of transfer to a Subaccount more than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the date We receive the notice.
- If We receive notice of transfer to a Subaccount less than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the annuity payment date.
- Transfers to the Fixed Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least thirty (30) days
prior to the anniversary.
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
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5. ANNUITY UNIT VALUE.
Annuity Unit value is determined independently for each Subaccount.
Annuity Unit value for any Valuation Period is:
- Annuity Unit value for the preceding Valuation Period times
- the net investment factor for the current Valuation Period times
- an interest factor which offsets the 2.5% per annum rate of investment
earnings assumed by the Contract's annuity tables.
The net investment factor for a Subaccount for any Valuation Period is:
- the Subaccount's Accumulation Unit value at the end of the current
Valuation Period, plus or minus the per share charge or credit for taxes
reserved; divided by
- the Subaccount's Accumulation Unit value at the end of the preceding
Valuation Period, plus or minus the per share charge or credit for taxes
reserved.
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
When annuity payments begin, the value of the Owner's Contract interest is:
- Accumulation Unit values at the end of the Valuation Period falling on
the 20th or 7th day of the month before the first annuity payment is due
times
- the number of Accumulation Units credited at the end of the Valuation
Period minus
- premium taxes and Withdrawal Charges
The first annuity payment is determined by multiplying the benefit per $1,000 of
value shown in the applicable annuity table by the number of thousands of
dollars of Contract Value.
A 2.5% per annum rate of investment earnings is assumed by the Contract's
annuity tables. If the actual net investment earnings rate exceeds 2.5% per
annum, payments increase accordingly. Conversely, if the actual rate is less
than 2.5% per annum, annuity payments decrease.
7. SUBSEQUENT PERIODIC PAYMENTS UNDER VARIABLE ANNUITY.
Subsequent annuity payments are determined by multiplying the number of Annuity
Units by the Annuity Unit value at the Valuation Period before each annuity
payment is due. The first annuity payment is divided by the Annuity Unit value
as of the Annuity Date to establish the number of Annuity Units representing
each annuity payment. This number does not change.
8. FIXED ANNUITY PAYMENTS.
Each Fixed Annuity payment is determined from tables We prepare. These tables
show the monthly payment for each $1,000 of Contract Value allocated
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to a Fixed Annuity. Payment is based on the Contract Value at the date before
the annuity payment is due. Fixed Annuity payments do not change regardless of
investment, mortality or expense experience.
9. DEATH PROCEEDS.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, depend upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
FEDERAL INCOME TAXES
A. INTRODUCTION
This discussion is not exhaustive 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
buying a Contract. In addition, WE MAKE NO GUARANTEE REGARDING ANY TAX
TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CONTRACT OR OF ANY TRANSACTION
INVOLVING A CONTRACT.
B. OUR TAX STATUS
We are taxed as a life insurance company and the operations of the Separate
Account are treated as a part of Our total operations. The Separate Account is
not separately taxed as a "regulated investment company". Investment income and
capital gains of the Separate Account are not taxed to the extent they are
applied under a Contract. We do not anticipate that We will incur federal income
tax liability attributable to the income and gains of the Separate Account, and
therefore We do not intend to provide for these taxes. If We are taxed on
investment income or capital gains of the Separate Account, then We may impose a
charge against the Separate Account to provide for these taxes.
C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under the Code, except as described below, increases in the Contract Value of a
Non-Qualified Plan Contract are generally not taxable to the Owner or Annuitant
until received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
- the Contract must be owned by an individual
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- Separate Account investments must be "adequately diversified"
- We, rather than the Owner, must be considered the owner of Separate
Account assets for federal tax purposes, and
- annuity payments must appropriately amortize Purchase Payments and
Contract earnings.
NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons", such as corporations, trusts or similar entities, are not
annuity contracts for federal income tax purposes. The investment income on
these contracts is taxed as ordinary income received or accrued by the non-
natural owner. There are exceptions to this general rule for non-natural owners.
Contracts are generally treated as held by a natural person if the nominal owner
is a trust or other entity holding the contract as an agent for a natural
person. However, this special exception does not apply to an employer who is the
nominal owner of a contract under a non-qualified deferred compensation plan for
its employees.
Additional exceptions to this rule include:
- contracts acquired by a decedent's estate
- certain Qualified Plan Contracts
- Contracts purchased by employers at termination of certain qualified
plans
- Contracts used with structured settlement agreements
- Contracts purchased with a single premium when the annuity starting date
is no later than a year from Contract purchase and substantially equal
periodic payments are made at least annually.
DIVERSIFICATION REQUIREMENTS. For a contract to be treated as an annuity for
federal income tax purposes, separate account investments must be "adequately
diversified". The Treasury Secretary issued regulations prescribing standards
for adequately diversifying separate account investments. If the Separate
Account failed to comply with these diversification standards, the Contract
would not be treated as an annuity contract for federal income tax purposes and
the Owner would generally be taxed on the difference between Contract Value and
Purchase Payments.
Although We do not control Fund investments, We expect the Fund will comply with
these 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 of the assets of the separate account supporting the
contract. Then, income and gains from separate account assets are includible in
the owner's gross income. The IRS, in published rulings, stated that a variable
contract owner will be considered the owner of separate account assets if the
owner possesses the ability to exercise investment control over the assets. As
of the date of this Prospectus, no investor control guidance is available.
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We may modify the Contract as necessary to attempt to prevent the Owner from
being considered the owner of the Separate Account assets.
DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur)
when the Annuitant has reached an advanced age, E.G., past age 85, the Contract
might not be treated as an annuity for federal income tax purposes. In that
event, the income and gains under the Contract could be currently includible in
the Owner's income.
The following discussion assumes that the Contract is treated as an annuity
contract for tax purposes and that We are treated as the owner of Separate
Account assets.
2. TAXATION OF PARTIAL AND FULL WITHDRAWALS
Partial withdrawals from a Non-Qualified Plan Contract are includible in income
if the withdrawal includes investment gain. Full withdrawals are also includible
in income if they exceed the "investment in the contract." Investment in the
contract equals the total of Purchase Payments minus amounts previously received
from the Contract.
Any assignment or pledge (or agreement to assign or pledge) of Contract Value,
is treated as a withdrawal. Investment in the contract is increased by the
amount includible in income with respect to such assignment or pledge. If an
individual transfers a Contract interest without adequate consideration to
someone other than the Owner's spouse (or to a former spouse incident to
divorce), the Owner is taxed on the difference between Contract Value and the
"investment in the contract." In this case, the transferee's investment in the
contract is increased to reflect the increase in the transferor's income.
The Contract's death benefit may exceed Purchase Payments or Contract Value. As
described in this Prospectus, We impose certain charges with respect to the
death benefit. It is possible that those charges (or some portion) could be
treated as a partial withdrawal.
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
adviser should be consulted in those situations.
3. TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as income equals the
payment minus the exclusion amount. The exclusion amount for variable annuity
payments is the "investment in the contract" allocated to the variable annuity
option and adjusted for any period certain or refund feature, divided by the
number of payments expected to be made. The exclusion amount for fixed annuity
payments is the payment times the ratio of the investment in the
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contract allocated to the fixed annuity option and adjusted for any period
certain or refund feature, to expected value of all annuity payments.
Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments stop because
the Annuitant dies before the total amount of the investment in the contract is
recovered, the unrecovered amount generally is allowed as a deduction to the
Annuitant in the last taxable year.
4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon the Owner's or Annuitant's death. Before the
Annuity Date, death benefits are includible in income and:
- if distributed in a lump sum are taxed like a full withdrawal, or
- if distributed under an annuity option are taxed like annuity payments.
After the Annuity Date, where a guaranteed period exists 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 and:
- if received in a lump sum are includible in income if they exceed the
unrecovered investment, or
- if distributed in accordance with the selected annuity option are fully
excludable from income until the remaining investment in the contract is
deemed to be recovered.
Thereafter, all annuity payments are fully includible in income.
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
A 10% penalty tax applies to a taxable payment from a Non-Qualified Plan
Contract unless:
- received on or after the Owner reaches age 59 1/2,
- attributable to the Owner's disability,
- made to a Beneficiary after the Owner's death or, for non-natural Owners,
after the primary Annuitant's death,
- made as a series of substantially equal periodic payments (at least
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,
- made under a Contract purchased with a single premium when the annuity
starting date is no later than a year from Contract purchase and
substantially equal periodic payments are made at least annually, or
- made with annuities used with structured settlement agreements.
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6. AGGREGATION OF CONTRACTS
The taxable amount of an annuity payment or withdrawal from a Non-Qualified Plan
Contract is determined by combining some or all of the Non-Qualified Plan
Contracts owned by an individual. For example, if a person purchases a Contract
and also purchases an immediate annuity at approximately the same time, the IRS
may treat the two contracts as one contract. In addition, if a person purchases
two or more deferred annuity contracts from the same company (or its affiliates)
during any calendar year, these contracts are treated as one contract. The
effects of this aggregation are not clear. However, it could affect the taxable
amount of an annuity payment or withdrawal and the amount which might be subject
to the 10% penalty tax.
7. LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
For Contracts issued after June 8, 1997 to a non-natural owner, otherwise
deductible interest may no longer be deductible by the owner. However, this
interest deduction disallowance does not affect Contracts generating taxable
income. Entities considering purchasing the Contract, or entities that will be
beneficiaries under a Contract, should consult a tax adviser.
D. QUALIFIED PLANS
The Contracts 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 contracts are referred to as "Qualified
Contracts." Numerous special tax rules apply to the participants in Qualified
Plans and to Qualified Plan Contracts. We make no attempt in this Prospectus to
provide more than general information about use of the Contract with the various
types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of plan
and the terms and conditions of the plan. For example, for both withdrawals and
annuity payments under certain Qualified Contracts, there may be no "investment
in the contract" and the total amount received may be taxable. Also, loans from
Qualified Contracts, where allowed, are subject to a variety of limitations,
including restrictions as to the amount that may be borrowed, the duration of
the loan, the number of allowable loans and the manner in which the loan must be
repaid. (Owners should always consult their tax advisers and retirement plan
fiduciaries prior to exercising their loan privileges.) Both the amount of the
contribution that may be made, and the tax deduction or exclusion that the Owner
may claim for such contribution, are limited under Qualified Plans. If this
Contract is used 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 their ages. Furthermore, the
length of any Guarantee Period may be limited in some circumstances to satisfy
certain minimum distribution requirements under the Code.
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Under a Qualified Contract, rules specify the form of distribution and start
dates. An excise tax is imposed for failure to comply with the minimum
distribution requirements. 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.
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Plan Contracts. For Individual Retirement Annuities, the penalty tax does not
apply to a payment:
- received after the Owner reaches age 55 and has separated from service,
- received after the Owner reaches age 59 1/2,
- received after the Owner's death or because of the Owner's disability, or
- made as a series of substantially equal periodic payments (at least
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.
In addition, the penalty tax does not apply to certain distributions taken after
December 31, 1997 used for qualified first time home purchases or for higher
education expenses. Special conditions must be met to qualify for these
exceptions. Owners wishing to take a distribution for these purposes should
consult their tax adviser. Other exceptions may apply.
Qualified Plan Contracts are amended to conform to plan requirements. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, We are not bound by terms and conditions of Qualified
Plans if they are inconsistent with the Contract.
1. QUALIFIED PLAN TYPES
We issue Contracts for the following types of Qualified Plans.
INDIVIDUAL RETIREMENT ANNUITIES. The Code permits eligible individuals to
contribute to an individual retirement annuity known as an "IRA." IRAs limit the
amounts contributed, the persons eligible and the time when distributions start.
Also, subject to direct rollover and mandatory withholding requirements,
distributions from other types of Qualified Plans may be "rolled over" on a tax-
deferred basis into an IRA. The Contract may not fund an "Education IRA."
IRAs generally may not provide life insurance coverage, but they may provide a
death benefit that equals the greater of the premiums paid and the contract
value. The Contract's death benefit may exceed Purchase Payments or Contract
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Value. It is possible that the death benefit could be viewed as violating the
prohibition on investment in life insurance contracts and failing IRA
requirements.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). The Code allows employers to establish
simplified employee pension plans, using the employees' IRAs. Under these plans
the employer may make limited deductible contributions on behalf of the
employees to IRAs. Employers and employees intending to use the Contract in
connection with these plans should seek tax competent advice.
SIMPLE IRAS. 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 Contract's death benefit for purposes of the tax rules governing IRAs (which
would include SIMPLE IRAs). Employers and employees intending to use the
Contract in connection with such plans should seek competent advice.
ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth
IRAs differ from other IRAs in that:
- Roth IRA contributions are never deductible,
- "qualified distributions" from a Roth IRA are excludable from income,
- different eligibility and mandatory distribution requirements apply,
- a rollover to a Roth IRA must be a "qualified rollover contribution,"
under the Code.
A rollover from an IRA to a Roth IRA is includible in gross income but the 10
percent penalty tax does not apply.
An IRA may be converted into a Roth IRA without taking a distribution. An
individual may convert by notifying the IRA issuer or trustee. The conversion of
an IRA to a Roth IRA is a special type of qualified rollover distribution.
Hence, the IRA participant must be eligible for a qualified rollover
distribution to convert an IRA to a Roth IRA. A conversion typically results in
the inclusion of some or all of the IRA value in gross income. 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
-- made after the Owner attains age 59 1/2,
-- made after the Owner's death,
-- attributable to the Owner being disabled, or
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-- made to a qualified first-time homebuyer.
- a payment or distribution made in a taxable year that is five years or
more after
-- the first taxable year for which a contribution was made to the
Owner's Roth IRA, or
-- the first taxable year for which rollover was made to the Owner's
Roth IRA. A non-qualified distribution from a Roth IRA is generally
taxed like a distribution from an IRA. Distributions from a Roth IRA
need not commence at age 70 1/2.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT-SHARING
PLANS. The Code permits 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 Contracts in order to provide benefits under the
plans. The Contract provides a death benefit that in certain circumstances may
exceed the greater of the Purchase Payments and the Contract 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 Contract in connection with such plans should seek
competent advice.
TAX-SHELTERED ANNUITIES. Code Section 403(b) permits public school employees
and employees of certain types of charitable, educational and scientific
organizations to have their employers purchase annuity contracts for them and,
subject to certain limitations, to exclude the amount of purchase payments from
taxable gross income. These annuity contracts are commonly referred to as
"tax-sheltered annuities". Purchasers of the Contracts for such purposes should
seek competent advice as to eligibility, limitations on permissible amounts of
purchase payments and other tax consequences associated with the Contracts. In
particular, purchasers should consider that the Contract provides a death
benefit that in certain circumstances may exceed the greater of the Purchase
Payments and the Contract 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
Contract were characterized as an incidental death benefit, it is unlikely to
violate those limits unless the Contract Owner also purchases a life insurance
contract as part of his or her tax-sheltered annuity plan.
Tax-sheltered annuity contracts must contain restrictions on withdrawals of
- contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988,
- earnings on those contributions, and
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<PAGE> 199
- earnings after December 31, 1988 on amounts attributable to salary
reduction contributions held as of December 31, 1998. These amounts can
be paid only if the employee has reached age 59 1/2, separated from
service, died, or becomes disabled, or in the case of hardship. 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.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. 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 Contract 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 Contracts
in connection with such plans should seek competent advice.
2. DIRECT ROLLOVERS
If the Contract 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 Contract 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
- minimum distributions required under section 401(a)(9) of the Code, and
- 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 Contract,
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
We withhold and send to the U.S. Government a part of the taxable portion of
each distribution unless the payee notifies Us before distribution of an
available election not to have any amounts withheld. In certain circumstances,
We may be required to withhold tax. The withholding rates for the taxable
portion of periodic annuity payments are the same as the withholding rates for
wage
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payments. In addition, the withholding rate for 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%. The
withholding rate for eligible rollover distributions is 20%.
DISTRIBUTION OF CONTRACTS
The Contracts are sold by licensed insurance agents in those states where the
Contract may be lawfully sold. The agents are also registered representatives of
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc. Sales commissions may vary, but are not expected to
exceed 6.25% of Purchase Payments. In addition to commissions, We may pay
additional promotional incentives, in the form of cash or other compensation, to
selling broker-dealers. These incentives may be offered to certain licensed
broker-dealers that sell or are expected to sell certain minimum amounts during
specified time periods. The Contracts are distributed through the principal
underwriter for the Separate Account:
Investors Brokerage Services, Inc. ("IBS")
1 Kemper Drive
Long Grove, Illinois, 60049
IBS is Our wholly-owned subsidiary. IBS enters into selling group agreements
with affiliated and unaffiliated broker-dealers. All of the investment options
are not available to all Owners. The investment options are available only under
Contracts that are sold or serviced by broker-dealers having a selling group
agreement with IBS authorizing the sale of Contracts with the investment options
specified in this Prospectus. Other distributors may sell and service contracts
with different investment options.
VOTING RIGHTS
Proxy materials in connection with any Fund shareholder meeting are delivered to
each Owner with Subaccount interests invested in the Fund as of the record date.
Proxy materials include a voting instruction form. We vote all Fund shares
proportionately in accordance with instructions received from Owners. We will
also vote any Fund shares attributed to amounts We have accumulated in the
Subaccounts in the same proportion that Owners vote. A Fund is not required to
hold annual shareholders' meetings. Funds hold special meetings as required or
deemed desirable for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement.
Owners have voting rights in a Portfolio based upon the Owner's proportionate
interest in the corresponding Subaccount as measured by units. Owners have
voting rights before surrender, the Annuity Date or the death of the Annuitant.
Thereafter, the payee entitled to receive Variable Annuity payments has voting
rights. During the Annuity Period, Annuitants' voting rights decrease as Annuity
Units decrease.
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REPORTS TO CONTRACT OWNERS AND INQUIRIES
After each Contract anniversary, We send Owners a statement showing amounts
credited to each Subaccount and to the Fixed Account Option. In addition, Owners
transferring amounts among the investment options or making additional payments
receive written confirmation of these transactions. We will also send a current
statement upon Owner request. Owners are also sent annual and semi-annual
reports for the Portfolios that correspond to the Subaccounts in which the Owner
invests and a list of the securities held by that Portfolio. In addition, We
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 selling agent 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
Under Our Dollar Cost Averaging program, a predesignated portion of Subaccount
Value is automatically transferred monthly, quarterly, semiannually or annually
for a specified duration to other Subaccounts, Guarantee Periods and the Fixed
Account. The Dollar Cost Averaging program is available only during the
Accumulation Period. An Owner may also elect transfers from the Fixed Account on
a monthly or quarterly basis for a minimum duration of one year. An Owner may
enroll any time by completing Our Dollar Cost Averaging form. Transfers are made
on the second Tuesday of the month. We must receive the enrollment form at least
five (5) business days before the transfer date.
An Owner participating in the Dollar Cost Averaging program may allocate all or
a portion of the initial Purchase Payment to the Scudder VLIF Money Market
Subaccount #2. This is the only Subaccount with no deduction for the 1.40%
charge for mortality and expense risks and administrative costs. The Owner must
transfer all Subaccount Value out of Scudder VLIF Money Market Subaccount #2
within one year from the initial Purchase Payment. If an Owner terminates Dollar
Cost Averaging or does not deplete all Subaccount Value in Scudder VLIF Money
Market Subaccount #2 within one year, We automatically transfer any remaining
Subaccount Value to Scudder VLIF Money Market Subaccount #1.
The minimum transfer amount is $100 per Subaccount, Guarantee Period or Fixed
Account. The total Contract Value in an account at the time Dollar Cost
Averaging is elected must be at least equal to the amount designated to be
transferred on each transfer date times the duration selected.
Dollar Cost Averaging ends if:
- the number of designated monthly transfers has been completed
- Contract Value in the transferring account is insufficient to complete
the next transfer; the remaining amount is transferred
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- We receive the Owner's written termination at least five (5) business
days before the next transfer date
- the Contract is surrendered or annuitized.
If the Fixed Account balance is at least $10,000, an Owner may elect automatic
calendar quarter transfers of interest accrued in the Fixed Account to one or
more of the Subaccounts or Guarantee Periods. An Owner may enroll in this
program any time by completing Our Dollar Cost Averaging form. Transfers are
made within five business days of the end of the calendar quarter. We must
receive the enrollment form at least ten (10) days before the end of the
calendar quarter.
Dollar Cost Averaging is not available during the Annuity Period.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing Owners to pre-authorize
periodic withdrawals during the Accumulation Period. Owners instruct Us to
withdraw selected amounts, or amounts based on the Owner's life expectancy, from
the Fixed Account, or from any of the Subaccounts or Guarantee Periods on a
monthly, quarterly, semi-annual or annual basis. The SWP is available to Owners
who request a minimum $100 periodic payment. A market value adjustment applies
to any withdrawals under the SWP from a Guarantee Period, unless effected within
30 days after the Guarantee Period ends. SWP withdrawals from the Fixed Account
are not available in the first Contract Year and are limited to the amount not
subject to Withdrawal Charges. If the amounts distributed under the SWP from the
Subaccounts or Guarantee Periods exceed the free withdrawal amount, the
Withdrawal Charge is applied on any amounts exceeding the free withdrawal
amount. WITHDRAWALS TAKEN UNDER THE SWP MAY BE SUBJECT TO THE 10% TAX PENALTY ON
EARLY WITHDRAWALS AND TO INCOME TAXES AND WITHHOLDING. Owners interested in SWP
may obtain an application and information concerning this program and its
restrictions from Us or their agent. We give thirty days' notice if We amend the
SWP. The SWP may be terminated at any time by the Owner or Us.
EXPERTS
The consolidated balance sheets of KILICO as of December 31, 1998 and 1997 and
the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1998 and
1997 have been included herein and in the registration statement in reliance
upon the report of PricewaterhouseCoopers LLP, independent public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of KILICO and
subsidiaries for the period from January 4, 1996 to December 31, 1996 and the
financial statement schedules as of December 31, 1996 have been included herein
and in the registration statement in reliance upon the report of KPMG
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<PAGE> 203
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Legal matters with respect to Our organization, Our authority to issue annuity
contracts and the validity of the Contract have been passed upon by Frank
Julian, Our Associate General Counsel. Jorden Burt Boros Cicchetti Berenson &
Johnson, Washington, D.C., has advised Us on certain legal matters concerning
federal securities laws applicable to the issue and sale of the Contracts.
SPECIAL CONSIDERATIONS
We reserve the right to amend the Contract to meet the requirements of federal
or state laws or regulations. We will notify the Owner in writing of these
amendments.
An Owner's rights under a Contract may be assigned as provided by law. An
assignment will not be binding upon Us until We receive 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 adviser
regarding the tax consequences, as an assignment may be a taxable event.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934 and file reports and other information with the SEC. These reports and
other information can be inspected and copied at the SEC's public reference
facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500 West
Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies also
can be obtained from the SEC's Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
We have filed registration statements (the "Registration Statements") relating
to the Contracts with the SEC under the Securities Act of 1933. This Prospectus
has been filed as part of the Registration Statements and does not contain all
of the information set forth in the Registration Statements. These Registration
Statements contain further information about Us and the Contracts. The
Registration Statements may be inspected and copied, and copies can be obtained
at prescribed rates, as mentioned above.
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BUSINESS
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. We are licensed
in the District of Columbia and all states except New York. We are a wholly-
owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company.
CORPORATE CONTROL EVENTS
Effective January 4, 1996, Zurich Insurance Company ("Zurich"), Insurance
Partners, L.P. ("IP") and Insurance Partners Offshore (Bermuda), L.P. (together
with IP, "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.
Effective September 7, 1998, the businesses of Zurich merged with the financial
services business of B.A.T. Industries forming Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG, representing
the financial interest of the former Zurich Group, is listed on the Swiss Market
Index, replacing Zurich. Allied Zurich p.l.c., representing the financial
interest of B.A.T. Industries, is included in the FTSE-100 Share Index in
London.
The acquisition of KILICO on January 4, 1996, was accounted for using the
purchase method of accounting. Our consolidated financial statements prior to
January 4, 1996, were prepared on a historical cost basis and have been labeled
as "preacquisition" where appropriate in this Prospectus. Our included
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles.
We originally began to amortize goodwill resulting from the acquisition on a
straight-line basis over twenty-five years. However, in the fourth quarter of
1997, We changed Our amortization period to twenty years. The change in
amortization periods was made to conform to Zurich's accounting practices and
policies. The change resulted in an increase in goodwill amortization of $5.1
million in 1997.
STRATEGIC INITIATIVES
Our management, operations and strategic directions are integrated 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
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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.
Over the last several years, We increased the competitiveness of Our variable
annuity products by adding multiple variable subaccount investment options and
investment managers to existing variable annuity products. In 1996, We
introduced a registered flexible individual variable life insurance product. In
1997, We introduced a non-registered individual and group variable bank-owned
life insurance contract ("BOLI") and a series of individual variable life
insurance contracts. In 1998, We introduced a new registered individual variable
annuity product with 29 variable subaccount investment options and various
investment managers.
NARRATIVE DESCRIPTION OF BUSINESS
We offer 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. We offer 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
Our products. Our 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.
Our 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, We have increased Our emphasis on marketing Our existing and new
separate account products. Unlike the fixed-rate annuity business where We
manage spread revenue, such variable products pose minimal investment risk for
Us, as policyholders direct their premium to one or more subaccounts that invest
in underlying investment funds. We, in turn, receive administrative fee revenue
on such variable products which compensates Us for providing death benefits
potentially in excess of cash surrender values. In addition, on variable life
insurance contracts, cost of insurance charges compensate Us for providing death
benefit coverage substantially in excess of surrender values.
As a result of this strategy, Our separate account assets and related sales of
Our variable annuity and life products have increased as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Separate account assets................ $7,099.2 $5,122.0 $2,127.2
======== ======== ========
</TABLE>
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<PAGE> 206
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Variable annuity sales................. $ 300.4 $ 259.8 $ 254.6
Variable life sales.................... 1,523.0 2,708.6 .2
-------- -------- --------
Total separate account sales......... $1,823.4 $2,968.4 $ 254.8
======== ======== ========
</TABLE>
In 1996, We added several new subaccounts and new investment managers as
investment portfolio choices for certain purchasers of the Kemper Advantage III
variable annuity product. During mid-1998, We introduced Destinations, a
registered individual variable annuity product. Destinations offers 29 variable
subaccount investment options with various investment managers, ten guarantee
period accounts and a fixed account, dollar cost averaging and a guaranteed
retirement income benefit option.
During late 1996, We introduced Power V, a registered flexible premium variable
life insurance product. During mid-1997, We also introduced variable BOLI, a
group variable life insurance contract that is primarily marketed to banks and
other large corporate entities. Also in 1997, We issued a series of
non-registered variable individual universal life insurance contracts that are
marketed primarily to high net worth individuals. Significant fluctuations in
Our sales of the variable life products are due mainly to the nature of the BOLI
product -- high dollar volume per sale, low frequency of sales -- and the
uncertainty surrounding BOLI's tax advantaged status since the release of the
Clinton Administration's Fiscal Year 1998 Budget, continuing with the release of
the 1999 Budget.
Investors Brokerage Services, Inc. ("IBS"), Our wholly-owned subsidiary, is the
principal underwriter and distributor of the variable annuity and variable life
products. Another Zurich affiliate is the principal underwriter and distributor
for the BOLI and high net worth products.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted Our general account annuity sales over the last
several years. Our general account fixed annuity sales were as follows (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
General account fixed annuity sales......... $179.9 $145.7 $140.6
====== ====== ======
</TABLE>
Strong stock and bond markets during 1996 and most of 1997, which influenced
potential buyers of fixed annuity products to purchase variable annuity
products, caused sales of general account annuities to increase only slightly in
1997, compared with 1996. Sales of general account annuities increased in 1998,
compared with 1997, as certain investors opted for fixed crediting rates rather
than other investment alternatives available during a period of market
uncertainty, primarily in the second half of 1998.
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During 1998 and 1997, We assumed $21.6 million and $21.1 million, respectively,
of term life insurance premiums from FKLA. Excluding the amounts assumed from
FKLA, Our total term life sales, including new and renewal premiums, net of
reinsurance ceded, amounted to $846 thousand in 1998, compared with $1.1 million
in 1997 and $565 thousand in 1996.
FEDERAL INCOME TAX DEVELOPMENTS
In early 1999, the Clinton Administration's Fiscal Year 1999 Budget ("Budget")
was released and contained certain proposals to change the taxation of 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, BOLI contracts may no longer be tax advantaged products
and therefore less attractive to those customers who purchase them in
recognition of their favorable tax attributes. Additionally, sales of these
products during 1999 may also be negatively impacted until the likelihood of the
current proposals being enacted into law has been 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 for any transaction with a date of January 1, 2000, or later.
Many companies must undertake major projects to address the year 2000 issue.
Each company's 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.
We have taken substantial steps over the last several years to ensure that Our
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, We replaced Our investment accounting system, and, in 1997, We replaced
its general ledger and accounts payable system. We have also ensured that new
systems developed to support new product introductions in 1997, 1998 and beyond
are already year 2000 compliant. Data processing expenses related solely to
bringing Our systems in compliance with the year 2000 amounted to $1.3 million
in 1998. We anticipate that it will cost an additional $662 thousand to bring
all remaining systems into compliance.
Our policy administration systems have been completely renovated to be year 2000
compliant and are currently running in a test environment. Approximately
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75 percent of Our ancillary systems confirmed to be year 2000 compliant were in
production at December 31, 1998. We anticipate that all such systems will be in
production at April 30, 1999 or sooner. Testing procedures have confirmed the
performance, functionality, and integration of converted or replaced platforms,
applications, databases, utilities, and interfaces in an operational
environment. Our testing and verification for year 2000 compliance has
encompassed the following:
- mainframe computing systems
- mainframe hardware and systems software
- PC/LAN computing systems
- PC/LAN hardware and systems software
- end-user computing systems
- interfaces to and from third parties, and
- other miscellaneous electronic non-information systems
We have also taken steps requiring all other entities with which We
electronically interact, including suppliers and other financial services
institutions, to attest to Us in writing that their systems are year 2000
compliant.
If We do not successfully address Our year 2000 issues, We could face material
adverse consequences from lawsuits, lost business, erroneous results and
substantial operating problems after January 1, 2000. Although We fully expect
to be year 2000 compliant by the close of 1999, We are currently developing
contingency plans to handle the most reasonably likely worst case scenarios.
These contingency plans are scheduled for completion in the third quarter of
1999.
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. Currently, twelve IRIS ratios are
calculated. The primary purpose of the ratios is to provide an "early warning"
of any negative developments. The NAIC reports a company's ratios to state
regulators who may then contact the company if three or more ratios fall outside
the NAIC's "usual ranges".
Based on statutory financial data as of December 31, 1998, We had two ratios
outside the usual ranges, the change in reserving ratio and the change in
premium ratio. Our change in reserving ratio reflected the level of interest-
sensitive life surrenders and withdrawals during 1998, as well as the effects of
a reinsurance agreement with FKLA. Our change in premium ratio reflected the
$1.2 billion decrease in BOLI premiums received during 1998, compared with 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 Our IRIS ratios for 1998 or earlier years.
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RISK-BASED CAPITAL, ASSET ADEQUACY AND CODIFICATION
Under Illinois' asset adequacy and risk-based capital rules, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to assure that
assets supporting reserves are adequate to cover liabilities under a variety of
economic scenarios. The focus of risk-based 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. We have capital
levels substantially exceeding any that would mandate action under the
risk-based capital rules and is in compliance with applicable asset adequacy
rules.
In March 1998, the NAIC approved the codification of statutory accounting
principles. Codification is effective January 1, 2001; however, Our domiciliary
state of Illinois has yet to adopt codification. In any event, We have not
quantified the impact that codification will have on Our statutory financial
position or results of operations.
RESERVES AND REINSURANCE
The following table provides a breakdown of Our reserves for future policy
benefits by product type (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
General account annuities................ $2,864 $3,137
Interest-sensitive life insurance and
other.................................. 688 709
Term life reserves....................... 9 10
Ceded future policy benefits............. 345 383
------ ------
Total.......................... $3,906 $4,239
====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions where We insured liabilities of approximately $516
million in 1992 and $416 million in 1991 with our affiliate Fidelity Life
Association, A Mutual Legal Reserve Company ("FLA"). 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, 1998 and 1997, Our reinsurance reserve credit from FLA related to these
coinsurance transactions totaled approximately $344.8 million and $382.6
million, respectively. Utilizing FKLA's employees, We are the servicing company
for this coinsured business and We are reimbursed by FLA for the related
servicing expenses.
During December 1997, We entered into a funds withheld reinsurance agreement
with a Zurich affiliated company, ZC Life Reinsurance Limited ("ZC Life"),
formerly EPICENTRE Reinsurance (Bermuda) Limited. Under the terms of this
agreement, We ceded, on a yearly renewable term basis, ninety percent of the net
amount at risk (death benefit payable to the insured
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less the insured's separate account cash surrender value) related to variable
BOLI, which is held in Our separate accounts. During 1998, We modified the
reinsurance agreement to increase the reinsurance from ninety percent to one
hundred percent. During 1998 and 1997, We issued $6.9 billion (face amount) and
$59.3 billion (face amount), respectively, of new BOLI business and ceded $11.1
billion (face amount) and $51.5 billion (face amount), respectively, to ZC Life
under the terms of the treaty. During 1998 and 1997, We also ceded $175.5
million and $24.3 million, respectively, of separate account fees (cost of
insurance charges) to ZC Life. We have also withheld approximately $170.9
million and $23.4 million of the funds due to ZC Life under the terms of the
reinsurance agreement as a component of benefits and funds payable in the
accompanying consolidated balance sheets in this Prospectus as of December 31,
1998 and 1997, respectively.
We have a large and growing funds withheld account ("FWA") supporting reserve
credits on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA is now marked-to-market based upon the
Total Return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, We recorded a $2.5 million increase to the FWA
related to this mark-to-market. In November 1998, to properly match revenue and
expenses, We placed assets supporting the FWA in a segmented portion of its
General Account. This portfolio is classified as "trading" under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, KILICO recorded a realized capital gain of $2.8 million upon
transfer of these assets from "available for sale" to the trading portfolio as
required by FAS 115. In addition, KILICO recorded realized capital losses of
$151 thousand related to the changes in fair value of this portfolio during
1998. The fair value of this portfolio was $101.8 million at December 31, 1998,
and the amortized cost was $99.1 million. We periodically purchase assets into
this segmented portfolio to support changes in the FWA.
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, We also recorded reserves in 1998 and 1997 of approximately $8.5
million and $7.9 million, respectively.
COMPETITION
We are in a highly competitive business. We compete 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. With Our emphasis on annuity
products, We also compete 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.
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<PAGE> 211
Our 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.
To address Our competition, We have adopted certain business strategies. These
include:
- systematic review of investment risk and 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, 1998, We used the services of approximately 861 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
We are generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions where We are 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, policy forms
and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
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<PAGE> 212
In addition, certain of Our variable life insurance and annuity products, and
the related separate accounts, are subject to regulation by the Securities and
Exchange Commission (the "SEC").
We believe We are in compliance in all material respects with all applicable
regulations.
INVESTMENTS
A changing marketplace has affected the life insurance industry. To accommodate
customers' increased preference for safety over higher yields, We have
systematically reduced Our investment risk and strengthened Our 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") and
its subsidiaries and affiliates. Our real estate-related investments are handled
by a majority-owned Kemper real estate subsidiary. Investment policy is directed
by KILICO's board of directors. Our 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.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
Prospectus and elsewhere (such as in Our filings with the SEC, press releases,
presentations by KILICO or its management or oral statements) about markets for
Our products and trends in Our 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. These factors include,
among other things:
(i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect Our
ability to sell Our products, the market value of Our investments and the
lapse rate and profitability of KILICO's contracts
(ii) Our 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 Our insurance products
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(v) changes in the federal income tax laws and regulations which may affect the
relative tax advantages of some of Our products
(vi) increasing competition which could affect the sale of Our 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 Our filings
with the SEC
PROPERTIES
We primarily share 84,270 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois. We also share 74,000 sq. ft. of office space leased by FKLA and
ZLICA from Zurich American Insurance Company, an affiliate, located in
Schaumburg, Illinois.
LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to insurance
business. Based upon the advice of legal counsel, Our management believes that
the resolution of these various lawsuits will not result in any material adverse
effect on KILICO's consolidated financial position.
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SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1998, and for the opening balance sheet as of the
acquisition date, January 4, 1996. This 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 DECEMBER 31 JANUARY 4 -----------
1998 1997 1996 1996(2) 1995 1994
----------- ----------- ----------- --------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE............................... $ 419.7 $ 425.5 $ 356.2 $ -- $ 68.1(1) $ 330.5
========= ========= ======== ======== ======== ========
NET INCOME EXCLUDING REALIZED INVESTMENT
RESULTS................................... $ 31.4 $ 31.9 $ 25.6 $ -- $ 74.2 $ 61.9
========= ========= ======== ======== ======== ========
NET INCOME (LOSS)........................... $ 65.1 $ 38.7 $ 34.4 $ -- $ (133.0)(1) $ 26.4
========= ========= ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account assets............... $ 7,099.2 $ 5,122.0 $2,127.2 $1,761.1 $1,761.1 $1,508.0
========= ========= ======== ======== ======== ========
Total assets................................ $12,239.7 $10,589.7 $7,717.9 $7,682.7 $7,581.7 $7,537.1
========= ========= ======== ======== ======== ========
Future policy benefits...................... $ 3,561.6 $ 3,856.9 $4,256.5 $4,585.1 $4,573.2 $4,843.7
========= ========= ======== ======== ======== ========
Stockholder's equity........................ $ 853.9 $ 865.6 $ 751.0 $ 745.6 $ 605.9 $ 434.0
========= ========= ======== ======== ======== ========
</TABLE>
- ---------------
(1) Real estate-related investment losses adversely impacted total revenue and
net income (loss) for 1995. These losses reflect a change in KILICO's
strategy with respect to its real estate-related investments resulting from
the January 4, 1996 acquisition of Kemper by the Zurich-led investor group.
(2) The consolidated information presented as of the acquisition on January 4,
1996 is accounted for using the purchase method of accounting.
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<PAGE> 215
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.
RESULTS OF OPERATIONS
KILICO recorded net income of $65.1 million in 1998, compared with net income of
$38.7 million in 1997 and $34.4 million in 1996. The increase in net income in
1998, compared with 1997, was due to a significant increase in net realized
capital gains and a decrease in goodwill amortization, offset by a slight
decline in operating earnings before amortization of goodwill.
The following table reflects the components of net income:
NET INCOME
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating earnings before amortization of
goodwill................................ $ 44.1 $ 47.2 $ 35.8
Amortization of goodwill.................. (12.7) (15.3) (10.2)
Net realized investment gains............. 33.7 6.8 8.8
------ ------ ------
Net income...................... $ 65.1 $ 38.7 $ 34.4
====== ====== ======
</TABLE>
The following table reflects the major components of realized investment results
included in net income above.
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Real estate-related gains................. $ 26.9 $ 12.8 $ 11.4
Fixed maturity write-downs................ (2.0) (2.8) (.9)
Other gains (losses), net................. 8.8 (3.2) (1.7)
------ ------ ------
Total........................... $ 33.7 $ 6.8 $ 8.8
====== ====== ======
</TABLE>
The real estate-related gains over the last three years, reflect Our adoption of
Zurich's strategy for disposition of real estate-related investments. This
strategy to reduce exposure to real estate-related investments, as well as
improving real
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<PAGE> 216
estate market conditions in most areas of the country, generated the increasing
real estate-related gains during the last three years. Fixed maturity
write-downs in 1998 and 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, as well as other U.S.
dollar denominated securities that had other-than-temporary declines in value in
1998. Other realized investment gains and losses for 1998, 1997 and 1996 relate
primarily to the sale of fixed maturity investments, as well as gains from
equity securities in 1998. The 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 Our 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.
Operating earnings before the amortization of goodwill decreased to $44.1
million in 1998, compared with $47.2 million in 1997. Operating earnings
decreased in 1998 before the amortization of goodwill, compared with 1997,
primarily due to:
- a decrease in separate account fees and charges
- an increase in commissions and operating expenses
- an increase in the amortization of insurance acquisition costs, offset by
- a decrease in taxes, licenses and fees
- an increase in the deferral of insurance acquisition costs, and
- a decrease in the amortization of the value of business acquired
Operating earnings before the amortization of goodwill increased to $47.2
million in 1997, compared with $35.8 million in 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
- an increase in the deferral of insurance acquisition costs, offset by
- an increase in claims incurred and other policyholder benefits
- an increase in taxes, licenses and fees, and
- an increase in commissions and operating expenses
Investment income and interest credited declined in 1998, compared with 1997 and
1996, 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
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<PAGE> 217
also decreased in 1998, compared with 1997, due to reinvestment of 1998 fixed
maturity sales proceeds at lower yields than in 1997 and higher amortization of
bond premium. This amortization was due to an increase in certain collateralized
mortgage obligation prepayments due to the low interest rate environment in
1998.
Investment income was also reduced over the last three years 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 the
investments. The difference between the new cost basis and original par is then
amortized against investment income over the remaining effective lives of the
fixed maturity investments. As a result of the interest rate environment as of
January 4, 1996, the market value of KILICO's fixed maturity investments was
approximately $133.9 million greater than original par. Premium amortization
decreased investment income by approximately $14.4 million in 1998, compared
with $15.3 million in 1997 and $22.7 million in 1996.
Investment income was also negatively impacted during 1996 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 negatively impacted by dividends paid to Kemper in 1998.
Investment income was positively impacted in 1997 and 1996 from the benefits of
capital contributions to KILICO and from the above-mentioned repositionings of
Our investment portfolio.
The following table reflects KILICO's sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Annuities:
General account........................ $ 179.9 $ 145.7 $140.6
Separate account....................... 300.4 259.8 254.6
-------- -------- ------
Total annuities..................... 480.3 405.5 395.2
-------- -------- ------
Life Insurance:
Separate account bank-owned variable
universal life ("BOLI")............. 1,501.0 2,700.0 --
Separate account variable universal
life................................ 22.0 8.6 .2
Term life.............................. 22.4 22.2 7.8
Interest-sensitive life................ .2 -- .6
-------- -------- ------
Total life.......................... 1,545.6 2,730.8 8.6
-------- -------- ------
Total sales............... $2,025.9 $3,136.3 $403.8
======== ======== ======
</TABLE>
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<PAGE> 218
Sales of annuity products consist of total deposits received. General account
annuity sales increased in 1998, compared with 1997, as certain investors opted
for fixed crediting rates rather than other investment alternatives available
during a period of market uncertainty, primarily in the second half of 1998. The
slight increase in 1997 general account (fixed annuity) sales, compared with
1996, reflected the low interest rate environment and the strong equity market
during 1997.
The increase in separate account (variable sales) in 1998, compared with 1997
and 1996, was in part due to:
- the addition of new separate account investment fund options
- the addition of new investment fund managers
- a strong overall underlying stock and bond market, and
- a new variable annuity product introduced during 1998
Sales of variable annuities increase administrative fees earned. In addition,
they pose minimal investment risk for KILICO, as policyholders direct their
premium to one or more subaccounts that invest in underlying investment funds
which invest in stocks and bonds. We believe that the increase in Our financial
strength and performance ratings in January 1996, together with Our association
with Zurich, will continue to assist in Our future sales efforts.
In 1997, We 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 direct their premium to
one or more subaccounts that invest in underlying investment funds which invest
in stocks and bonds. We receive premium tax and DAC tax expense loads from
certain contract holders, as well as administrative fees and cost of insurance
charges. These fees and charges compensate Us 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 $7.7
billion in 1998, compared with $59.6 billion in 1997. The decrease in face
amount issued in 1998, compared to 1997 is due to a significant portion of
renewal premiums in 1998 and higher funded policies issued in 1998, compared to
those issued in 1997.
In early 1999, the Clinton Administration's Fiscal Year 1999 Budget ("Budget")
was released and contained certain proposals to change the taxation of 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, BOLI contracts may no longer be tax advantaged products
and therefore no longer attractive to those customers who purchase them because
of their favorable tax attributes. Sales of these products during 1999 may be
negatively impacted until the likelihood of the current proposals being enacted
into law has been determined.
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<PAGE> 219
In 1998 and 1997, KILICO assumed $21.6 million and $21.1 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,
amounted to $846 thousand in 1998, compared with $1.1 million in 1997 and $565
thousand in 1996. The face amounts of new term business issued during 1998, 1997
and 1996 totaled approximately $276 million, $278 million and $187 million,
respectively.
Included in separate account fees and charges are administrative fees received
from Our separate account products of $38.3 million in 1998, compared with $31.0
million and $25.3 million in 1997 and 1996, 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 1998 and 1997 are cost of
insurance ("COI") charges related to variable universal life insurance,
primarily BOLI, of $167.6 million and $27.6 million, respectively. Of these COI
charges, $175.5 million and $24.3 million of such fees were ceded in 1998 and
1997, respectively, to a Zurich affiliated company, ZC Life Reinsurance Limited
("ZC Life"), formerly EPICENTER Reinsurance (Bermuda) Limited. In 1998, KILICO
ceded in excess of 100 percent of the COI charges received due to changes to the
reinsurance agreement with ZC Life. Separate account fees and charges in 1998
and 1997 also include BOLI-related premium tax expense loads of $29.1 million
and $51.1 million, respectively.
Other income includes surrender charge revenue of $4.0 million in 1998, compared
with $5.2 million and $5.4 million in 1997 and 1996, respectively. The decrease
in surrender charge revenue in 1998, compared with 1997, primarily reflects a
decrease in total general account and separate account policyholder surrenders
and withdrawals. The slight decrease in surrender charge revenue in 1997,
compared with 1996, reflects that 46 percent of KILICO's fixed and variable
annuity liabilities, excluding BOLI, at December 31, 1997 are subject to minimal
(5 percent or less) or no surrender charges, compared with 57 percent in 1996.
This decrease in surrender charge revenue in 1997 was offset somewhat by an
increase in total general account and separate account policyholder surrenders
and withdrawals.
POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
(in millions)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
General account............................ $645.5 $703.1 $652.0
Separate account........................... 260.9 236.2 196.7
------ ------ ------
Total................................. $906.4 $939.3 $848.7
====== ====== ======
</TABLE>
Reflecting the current interest rate environment and other competitive market
factors, We adjust Our crediting rates on interest-sensitive products over time
in order to manage spread revenue and policyholder surrender and withdrawal
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<PAGE> 220
activity. We can also improve spread revenue over time by increasing investment
income. The current interest rate environment during 1997 and 1998, has
mitigated at present, competitive pressures to increase existing renewal
crediting rates.
General account surrenders, withdrawals and death benefits decreased $57.6
million in 1998, compared with 1997. This decrease primarily reflects a decrease
in surrenders and withdrawals due to uncertainty with alternative investment
options because of market instability during the second half of 1998.
Taxes, licenses and fees decreased $22.3 million in 1998 to $30.3 million,
reflecting the decrease in premium taxes on BOLI. Excluding the taxes due on
BOLI, for which We received a corresponding expense load in separate account
fees and other charges, taxes, licenses and fees amounted to $1.5 million,
compared with $1.5 million in 1997 and $2.2 million in 1996.
Commission expense was higher in 1998, compared with both 1997 and 1996, due to
an increase in total sales, excluding BOLI.
Operating expenses increased in 1998 and 1997, compared with 1996, as a result
of:
- restaffing after the completion of the acquisition and for new business
initiatives
- an increase in various outside consulting fees
- an increase in printing and stationary expenses for sales materials, and
- an increase in data processing expenses
Data processing expenses increased to $12.9 million in 1998, compared with $10.8
million in 1997 and $4.1 million in 1996, primarily due to:
- infrastructure improvements related to new product development
- new systems implemented and put into production
- system conversion projects
- development of a data warehouse, and
- costs related to bringing Our systems in compliance with the year 2000
Data processing expenses related to bringing Our systems in compliance with the
year 2000 amounted to $1.3 million in 1998. We currently anticipate that it will
cost an additional $662 thousand to bring all remaining systems in compliance.
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1998, compared with 1997 and 1996. The deferral of
insurance acquisition costs increased in 1998, compared with both 1997 and 1996.
This reflects an increase in commissions expense and operating expenses related
directly to the increase in production of new business.
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<PAGE> 221
Operating earnings were negatively impacted by the amortization of insurance
acquisition costs in 1998 and 1997, compared with 1996, with the most dramatic
increase occurring in 1998. The increase in amortization of insurance
acquisition costs in 1998, compared with 1997, was primarily due to the increase
in production of new business in 1998, as well as increased profits in 1998.
These increases tend to accelerate amortization. Deferred insurance acquisition
costs, and their related amortization, 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. Deferred insurance acquisition costs are established
on all new policies sold after January 4, 1996.
The amortization of the value of business acquired decreased in 1998, compared
with 1997, as a result of:
- a significant increase in separate account assets, which increases
estimated future gross profits and shifts amortization to later years
- a decreasing block of business previously acquired, resulting in less
amortization as gross profits on this business decrease, offset by
- a significant increase in realized capital gains which tend to accelerate
the amortization of the value of business acquired as the gains tend to
decrease Our 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, We began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, We changed Our 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, We recorded an increase in
amortization expense of $5.1 million during 1997.
INVESTMENTS
Our principal investment strategy is to maintain a balanced, well-diversified
portfolio supporting the insurance contracts written. We make shifts in Our
investment portfolio depending on, among other factors:
- its evaluation of risk and return in various markets
- consistency with Our business strategy and investment guidelines approved
by the board of directors
- the interest rate environment
- liability durations, and
- changes in market and business conditions
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<PAGE> 222
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C> <C> <C>
Cash and short-term investments...... $ 72 1.7% $ 260 5.8%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1................. 2,663 63.7 3,004 67.1
NAIC(1) Class 2................. 724 17.3 651 14.5
Below investment grade:
Performing...................... 96 2.3 14 .3
Nonperforming................... -- -- -- --
Trading account securities........... 102 2.4 -- --
Joint venture mortgage loans......... 66 1.6 73 1.6
Third-party mortgage loans........... 76 1.8 103 2.3
Other real estate-related
investments........................ 22 .5 44 1.0
Policy loans......................... 271 6.5 282 6.3
Equity securities.................... 67 1.6 25 .6
Other................................ 24 .6 21 .5
------ ----- ------ -----
Total(2)................... $4,183 100.0% $4,477 100.0%
====== ===== ====== =====
</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
We are carrying Our fixed maturity investment portfolio, which We consider
available for sale, at estimated fair value. The aggregate unrealized
appreciation or depreciation is recorded as a component of accumulated other
comprehensive income, net of any applicable income tax expense. The aggregate
unrealized appreciation (depreciation) on fixed maturities at December 31, 1998
and 1997 was $61.3 million and $24.6 million, respectively. Fair values are
sensitive to movements in interest rates and other economic developments and can
be expected to fluctuate, at times significantly, from period to period.
At December 31, 1998, investment-grade fixed maturities and cash and short-term
investments accounted for 82.7 percent of Our invested assets and cash, compared
with 87.4 percent at December 31, 1997. Approximately 53.4 percent of Our NAIC
Class 1 bonds were rated AAA or equivalent at year-end 1998, compared with 54.0
percent at December 31, 1997.
Approximately 28.0 percent of Our investment-grade fixed maturities at December
31, 1998 were mortgage-backed securities, down from 35.1 percent at December 31,
1997, due to sales and paydowns during 1998. These investments consist primarily
of marketable mortgage pass-through securities issued by the Government National
Mortgage Association, the Federal National Mortgage
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<PAGE> 223
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. We have not made any investments in interest-only or
other similarly volatile tranches of mortgage-backed securities. Our mortgage-
backed investments are generally of AAA credit quality, and the markets for
these investments have been and are expected to remain liquid. We plan to
continue to reduce Our holding of these investments over time.
As a result of the previously discussed repositionings of Our fixed maturity
portfolio, approximately 15.4 percent and 10.8 percent of Our investment-grade
fixed maturities at December 31, 1998 and 1997, respectively, consisted of
corporate asset-backed securities. The majority of Our investments in asset-
backed securities were backed by home equity loans (21.9%), auto loans (8.2%),
manufactured housing loans (14.8%), equipment loans (5.2%), and commercial
mortgage backed securities ("CMBs") (22.1%).
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 Our 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. Accelerated amortization would
result in reductions of investment income related to such securities.
At December 31, 1998 and 1997 We had unamortized premiums and discounts related
to mortgage-backed and asset-backed securities as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1998 1997
---- ----
<S> <C> <C>
Unamortized premiums.................................. $15.8 $19.6
===== =====
Unamortized discounts................................. $ 4.6 $ 5.2
===== =====
</TABLE>
Amortization of the discount or premium from mortgage-backed and asset-backed
securities is recognized using a level effective yield method. This method
considers the estimated timing and amount of prepayments of the underlying loans
and is adjusted to reflect differences between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. To
the extent that the estimated lives of these securities change as a result of
changes in prepayment rates, the adjustment is also included in net investment
income.
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<PAGE> 224
The table below provides information about Our 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) 1998 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds...... $ 946.7 $137.2 $ 85.7 $ 48.3 $47.7 $149.6 $478.2 $ 946.7 $ 946.7
Average yield............ 6.45% 6.46% 6.42% 6.43% 6.42% 6.42% 6.42% 6.45% 6.45%
Asset-backed bonds......... $ 407.4 $ 17.9 $ 36.1 $ 49.8 $36.1 $ 31.9 $235.6 $ 407.4 $ 407.4
Average yield............ 6.67% 6.73% 6.75% 6.82% 6.90% 6.90% 6.95% 6.67% 6.67%
CMBs....................... $ 115.5 $ 1.3 $ 1.2 $ 1.4 $ 1.5 $ 12.3 $ 97.8 $ 115.5 $ 115.5
Average yield............ 6.25% 6.28% 6.28% 6.28% 6.28% 6.28% 6.28% 6.25% 6.25%
-------- -------- --------
$1,469.6 $1,469.6 $1,469.6
======== ======== ========
</TABLE>
<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>
70
<PAGE> 225
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1998, is 4.0 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately .65
of a year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.45 years.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1997, was 3.8 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately 1.0
year, 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, 1998, We had $29.9 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 $3.5 million of these securities were from Korea, $17.6 million
were from Hong Kong, China, $2.9 million were from South Korea and the remainder
were from a United Kingdom bank with most of its loans issued to countries in
Southeast Asia. Write-downs on these securities, which were considered to be
other-than-temporary, as of December 31, 1998 and 1997 amounted to $1.1 million
and $3.1 million, respectively. 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.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 40 issuers at December 31, 1998, totaled 2.3 percent
of cash and invested assets at December 31, 1998 and .3 percent at December 31,
1997. 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. Our strategy of limiting
exposure to below investment-grade securities takes into account the more
conservative nature of today's consumer and the resulting demand for higher-
quality investments in the life insurance and annuity marketplace.
REAL ESTATE-RELATED INVESTMENTS
The $164.4 million real estate-related portfolio We hold, consists of joint
venture and third-party mortgage loans and other real estate-related
investments. The real estate-related portfolio constituted 3.9 percent of cash
and invested assets at December 31, 1998, compared with $220.0 million, or 4.9
percent, at December 31, 1997. The decrease in real estate-related investments
during 1998 was primarily due to asset sales and a net increase of $16.1 million
in real estate-related reserves during 1998.
As reflected in the "Real estate portfolio" table below, We have continued to
fund both existing projects and legal commitments. The future legal commitments
were $64.4 million at December 31, 1998. This amount represented a net decrease
of $10.9 million since December 31, 1997, primarily due to sales in
71
<PAGE> 226
1998. As of December 31, 1998, We expect to fund approximately $.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. We do not currently expect to fund
these commitments. The total legal commitments, along with estimated working
capital requirements, are considered in Our evaluation of reserves and
write-downs.
Excluding the $1.2 million of net equity investments in joint ventures, Our real
estate loans totaled $163.2 million at December 31, 1998, after reserves and
write-downs. Of this amount, $131.3 million are on accrual status with a
weighted average interest rate of approximately 8.79 percent. Of these accrual
loans:
- 17.0 percent have terms requiring current periodic payments of their full
contractual interest
- 46.1 percent require only partial payments or payments to the extent of
borrowers' cash flow, and
- 36.9 percent defer all interest to maturity
72
<PAGE> 227
The equity investments in real estate at December 31, 1998 consisted of Our
other equity investments in joint ventures. These equity investments include Our
share of periodic operating results. As an equity owner or affiliate of an
equity owner, We have the ability to fund, and historically have elected to
fund, operating requirements of certain joint ventures.
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
OTHER REAL ESTATE-RELATED
MORTGAGE LOANS INVESTMENTS
---------------- ------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ -------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................. $ 72.7 $103.0 $21.1 $ 4.0 $ 19.2 $220.0(1)
Additions (deductions):
Fundings............... 13.1 -- -- .2 -- 13.3
Interest added to
principal............ 6.3 2.8 -- -- -- 9.1
Sales/paydowns/
distributions........ (11.8) (30.1) (.3) (6.6) (27.0) (75.8)
Operating gain......... -- -- -- -- .2 .2
Transfers.............. -- -- -- (.7) -- (.7)
Net realized
investments gains
(losses)............. (3.0) 32.4 .4 3.1 8.5 41.4(4)
Other transactions,
net.................. (11.5) (31.6) (.3) -- .3 (43.1)(4)
------ ------ ----- ----- ------ ------
Balance at December 31,
1998................. $ 65.8 $ 76.5 $20.9 $ 0 $ 1.2 $164.4(3)
====== ====== ===== ===== ====== ======
</TABLE>
- ---------------
(1) Net of $9.2 million reserve and write-downs. Excludes $9.5 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 $25.3 million reserve and write-downs. Excludes $8.7 million of real
estate-related accrued interest.
(4) Included in this amount is $37.0 million of contingent interest payments
related to a 1995 real estate sale. These payments were recorded as realized
investment gains and then deducted from other transactions because they did
not affect the carrying value.
REAL ESTATE CONCENTRATIONS AND OUTLOOK
Our real estate portfolio is distributed by geographic location and property
type. However, We have concentration exposures in certain states and in certain
types of properties. In addition to these exposures, We also have exposures to
certain real estate developers and partnerships.
73
<PAGE> 228
As a result of Our ongoing strategy to reduce Our exposure to real
estate-related investments, as of December 31, 1998, We had three remaining
properties which account for approximately 87.2 percent of Our $164.4 million
real estate-related portfolio.
The largest of these investments at December 31, 1998 amounted to $64.5 million
and consisted of second mortgages on nine hotel properties and two office
buildings. Patrick M. Nesbitt or his affiliates, a third-party real estate
developer, have ownership interests in these properties. These hotels and office
buildings are geographically dispersed and the current market values of the
underlying properties substantially exceed the balances due on Our mortgages.
These loans are on accrual status.
Our loans to a master limited partnership (the "MLP") between subsidiaries of
Kemper and subsidiaries of Lumbermens, amounted to $51.6 million at December 31,
1998. The MLP's underlying 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. Loans to the MLP are on accrual status.
The remaining significant real estate-related investment amounted to $27.3
million at December 31, 1998 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, We have placed these real estate-related investments on nonaccrual
status as of December 31, 1996. We are 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,
We anticipate that it could be several additional years until We completely
dispose of all investments in Hawaii.
We evaluate Our real estate-related investments (including accrued interest)
using an estimate of the investments observable market price, net of estimated
selling costs. Because Our real estate review process includes estimates
involving changing economic conditions and other factors, there can be no
assurance that current estimates will prove accurate over time. Our real
estate-related investments are expected to continue to decline further through
future sales. Our net income could be materially reduced in future periods if:
- real estate market conditions worsen in areas where Our portfolio is
located
- Kemper's and KILICO's plans with respect to certain projects change, or
- necessary construction or zoning permits are not obtained
74
<PAGE> 229
The following table is a summary of Our 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
1998 1997
----------- -----------
<S> <C> <C>
Potential problem loans(1)............... $ -- $ --
Past due loans(2)........................ -- --
Nonaccrual loans (primarily Hawaiian
properties)(3)......................... 37.4 47.4
Real estate owned........................ -- 4.0
----- -----
Total.......................... $37.4 $51.4
===== =====
</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 We anticipate may go into nonaccrual,
past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) We do not accrue interest on real estate-related investments when We judge
that the likelihood of interest collection is doubtful. Loans on nonaccrual
status after reserves and write-downs amounted to $31.8 million and $41.8
million at December 31, 1998 and December 31, 1997, respectively.
NET INVESTMENT INCOME
Our pre-tax net investment income totaled $273.5 million in 1998, compared with
$296.2 million in 1997 and $299.7 million in 1996. This includes Our 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 which are on nonaccrual status. As previously
discussed, Our net investment income in 1998 and 1997, compared with 1996, has
been negatively impacted by purchase accounting adjustments.
75
<PAGE> 230
Our 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
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturities......................... $.3 $.5 $ .7
Real estate-related investments.......... 3.2 3.9 .5
---- ---- ----
Total............................. $3.5 $4.4 $1.2
==== ==== ====
Basis points............................. 8 10 3
==== ==== ====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of Our share of interest expense on these loans excluded from
Our share of joint venture operating results. Any increase in nonperforming
securities, and either worsening or stagnant real estate conditions, would
increase the expected adverse effect on Our future investment income and
realized investment results.
REALIZED INVESTMENT RESULTS
Net income reflects after-tax realized investment gains of $33.7 million, $6.8
million and $8.8 million in 1998, 1997 and 1996, respectively. Included in the
after-tax realized investment gains are trading account security gains of $1.7
million in 1998. As previously discussed, We segregated a portion of Our General
Account investment portfolio in 1998 into a "trading" account under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
Unrealized gains and losses on fixed maturity investments which are available
for sale are not reflected in KILICO's net income. These changes in unrealized
value are recorded as a component of accumulated other comprehensive income, net
of any applicable income taxes. If and to the extent a fixed maturity investment
suffers an other-than-temporary decline in value, however, the security is
written down to net realizable value, and the write-down adversely impacts net
income.
We regularly monitor Our investment portfolio and as part of this process review
Our assets for possible impairments of carrying value. Because the review
process includes estimates involving changing economic conditions and other
factors, there can be no assurance that current estimates will prove accurate
over time.
76
<PAGE> 231
A valuation allowance has been established to reduce the deferred tax asset for
investment losses to the amount that, based upon available evidence, is in
management's judgment more likely than not to be realized. The valuation
allowance is evaluated as of each balance sheet date.
INTEREST RATES
Interest rates remained relatively stable during 1996 and 1997, before declining
in 1998. The Federal Reserve Board lowered rates 3 times during the second half
of 1998, resulting in a steeper yield curve due to the lower short-term interest
rates.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, We can adjust Our 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. This 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. 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. We mitigate this risk somewhat by charging surrender
fees, which decrease over time, when annuity holders withdraw funds prior to
maturity on certain annuity products. Approximately 46 percent of KILICO's fixed
and variable annuity liabilities as of December 31, 1998, however, were no
longer subject to significant surrender fees.
LIQUIDITY AND CAPITAL RESOURCES
We carefully monitor 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 Our
liquidity are deposits for fixed annuities, premium income, investment income,
separate account fees, other operating revenue and cash provided from maturing
or sold investments.
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 Our claims-paying ability or
financial strength ratings could result in Our products being less attractive to
consumers. Any reductions in Our parent's ratings could also adversely impact
Our financial flexibility.
77
<PAGE> 232
Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating.
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $853.9 million at December 31, 1998, compared with
$865.6 million at December 31, 1997, and $751.0 million at December 31, 1996.
The 1998 decrease in stockholder's equity was primarily due to dividends of
$95.0 million paid to Kemper during 1998. This decrease was offset by 1998 net
income of $65.1 million and an increase of $20.3 million in accumulated other
comprehensive income. The increase in accumulated other comprehensive income was
primarily related to the change in unrealized appreciation related to Our fixed
maturity investment portfolio due to falling interest rates during 1998. 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 accumulated
other comprehensive income related to the change in unrealized appreciation of
$60.1 million related to Our fixed maturity investment portfolio. These
increases were offset by a dividend of $29.2 million to Kemper.
EMERGING ISSUE
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement is effective for fiscal years
beginning after June 15, 1999. Full implementation of SFAS No. 133 is expected
in December 1999. The impact of implementation is not expected to be material to
KILICO.
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<PAGE> 233
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING
YEAR OF ELECTION PAST 5 YEARS OR MORE
-------------------- --------------------------------
<S> <C>
John B. Scott (54) Chief Executive Officer, President
Chief Executive Officer since and Director of Federal Kemper Life
February 1992. President since Assurance Company (FKLA) and Fidelity
November 1993. Director since 1992. Life Association (FLA) since 1988.
Chief Executive Officer, President
and Director of Zurich Life Insurance
Company of America (ZLICA) and Zurich
Direct, Inc. (ZD) since March 1996.
Chairman of the Board and Director of
Investors Brokerage Services, Inc.
(IBS) and Investors Brokerage
Services Insurance Agency, Inc.
(IBSIA) since 1993. Chairman of the
Board of FKLA and FLA from April 1988
to January 1996. Chairman of the
Board of KILICO from February 1992 to
January 1996. Executive Vice
President and Director of Kemper
Corporation (Kemper) since 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 (51) Executive Vice President of FKLA and
Executive Vice President since 1995. FLA since 1995. Executive Vice
Director since May 1998. President of ZLICA and ZD since March
1996. Director of FLA since December
1997. Director of FKLA and ZLICA
since May 1998. 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.
</TABLE>
79
<PAGE> 234
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING
YEAR OF ELECTION PAST 5 YEARS OR MORE
-------------------- --------------------------------
<S> <C>
Frederick L. Blackmon (47) Senior Vice President and Chief
Senior Vice President and Chief Financial Officer of FKLA since
Financial Officer since December December 1995. Senior Vice President
1995. and Chief Financial Officer of FLA
since January 1996. Senior Vice
President and Chief Financial Officer
of ZLICA since March 1996. Senior
Vice President and Chief Financial
Officer of ZD since March 1996.
Director of FLA since May 1998.
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 (40) Senior Vice President of FKLA and FLA
Senior Vice President since January since January 1996. Senior Vice
1996. President of ZLICA since 1995. Senior
Vice President of ZD since 1995.
Director of ZD from April 1993 to
March 1997 and since March 1998. 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 (43) Senior Vice President of FKLA since
Senior Vice President since December December 1995. Chief Actuary of FKLA
1995. Director since May 1998. and KILICO from December 1995 to
January 1999. Senior Vice President
of FLA since January 1996. Chief
Actuary of FLA from January 1996 to
January 1999. Senior Vice President
of ZLICA and ZD since March 1996.
Chief Actuary of ZLICA and ZD from
March 1996 to January 1999. Director
of FLA since June 1997. Director of
FKLA and ZLICA since May 1998.
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>
80
<PAGE> 235
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING
YEAR OF ELECTION PAST 5 YEARS OR MORE
-------------------- --------------------------------
<S> <C>
Edward K. Loughridge (44) Senior Vice President and Corporate
Senior Vice President and Corporate Development Officer of FKLA and FLA
Development Officer since January since January 1996. Senior Vice
1996. President and Corporate Development
Officer for ZLICA and ZD since March
1996. Senior Vice President of Human
Resources of Zurich-American
Insurance Group from February 1992 to
March 1996.
Debra P. Rezabek (43) Senior Vice President of FKLA and FLA
Senior Vice President since 1996. since March 1996. Corporate Secretary
General Counsel since 1992. Corporate of FKLA and FLA since January 1996.
Secretary since January 1996. Director of FLA since May 1998. Vice
President of KILICO, FKLA and FLA
since 1995. General 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 (53) Senior Vice President of FKLA, FLA
Senior Vice President since January and ZLICA since January 1998.
1998. Director of IBS since May 1998.
Director of IBSIA since September
1998. Vice President--Aetna Life
Brokerage of Aetna Life & Annuity
Company from February 1992 to January
1998.
George Vlaisavljevich (56) Senior Vice President of FKLA, FLA
Senior Vice President since October and ZLICA since October 1996. Senior
1996. Vice President of ZD since March
1997. Director of IBS and IBSIA since
October 1996. Executive Vice
President of The Copeland Companies
from April 1983 to September 1996.
</TABLE>
81
<PAGE> 236
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING
YEAR OF ELECTION PAST 5 YEARS OR MORE
-------------------- --------------------------------
<S> <C>
Loren J. Alter (60) Director of FKLA, FLA and Scudder
Director since January 1996. Kemper Investments, Inc. (SKI) since
January 1996. Director of ZLICA since
May 1979. Executive Vice President
and Chief Financial Officer of Zurich
U.S. since 1979. President, Chief
Executive Officer and Director of
Kemper since January 1996.
William H. Bolinder (55) Chairman of the Board and Director of
Chairman of the Board and Director FKLA and FLA since January 1996.
since January 1996. Chairman of the Board of ZLICA and ZD
since March 1995. Chairman of the
Board and Director of Kemper since
January 1996. Director of SKI since
January 1996. Vice Chairman of SKI
from January 1996 to 1998. Member of
the Group Executive Board of Zurich
Financial Services Group since 1998.
Member of the Corporate Executive
Board of Zurich Insurance Group from
October 1994 to 1998. Chairman of
Zurich American Insurance Company
since 1998. 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 and
American Zurich Insurance Company
from 1986 to June 1995. President of
Zurich Holding Company of America
since 1986. Manager of Zurich
Insurance Company, U.S. Branch from
1986 to 1998. Underwriter for Zurich
American Lloyds since 1986.
</TABLE>
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<PAGE> 237
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING
YEAR OF ELECTION PAST 5 YEARS OR MORE
-------------------- --------------------------------
<S> <C>
David A. Bowers (52) Director of FKLA and ZLICA since May
Director since May 1997. 1997. Director of FLA since June
1997. Executive Vice President,
Corporate Secretary and General
Counsel of Zurich U.S. since August
1985. Vice President, General Counsel
and Secretary of Kemper since January
1996.
Gunther Gose (54) Director of FKLA, FLA and ZLICA since
Director since November 1998. November 1998. Chief Financial
Officer and Member of the Group
Executive Board of Zurich Financial
Services since October 1998. Member
of the Corporate Executive Board of
Zurich Insurance Group from April
1990 to October 1998.
</TABLE>
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<PAGE> 238
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------- -------------
LONG TERM
OTHER INCENTIVE
ANNUAL PLAN ALL OTHER
NAME AND COMPENSATION PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) ($)(3) ($)(2) ($)(4)(5)(6)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John B. Scott.................................... 1998 $171,000 $ -- $ -- $ -- $ 38,326
Chief Executive Officer(1) 1997 171,000 112,100 -- 239,400 64,089
1996 212,500 94,000 -- 212,500 142,498
Eliane C. Frye................................... 1998 107,160 -- -- -- 18,024
Executive Vice President(1) 1997 98,040 47,515 -- 91,590 30,311
1996 105,000 41,750 -- 69,750 58,520
Frederick L. Blackmon............................ 1998 94,160 -- -- -- 8,977
Senior Vice President and Chief Financial 1997 96,300 54,225 -- 112,500 19,543
Officer(1) 1996 100,583 47,000 27,924 71,250 11,226
George Vlaisavljevich............................ 1998 260,000 -- -- -- 23,236
Senior Vice President(1)......................... 1997 252,500 146,000 39,922 243,000 9,165
James E. Hohmann................................. 1998 88,400 -- -- -- 7,823
Senior Vice President and 1997 79,333 45,500 -- 80,150 1,063
Chief Actuary(1) 1996 113,333 -- -- -- 11,333
</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.
84
<PAGE> 239
(2) Annual bonuses are paid pursuant to annual incentive plans. The amounts of
the bonuses earned in 1998 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 for Mr. Vlaisavljevich in 1997.
(4) The amounts in this column include:
(a) The amounts of employer contributions allocated to the accounts of the
named persons under profit sharing plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.
(b) Distributions from the Kemper and FKLA supplemental plans.
(5) 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
85
<PAGE> 240
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 entitled 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, 1996, were Mr. Scott 12,600 phantom units and Ms.
Frye 1,680 phantom units. 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.
(6) 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.
86
<PAGE> 241
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. Please read the Statement of Additional
Information in conjunction with this Prospectus.
FINANCIAL STATEMENTS
Our included financial statements should be considered primarily as bearing on
Our ability to meet Our obligations under the Contracts. The Contracts are not
entitled to participate in earnings, dividends or surplus of KILICO. In addition
to audited financial statements for the year ended December 31, 1997, KILICO has
provided unaudited financial statements for the period ended June 30, 1998.
CHANGE OF ACCOUNTANTS
On September 12, 1997, KILICO appointed the accounting firm of
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), formerly Coopers &
Lybrand, L.L.P., as independent accountants for the year ended December 31, 1997
to replace KPMG LLP effective with such appointment. Our Board of Directors
approved the selection of PricewaterhouseCoopers as the new independent
accountants. Management had not consulted with PricewaterhouseCoopers on any
accounting, auditing or reporting matter, prior to that time.
During the fiscal year ended December 31, 1996, there were no disagreements with
KPMG LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure or any reportable events.
KPMG LLP's report on the financial statements for 1996 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 PricewaterhouseCoopers on accounting or
financial disclosures for the years ended December 31, 1998 or 1997.
87
<PAGE> 242
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the accompanying consolidated balance sheets as of December 31,
1998 and 1997 and the related consolidated statements of operations,
comprehensive income, stockholder's equity and cash flows present fairly, in all
material respects, the financial position of Kemper Investors Life Insurance
Company and subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. The financial
statements of the Company for the period from January 4, 1996 to December 31,
1996 were audited by other independent accountants whose report, dated March 21,
1997, expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 12, 1999
88
<PAGE> 243
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of Kemper Investors
Life Insurance Company and subsidiaries for the period from January 4, 1996 to
December 31, 1996. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as of
December 31, 1996 as listed in the accompanying index. These financial statement
schedules are incorporated by reference to a previously filed Form 10-K. 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
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 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 aforementioned consolidated financial statements present
fairly, in all material respects, the results of operations and the cash flows
of Kemper Investors Life Insurance Company and subsidiaries for the period from
January 4, 1996 to December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the aforementioned supplementary
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.
KPMG LLP
Chicago, Illinois
March 21, 1997
89
<PAGE> 244
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair
value (amortized cost: December 31, 1998,.....
$3,421,535; December 31, 1997, $3,644,075).... $3,482,820 $ 3,668,643
Trading account securities at fair value
(amortized cost: December 31, 1998,
$99,095)...................................... 101,781 --
Short-term investments.......................... 58,334 236,057
Joint venture mortgage loans.................... 65,806 72,663
Third-party mortgage loans...................... 76,520 102,974
Other real estate-related investments........... 22,049 44,409
Policy loans.................................... 271,540 282,439
Equity securities............................... 66,854 24,839
Other invested assets........................... 23,645 20,820
----------- -----------
Total investments...................... 4,169,349 4,452,844
Cash............................................ 13,486 23,868
Accrued investment income....................... 124,213 117,789
Goodwill........................................ 216,651 229,393
Value of business acquired...................... 118,850 138,482
Deferred insurance acquisition costs............ 91,543 59,459
Deferred income taxes........................... 35,059 39,993
Reinsurance recoverable......................... 344,837 382,609
Receivable on sales of securities............... 3,500 20,076
Other assets and receivables.................... 23,029 3,187
Assets held in separate accounts................ 7,099,204 5,121,950
----------- -----------
Total assets........................... $12,239,721 $10,589,650
=========== ===========
LIABILITIES
Future policy benefits.......................... $3,906,391 $ 4,239,480
Benefits and funds payable...................... 318,369 150,524
Other accounts payable and liabilities.......... 61,898 212,133
Liabilities related to separate accounts........ 7,099,204 5,121,950
----------- -----------
Total liabilities...................... 11,385,862 9,724,087
----------- -----------
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...................... 804,347 806,538
Accumulated other comprehensive income.......... 32,975 12,637
Retained earnings............................... 14,037 43,888
----------- -----------
Total stockholder's equity............. 853,859 865,563
----------- -----------
Total liabilities and stockholder's
equity............................... $12,239,721 $10,589,650
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
90
<PAGE> 245
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE
Net investment income.................. $273,512 $296,195 $299,688
Realized investment gains.............. 51,868 10,546 13,602
Premium income......................... 22,346 22,239 7,822
Separate account fees and charges...... 61,982 85,413 25,309
Other income........................... 10,031 11,087 9,786
-------- -------- --------
Total revenue................ 419,739 425,480 356,207
-------- -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholders..... 176,906 199,782 223,094
Claims incurred and other policyholder
benefits............................. 28,029 28,372 14,255
Taxes, licenses and fees............... 30,292 52,608 2,173
Commissions............................ 39,046 32,602 25,962
Operating expenses..................... 44,575 36,837 24,678
Deferral of insurance acquisition
costs................................ (46,565) (38,177) (27,820)
Amortization of insurance acquisition
costs................................ 12,082 3,204 2,316
Amortization of value of business
acquired............................. 17,677 24,948 21,530
Amortization of goodwill............... 12,744 15,295 10,195
-------- -------- --------
Total benefits and
expenses................... 314,786 355,471 296,383
-------- -------- --------
Income before income tax expense....... 104,953 70,009 59,824
Income tax expense..................... 39,804 31,292 25,403
-------- -------- --------
Net income................... $ 65,149 $ 38,717 $ 34,421
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
91
<PAGE> 246
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME............................... $ 65,149 $ 38,717 $ 34,421
-------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE
TAX:
Unrealized holding gains (losses) on
investments arising during period:
Unrealized holdings gains (losses)
on investments.................... 25,372 60,802 (84,036)
Adjustment to value of business
acquired.......................... (9,332) (28,562) 16,735
Adjustment to deferred insurance
acquisition costs................. (2,862) (2,680) 1,307
-------- -------- --------
Total unrealized holding gains
(losses) on investments
arising during period........ 13,178 29,560 (65,994)
-------- -------- --------
Less reclassification adjustments for
items included in net income:
Adjustment for (gains) losses
included in realized investment
gains............................. 6,794 (9,016) 3,963
Adjustment for amortization of
premium on fixed maturities
included in net investment
income............................ (17,064) (17,866) (26,036)
Adjustment for (gains) losses
included in amortization of value
of business acquired.............. (7,378) (2,353) (4,212)
Adjustment for (gains) losses
included in amortization of
insurance acquisition costs....... (463) (355) --
-------- -------- --------
Total reclassification
adjustments for items
included in net income....... (18,111) (29,590) (26,285)
-------- -------- --------
Other comprehensive income (loss), before
related income tax expense (benefit) 31,289 59,150 (39,709)
Related income tax expense (benefit)..... 10,952 (985) 7,789
-------- -------- --------
Other comprehensive income
(loss), net of tax........... 20,337 60,135 (47,498)
-------- -------- --------
Comprehensive income (loss).... $ 85,486 $ 98,852 $(13,077)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
92
<PAGE> 247
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of
period.............................. $ 2,500 $ 2,500 $ 2,500
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL, beginning
of period........................... 806,538 761,538 743,104
Capital contributions from parent..... 4,261 45,000 18,434
Adjustment to prior period capital
contribution from parent............ (6,452) -- --
-------- -------- --------
End of period............... 804,347 806,538 761,538
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS), beginning of period......... 12,637 (47,498) --
Other comprehensive income (loss), net
of tax.............................. 20,338 60,135 (47,498)
-------- -------- --------
End of period............... 32,975 12,637 (47,498)
-------- -------- --------
RETAINED EARNINGS, beginning of
period.............................. 43,888 34,421 --
Net income............................ 65,149 38,717 34,421
Dividends to parent................... (95,000) (29,250) --
-------- -------- --------
End of period............... 14,037 43,888 34,421
-------- -------- --------
Total stockholder's
equity.................... $853,859 $865,563 $750,961
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
93
<PAGE> 248
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................... $ 65,149 $ 38,717 $ 34,421
Reconcilement of net income to net cash
provided:
Realized investment gains..................... (51,868) (10,546) (13,602)
Net change in trading account securities...... (6,727) -- --
Interest credited and other charges........... 173,958 198,206 230,298
Deferred insurance acquisition costs.......... (34,483) (34,973) (25,504)
Amortization of value of business acquired.... 17,677 24,948 21,530
Amortization of goodwill...................... 12,744 15,295 10,195
Amortization of discount and premium on
investments................................. 17,353 17,866 25,743
Deferred income taxes......................... (12,469) (99,370) (897)
Net change in current federal income taxes.... (73,162) 97,386 108,806
Benefits and premium taxes due related to
separate account bank-owned life
insurance................................... 123,884 180,546 --
Other, net.................................... (41,477) 17,168 (22,283)
----------- --------- -----------
Net cash provided from operating
activities.............................. 190,579 445,243 368,707
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity............. 491,699 229,208 264,383
Fixed maturities sold prior to maturity....... 882,596 633,872 891,995
Equity securities............................. 107,598 -- --
Mortgage loans, policy loans and other
invested assets............................. 180,316 131,866 168,727
Cost of investments purchased or loans
originated:
Fixed maturities.............................. (1,319,119) (606,028) (1,369,091)
Equity securities............................. (83,303) -- --
Mortgage loans, policy loans and other
invested assets............................. (66,331) (76,350) (119,044)
Short-term investments, net..................... 177,723 (164,361) 300,819
Net change in receivable and payable for
securities transactions....................... (677) 29,746 (31,667)
Net change in other assets...................... -- 244 115
----------- --------- -----------
Net cash provided by investing
activities.............................. 370,502 178,197 106,237
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits...................................... 180,124 145,687 141,159
Withdrawals................................... (649,400) (745,510) (700,084)
Capital contributions from parent............... 4,261 45,000 18,434
Dividends to parent............................. (95,000) (29,250) --
Other........................................... (11,448) (18,275) 42,512
----------- --------- -----------
Net cash used in financing activities..... (571,463) (602,348) (497,979)
----------- --------- -----------
Net increase (decrease) in cash....... (10,382) 21,092 (23,035)
CASH, beginning of period......................... 23,868 2,776 25,811
----------- --------- -----------
CASH, end of period............................... $ 13,486 $ 23,868 $ 2,776
=========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
94
<PAGE> 249
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"). Effective January 4, 1996, Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "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.
Effective September 7, 1998, the businesses of Zurich merged with the financial
services business of B.A.T. Industries forming Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG, representing
the financial interest of the former Zurich Group, is listed on the Swiss Market
Index, replacing Zurich. Allied Zurich p.l.c., representing the financial
interest of B.A.T. Industries, is included in the FTSE-100 Share Index in
London.
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 1997 and 1996
consolidated financial statements in order for them to conform to the 1998
presentation.
BASIS OF ACCOUNTING
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
consolidated financial statements of the Company as of and for the years ended
December 31, 1996, 1997 and 1998, have been prepared in conformity with
generally accepted accounting principles.
95
<PAGE> 250
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.
GOODWILL
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, 1998, the Company
believes that no such adjustment is necessary.
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.
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.
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
96
<PAGE> 251
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2003 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 (actual)............ 143,744 (26,807) 9,129 126,066
1999..................... 126,066 (24,926) 7,741 108,881
2000..................... 108,881 (22,649) 6,619 92,851
2001..................... 92,851 (20,736) 5,577 77,692
2002..................... 77,692 (17,096) 4,695 65,291
2003..................... 65,291 (15,504) 3,948 53,735
</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 accumulated other comprehensive income, net of income tax. As of
December 31, 1998 and 1997, this adjustment decreased the value of business
acquired by $7.2 million and $5.3 million, respectively, and accumulated other
comprehensive income by approximately $4.7 million and $3.4 million,
respectively.
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.
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.
97
<PAGE> 252
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 accumulated other comprehensive income,
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 7.5 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 2.5 percent to 12.0
percent.
Liabilities for future term life policy benefits have been computed principally
by a net level premium method. Anticipated rates of mortality are based on the
1975-1980 Select and Ultimate Table modified by Company experience, including
withdrawals. Estimated future investment yields are a level 6.8 percent.
GUARANTY FUND ASSESSMENTS
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1998 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.
98
<PAGE> 253
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 reserves and write-downs, include: (1) notes
receivable from real estate ventures; (2) investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures, and
(3) real estate owned at December 31, 1997, carried at fair value. Real estate
reserves are established when declines in collateral values, estimated in light
of current economic conditions, indicate a likelihood of loss.
Investments in policy loans and other invested assets, consisting primarily of
venture capital investments and a leveraged lease, are carried primarily 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 accumulated other
comprehensive income. Such unrealized gains are recorded net of deferred income
tax expense, while unrealized losses are not tax benefitted.
99
<PAGE> 254
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
For the period January 1 through January 4, 1996, the Company's federal income
tax return was consolidated with Kemper and Kemper's other wholly-owned life
insurance subsidiary, Federal Kemper Life Assurance Company ("FKLA"). The Boards
of Directors of Kemper, KILICO and FKLA, adopted a written plan that provided
that federal income taxes would be paid to or recovered from Kemper on the basis
of each company's taxable income or loss as shown on its respective federal
income tax return. In the event of a federal income tax credit which is greater
than the amount recoverable from the other life insurance company or from the
Internal Revenue Service, the funds available would be apportioned among the
life companies entitled to a recovery on the basis of the relationship of each
company's tax credit to the total of all of the life insurance companies in a
deficit position. For the period January 5 through December 31, 1996, and
subsequent years, the Company has filed a separate federal income tax return.
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. The Company
paid federal income taxes of $126.0 million, $29.0 million and $28.1 million
directly to the United States Treasury Department during 1998, 1997 and 1996
respectively.
(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
100
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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, 1998
U.S. treasury securities and
obligations of U.S.
government agencies and
authorities.................. $ 7,951 $ 7,879 $ 81 $ (9)
Obligations of states and
political subdivisions,
special revenue and
nonguaranteed................ 27,039 26,768 362 (91)
Debt securities issued by
foreign governments.......... 69,357 67,239 2,266 (148)
Corporate securities........... 1,908,850 1,866,372 46,664 (4,186)
Mortgage and asset-backed
securities................... 1,469,623 1,453,277 19,063 (2,717)
---------- ---------- ------- --------
Total fixed
maturities............ $3,482,820 $3,421,535 $68,436 $ (7,151)
========== ========== ======= ========
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)
========== ========== ======= ========
</TABLE>
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1998, 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
101
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST
(in thousands) -------- ---------
<S> <C> <C>
One year or less............................. $ 44,816 $ 44,745
Over one year through five years............. 814,646 802,147
Over five years through ten years............ 891,767 866,613
Over ten years............................... 261,968 254,753
Securities not due at a single maturity date,
primarily mortgage and asset-backed
securities(1).............................. 1,469,623 1,453,277
---------- ----------
Total fixed maturities................ $3,482,820 $3,421,535
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 4.0 years.
Proceeds from sales of investments in fixed maturities prior to maturity were
$882.6 million, $633.9 million and $892.0 million during 1998, 1997 and 1996,
respectively. Gross gains of $10.1 million, $3.1 million and $9.9 million and
gross losses of $8.0 million, $13.7 million and $16.2 million were realized on
sales and write-downs of fixed maturities in 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had 12 separate asset-backed securities
included in fixed maturity investments from trusts formed to collateralize
assets underwritten by Green Tree Financial Corporation, which in aggregate
amounted to $97.7 million. No other individual investments exceeded ten percent
of stockholder's equity at December 31, 1998.
At December 31, 1998, securities carried at approximately $6.4 million were on
deposit with governmental agencies as required by law.
Upon default or indication of potential default by an issuer of fixed maturity
securities, the 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
102
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KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $164.4 million real estate portfolio at December 31, 1998 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1998 and 1997, total impaired real estate-related
loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross....... $ 83.9 $39.3
Impaired loans with reserves--gross.......... 21.5 2.2
------ -----
Total gross impaired loans............ 105.4 41.5
Reserves related to impaired loans........... (18.5) (2.1)
------ -----
Net impaired loans.................... $ 86.9 $39.4
====== =====
</TABLE>
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. The Company had an average balance of $54.6 million
and $45.2 million in impaired loans for 1998 and 1997, respectively. Cash
payments received on impaired loans are generally applied to reduce the
outstanding loan balance.
At December 31, 1998 and 1997, loans on nonaccrual status, before reserves and
write-downs, amounted to $37.4 million and $47.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
103
<PAGE> 258
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Interest and dividends on fixed
maturities.............................. $232,707 $250,170 $250,683
Dividends on equity securities............ 2,143 2,123 646
Income from short-term investments........ 5,391 4,128 9,130
Income from mortgage loans................ 14,964 16,283 20,257
Income from policy loans.................. 21,096 20,549 20,700
Income from other real estate-related
investments............................. 352 6,631 4,917
Income from other loans and investments... 2,223 2,045 2,480
-------- -------- --------
Total investment income............ 278,876 301,929 308,813
Investment expense........................ (5,364) (5,734) (9,125)
-------- -------- --------
Net investment income.............. $273,512 $296,195 $299,688
======== ======== ========
</TABLE>
Net realized investment gains (losses) for the years ended December 31, 1998,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------
1998 1997 1996
(in thousands) -------- -------- -------
<S> <C> <C> <C>
Real estate-related........................ $ 41,362 $ 19,758 $17,462
Fixed maturities........................... 2,158 (10,656) (6,344)
Trading account securities--gross gains on
transfer................................. 3,254 -- --
Trading account securities--gross losses on
transfer................................. (417) -- --
Trading account securities--holding
losses................................... (151) -- --
Equity securities.......................... 5,496 914 --
Other...................................... 166 530 2,484
-------- -------- -------
Realized investment gains before income
tax expense............................ 51,868 10,546 13,602
Income tax expense......................... (18,154) (3,691) (4,761)
-------- -------- -------
Net realized investment gains............ $ 33,714 $ 6,855 $ 8,841
======== ======== =======
</TABLE>
104
<PAGE> 259
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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 and other securities--the difference between
fair value and cost. The change in net unrealized investment gains (losses) by
class of investment for the years ended December 31, 1998, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-----------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1996
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities................ $36,717 $ 87,787 $(63,219)
Equity and other securities..... (1,074) (103) 1,256
Adjustment to deferred insurance
acquisition costs............. (2,399) (2,325) 1,307
Adjustment to value of business
acquired...................... (1,954) (26,209) 20,947
------- -------- --------
Unrealized gain (loss) before
income tax expense
(benefit)................... 31,290 59,150 (39,709)
Income tax expense (benefit).... 10,952 (985) 7,789
------- -------- --------
Net unrealized gain
(loss) on
investments............ $20,338 $ 60,135 $(47,498)
======= ======== ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1998 and 1997 the Company, along with other Kemper subsidiaries,
directly held partnership interests in a number of real estate joint ventures.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation
accounting methods are not utilized as the Company, in most instances, does not
own more than 50 percent in the aggregate, and in any event, major decisions of
the partnership must be made jointly by all partners.
As of December 31, 1998 and 1997, the Company's net equity investment in
unconsolidated investees amounted to $1.2 million and $19.3 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $241 thousand, $835 thousand and $223 thousand in 1998,
1997 and 1996, respectively.
105
<PAGE> 260
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 28.0 percent of the Company's investment-grade fixed maturities at
December 31, 1998 were mortgage-backed securities, down from 35.1 percent at
December 31, 1997, due to sales and paydowns during 1998. 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 15.4 percent and 10.8 percent of the Company's investment-grade
fixed maturities at December 31, 1998 and 1997, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (21.9%), auto loans
(8.2%), manufactured housing loans (14.8%), equipment loans (5.2%), and
commercial mortgage backed securities (22.1%).
The Company's real estate portfolio is distributed by geographic location and
property type. The geographic distribution of a majority of the real estate
portfolio as of December 31, 1998 was as follows: California (31.5%), Hawaii
(16.2%), Washington (9.9%) and Colorado (9.4%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1998 was as
follows: hotels (39.9%), land (30.9%) and residential (15.5%).
Undeveloped land represented approximately 30.9 percent of the Company's real
estate portfolio at December 31, 1998. 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.
There can be no assurance that such permits will be obtained as planned or at
all, nor that such expenditures will occur as
106
<PAGE> 261
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
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.
At December 31, 1998, 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 $64.5 million, or
39.3 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1998,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.
At December 31, 1998, loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company
("Lumbermens"), a former affiliate, constituted approximately $51.6 million, or
31.4 percent, of the Company's real estate portfolio. Kemper's interest is 75
percent at December 31, 1998. At December 31, 1998, MLP-related commitments
accounted for approximately $6.1 million of the Company's off-balance-sheet
legal commitments.
The remaining significant real estate-related investments amounted to $27.3
million at December 31, 1998 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, the Company has placed these real estate-related investments on
nonaccrual status as of December 31, 1996. The Company 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, the Company anticipates that it could be several additional years until
the Company completely disposes of all of its investments in Hawaii.
At December 31, 1998, 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. 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, 1998.
107
<PAGE> 262
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Current............................... $ 52,274 $130,662 $26,300
Deferred.............................. (12,470) (99,370) (897)
-------- -------- -------
Total....................... $ 39,804 $ 31,292 $25,403
======== ======== =======
</TABLE>
Additionally, the deferred income tax expense (benefit) related to items
included in other comprehensive income was as follows for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Unrealized gains and losses on
investments............................ $12,475 $ 9,002 $ --
Value of business acquired............... (684) (9,173) 7,331
Deferred insurance acquisition costs..... (840) (814) 457
------- ------- ------
Total.......................... $10,952 $ (985) $7,789
======= ======= ======
</TABLE>
The actual income tax expense for 1998, 1997 and 1996 differed from the
"expected" tax expense for those years as displayed below. "Expected" tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 1998, 1997, and 1996 to income before income tax expense.
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Computed expected tax expense........... $36,734 $24,503 $20,938
Difference between "expected" and actual
tax expense:
State taxes........................... (434) 1,801 913
Amortization of goodwill.............. 4,460 5,353 3,568
Dividend received deduction........... (540) -- --
Foreign tax credit.................... (250) (278) --
Other, net............................ (166) (87) (16)
------- ------- -------
Total actual tax expense...... $39,804 $31,292 $25,403
======= ======= =======
</TABLE>
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
108
<PAGE> 263
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
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.
109
<PAGE> 264
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred federal tax assets or liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1996
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance
acquisition costs....... $ 86,332 $ 75,522 $ 4,520
Unrealized losses on
investments............. -- -- 16,624
Life policy reserves....... 27,240 43,337 46,452
Unearned revenue........... 42,598 37,243 --
Real estate-related........ 13,944 13,400 20,642
Other investment-related... 5,770 3,298 5,409
Other...................... 4,923 4,371 3,639
-------- -------- --------
Total deferred federal
tax assets............ 180,807 177,171 97,286
Valuation allowance........ (15,201) (15,201) (31,825)
-------- -------- --------
Total deferred federal
tax assets after
valuation allowance... 165,606 161,970 65,461
-------- -------- --------
Deferred federal tax
liabilities:
Value of business
acquired................ 41,598 48,469 66,373
Deferred insurance
acquisition costs....... 32,040 20,811 9,384
Depreciation and
amortization............ 19,111 20,201 15,473
Other investment-related... 14,337 18,774 28,855
Unrealized gains on
investments............. 21,477 9,002 --
Other...................... 1,984 4,720 5,738
-------- -------- --------
Total deferred federal
tax liabilities....... 130,547 121,977 125,823
-------- -------- --------
Net deferred federal tax
assets (liabilities)....... $ 35,059 $ 39,993 $(60,362)
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the tax on
deferred insurance acquisition costs ("DAC Tax") associated with $1.5 billion
110
<PAGE> 265
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
and $2.7 billion of new and renewal sales in 1998 and 1997, respectively from a
non-registered individual and group variable bank-owned life insurance contract
("BOLI"). 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.
The tax returns through the year 1993 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 1994 through 1996 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received capital contributions from Kemper of $4.3 million, $45.0
million and $18.4 million during 1998, 1997 and 1996, respectively. The Company
paid cash dividends of $95.0 million and $29.3 million to Kemper during 1998 and
1997, respectively. The Company did not pay any cash dividends to Kemper during
1996.
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, 1998 and 1997, joint venture mortgage loans
totaled $65.8 million and $72.7 million, respectively, and during 1998, 1997 and
1996, the Company earned interest income on these joint venture loans of $6.8
million, $7.5 million and $9.5 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") 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 1998,
1997 and 1996, expenses allocated to the Company from SKI and KSvC amounted to
$43 thousand, $114 thousand and $1.7 million, respectively. The Company also
paid to SKI investment management fees of $3.1 million, $3.5 million and $3.6
million during 1998, 1997 and 1996, respectively. In addition, expenses
allocated to the Company from FKLA during 1998, 1997 and 1996 amounted to $35.5
million, $30.0 million and $10.5 million, respectively. The Company also paid to
Kemper real estate
111
<PAGE> 266
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
subsidiaries $1.5 million, $2.2 million and $1.8 million in 1998, 1997 and 1996,
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.
As of December 31, 1998 and 1997, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $344.8 million
and $382.6 million, respectively.
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 ("GAAP"), of
approximately $18.4 million, was deemed to be a capital contribution from Kemper
and was recorded as additional paid-in-capital during 1996. As of the date of
this transaction, no deferred tax impact was recorded on the difference between
the statutory and GAAP reserves. This deferred tax impact of $6.5 million was
recorded in 1998 as a reduction to the original capital contribution. Premiums
assumed during 1998 under the terms of the treaty amounted to $21.6 million and
the face amount which remained outstanding at December 31, 1998 amounted to
$11.7 billion.
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 $293
thousand and $139 thousand as of December 31, 1998 and 1997, respectively.
During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, ZC Life Reinsurance Limited
112
<PAGE> 267
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
("ZC Life"), formerly EPICENTRE Reinsurance (Bermuda) Limited. 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 the new BOLI product
developed in 1997, 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 ZC Life under the terms of the treaty.
During 1997, the Company also ceded $24.3 million of separate account fees (cost
of insurance charges) to ZC Life. The Company has also withheld approximately
$23.4 million of such funds due to ZC Life 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.
During 1998, the Company modified the reinsurance agreement to increase the
reinsurance from ninety percent to one hundred percent. During 1998, the Company
issued $6.9 billion (face amount) of new BOLI business and ceded $11.1 billion
(face amount) to ZC Life under the terms of the modified treaty. During 1998,
the Company also ceded $175.5 million of separate account fees (cost of
insurance charges) to ZC Life. The Company has also withheld approximately
$170.9 million of such funds due to ZC Life 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, 1998.
KILICO has a large and growing funds withheld account ("FWA") supporting reserve
credits on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA is now marked-to-market based upon the
Total Return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, the Company recorded a $2.5 million increase to
the FWA related to this mark-to-market. To properly match revenue and expenses,
the Company has placed assets supporting the FWA in a segmented portion of its
General Account. This portfolio is classified as "trading" under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, the Company recorded a realized capital gain of $2.8 million upon
transfer of these assets from "available for sale" to the trading portfolio as
required by FAS 115. In addition, the Company recorded realized capital losses
of $151 thousand related to the changes in fair value of this portfolio
113
<PAGE> 268
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
during 1998. The fair value of this portfolio was $101.8 million at December 31,
1998, and the amortized cost was $99.1 million. The Company periodically
purchases assets into this segmented portfolio to support changes in the FWA.
(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 $2.0 million and $1.9 million at December 31, 1998 and 1997,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.0 percent and 7.25 percent for 1998 and 1997, respectively. The
assumed health care trend rate used was based on projected experience for 1998,
8.0 percent for 1999, gradually declining to 6.4 percent by the year 2003 and
gradually declining 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, 1998 and 1997 by $312 thousand and $242 thousand, respectively.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company nor its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental
114
<PAGE> 269
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1998, the Company had future legal loan commitments and stand-by
financing agreements totaling $64.4 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be collateralized 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. 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 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. Fair value estimates for financial instruments not
carried at fair value are generally determined using discounted cash flow models
and
115
<PAGE> 270
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 sheets 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 in 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 sheets 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,
116
<PAGE> 271
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 1998 and 1997 to be 4.75 percent and 5.25 percent, respectively, while
the assumed average market crediting rate was 5.0 percent and 6.0 percent in
1998 and 1997, respectively.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) -------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial instruments
recorded as assets:
Fixed maturities....... $3,482,820 $3,482,820 $3,668,643 $3,668,643
Trading account
securities.......... 101,781 101,781 -- --
Cash and short-term
investments......... 71,820 71,820 259,925 259,925
Mortgage loans and
other real
estate-related
assets.............. 164,375 164,375 220,046 220,046
Policy loans........... 271,540 271,540 282,439 282,439
Equity securities...... 66,854 66,854 24,839 24,839
Other invested
assets.............. 23,645 27,620 20,820 24,404
Financial instruments
recorded as
liabilities:
Life policy benefits,
excluding term life
reserves............ 3,551,050 3,657,510 3,846,023 4,050,852
Funds withheld
account............. 170,920 170,920 23,420 23,420
</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 1999 is $64.9 million. The
Company paid cash dividends of $95.0 million and $29.3 million to Kemper during
1998 and 1997, respectively. The Company paid no cash dividends in 1996.
117
<PAGE> 272
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS (CONTINUED)
The Company's net income and capital and surplus as determined in accordance
with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Net income............................... $ 64,871 $ 58,372 $ 37,287
======== ======== ========
Statutory capital and surplus............ $455,213 $476,924 $411,837
======== ======== ========
</TABLE>
(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>
1998 OPERATING SUMMARY
Net investment income........... $70,551 $68,467 $66,892 $ 67,602
Realized investment gains....... 1,854 15,673 8,951 25,390
Premium income.................. 5,203 5,941 5,278 5,924
Separate account fees and other
income........................ 20,418 19,922 17,631 14,042
------- ------- ------- --------
Total revenue............ 98,026 110,003 98,752 112,958
------- ------- ------- --------
Interest credited and benefits
to policyholders.............. 57,930 57,939 54,251 34,815
Commissions, taxes, licenses and
fees.......................... 13,885 13,922 12,282 29,251
Operating expenses.............. 10,094 12,157 10,528 11,794
Net deferral of insurance
acquisition costs............. (7,973) (11,983) (9,669) (4,858)
Amortization of value of
business acquired............. 4,427 7,121 6,359 (230)
Amortization of goodwill........ 3,186 3,186 3,186 3,186
------- ------- ------- --------
Total benefits and
expenses............... 81,549 82,342 76,937 73,958
------- ------- ------- --------
Income before income tax
expense....................... 16,477 27,661 21,815 39,000
Income tax expense.............. 7,247 11,774 8,828 11,955
------- ------- ------- --------
Net income............... $ 9,230 $15,887 $12,987 $ 27,045
======= ======= ======= ========
</TABLE>
118
<PAGE> 273
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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
======= ======= ======= ========
</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.
(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
years.
(15) OPERATING SEGMENTS AND RELATED INFORMATION
In June 1997, the FASB 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. The Company adopted SFAS No. 131 as of December 31, 1998 and the
impact of implementation did not affect the Company's consolidated financial
position, results of operations or cash flows. In the initial year of adoption,
SFAS No. 131 requires comparative information for earlier years to be restated,
unless impracticable to do so.
119
<PAGE> 274
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the acquisition by Zurich, the Company, FKLA, ZLICA, and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, began to operate under the trade name Zurich Kemper Life. For
purposes of this operating segment disclosure, Zurich Kemper Life will also
include the operations of Zurich Direct, Inc., an affiliated direct marketing
life insurance agency and excludes FLA, as it is owned by its policyholders.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The SBU
concept employed by ZFS has each SBU concentrate on a specific customer market.
The SBU is the focal point of Zurich Kemper Life, because it is at the SBU level
that Zurich Kemper Life can clearly identify customer segments and then work to
understand and satisfy the needs of each customer. The contributions of Zurich
Kemper Life's SBU's to consolidated revenues, operating results and certain
balance sheet data pertaining thereto, are shown in the following tables on the
basis of generally accepted accounting principles. Zurich Kemper Life's SBU's
were formed in 1996, subsequent to the acquisition by Zurich, however, financial
information was not produced by SBU until 1997. Therefore, Zurich Kemper Life
has not provided segment information for 1996, as it would be impracticable to
do so.
Zurich Kemper Life is segregated into the Agency, Financial, Group Retirement
and Direct SBU's. The SBU's are not managed at the legal entity level, but
rather at the Zurich Kemper Life level. Zurich Kemper Life's SBU's cross legal
entity lines, as certain similar products are sold by more than one legal
entity. The vast majority of the Company's business is derived from the
Financial and Group Retirement SBU's.
Each SBU's revenue is derived from geographically dispersed areas as Zurich
Kemper Life is licensed in the District of Columbia and all states except New
York. During 1998 and 1997, Zurich Kemper Life did not derive net revenue from
one customer that exceeded 10 percent of the total revenue of Zurich Kemper
Life.
The principal products and markets of Zurich Kemper Life's SBU's are as follows:
AGENCY: The Agency SBU develops low cost term and universal life insurance, as
well as fixed annuities, to market through independent agencies and national
marketing organizations.
FINANCIAL: The Financial SBU focuses on a wide range of products that provide
for the accumulation, distribution and transfer of wealth and primarily includes
variable and fixed annuities, variable universal life and bank-owned life
insurance. These products are distributed to consumers through financial
120
<PAGE> 275
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
intermediaries such as banks, brokerage firms and independent financial
planners.
GROUP RETIREMENT: The Group Retirement SBU has a sharp focus on its target
customer. This SBU markets variable annuities to K-12 schoolteachers,
administrators, and healthcare workers, along with college professors and
certain employees of selected non-profit organizations. This target market is
eligible for what the IRS designates as retirement-oriented savings or
investment plans that qualify for special tax treatment.
DIRECT: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.
121
<PAGE> 276
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information for ZKL's SBU's are as follows:
As of and for the period ending December 31, 1998:
(in thousands)
<TABLE>
<CAPTION>
GROUP
AGENCY FINANCIAL RETIREMENT DIRECT TOTAL
INCOME STATEMENT ------ --------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income............ $ 160,067 $ 56 $ -- $ 5,583 $ 165,706
Net investment income..... 141,171 180,721 100,695 271 422,858
Realized investment
gains................... 20,335 33,691 15,659 30 69,715
Fees and other income..... 80,831 40,421 31,074 23,581 175,907
---------- ---------- ---------- -------- -----------
Total revenue......... 402,404 254,889 147,428 29,465 834,186
---------- ---------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits..... 243,793 117,742 73,844 2,110 437,489
Intangible asset
amortization............ 58,390 15,669 15,703 -- 89,762
Net deferral of insurance
acquisition costs....... (55,569) (9,444) (22,964) (22,765) (110,742)
Commissions and taxes,
licenses and fees....... 29,539 43,919 22,227 11,707 107,392
Operating expenses........ 61,659 24,924 20,279 35,593 142,455
---------- ---------- ---------- -------- -----------
Total benefits and
expenses............ 337,812 192,810 109,089 26,645 666,356
---------- ---------- ---------- -------- -----------
Income before income tax
expense................... 64,592 62,079 38,339 2,820 167,830
Income tax expense.......... 26,774 24,340 14,794 1,001 66,909
---------- ---------- ---------- -------- -----------
Net income............ $ 37,818 $ 37,739 $ 23,545 $ 1,819 $ 100,921
========== ========== ========== ======== ===========
BALANCE SHEET
Total assets.............. $3,194,530 $8,232,927 $4,172,828 $ 46,254 $15,646,539
========== ========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
REVENUE INCOME ASSETS
------- ------ ------
<S> <C> <C> <C> <C> <C>
Total revenue, net income and assets,
respectively, from above:....................... $834,186 $100,921 $15,646,539
-------- -------- -----------
Less:
Revenue, net income and assets of FKLA........ 336,841 35,953 2,986,381
Revenue, net loss and assets of ZLICA......... 54,058 (1,066) 416,115
Revenue, net income and assets Zurich
Direct...................................... 23,548 885 4,322
-------- -------- -----------
Totals per the Company's consolidated
financial statements........................ $419,739 $ 65,149 $12,239,721
======== ======== ===========
</TABLE>
122
<PAGE> 277
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the period ending December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
GROUP
AGENCY FINANCIAL RETIREMENT DIRECT TOTAL
INCOME STATEMENT ------ --------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income................ $ 167,439 $ -- $ -- $ 4,249 $ 171,688
Net investment income......... 155,885 212,767 91,664 455 460,771
Realized investment gains..... 2,503 7,744 2,692 50 12,989
Fees and other income......... 78,668 73,823 23,663 8,007 184,161
---------- ---------- ---------- ------- -----------
Total revenue............. 404,495 294,334 118,019 12,761 829,609
---------- ---------- ---------- ------- -----------
BENEFITS AND EXPENSES
Policyholder benefits......... 247,878 153,327 60,061 2,234 463,500
Intangible asset
amortization................ 58,534 25,593 15,589 -- 99,716
Net deferral of insurance
acquisition costs........... (50,328) (18,222) (13,033) (5,242) (86,825)
Commissions and taxes,
licenses and fees........... 39,477 66,552 16,668 3,518 126,215
Operating expenses............ 55,859 20,282 14,320 19,472 109,933
---------- ---------- ---------- ------- -----------
Total benefits and
expenses................ 361,420 247,532 93,605 19,982 712,539
---------- ---------- ---------- ------- -----------
Income (loss) before income tax
expense (benefit)............. 53,075 46,802 24,414 (7,221) 117,070
Income tax expense (benefit).... 25,554 21,144 10,545 (2,528) 54,715
---------- ---------- ---------- ------- -----------
Net income (loss)......... $ 27,521 $ 25,658 $ 13,869 $(4,693) $ 62,355
========== ========== ========== ======= ===========
BALANCE SHEET
Total assets.................. $2,877,854 $7,416,791 $3,759,173 $41,669 $14,095,487
========== ========== ========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
REVENUE NET INCOME ASSETS
------- ---------- ------
<S> <C> <C> <C>
Total revenue, net income and assets,
respectively, from above:.............. $829,609 $62,355 $14,095,487
Less:
Revenue, net income and assets of
FKLA................................. 338,854 24,740 3,105,396
Revenue, net income and assets of
ZLICA................................ 57,233 2,193 398,786
Revenue, net loss and assets of Zurich
Direct............................... 8,042 (3,295) 1,655
-------- ------- -----------
Totals per the Company's
consolidated financial
statements...................... $425,480 $38,717 $10,589,650
======== ======= ===========
</TABLE>
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APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Certificate upon a withdrawal. The
5% assumed Guaranteed Interest Rate is the rate required to be used in the
"Summary of Expenses." In these examples, the withdrawal occurs one year after
the Date of Issue. The Market Value Adjustment operates in a similar manner for
transfers. No Withdrawal Charge applies to transfers.
The Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at
the end of the five-year Guarantee Period. After one year, when the withdrawals
occur in these examples, the Guarantee Period Value is $42,000.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate KILICO is then crediting
(at the time of the withdrawal) on new Certificates with the same Guarantee
Period as the time remaining in your Guarantee Period rounded to the next higher
number of complete years. One year after the Purchase Payment there would have
been four years remaining in your Guarantee Period. These examples also show the
Withdrawal Charge (if any) which would be calculated separately after the Market
Value Adjustment.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment and KILICO is then crediting 6.5%
for a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:
(1 + .05) (4)
-.0551589* = [ ---------- ] -1
(1 + .065)
The Market Value Adjustment is a reduction of $2,316.67 from the Guarantee
Period Value:
- 2,316.67 = -.0551589 X 42,000.00
- ---------------
* Actual calculation utilizes 10 decimal places.
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The Market Adjusted Value would be:
$39,683.33 = $42,000.00 - $2,316.67
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 10% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$2,142.90 = $39,683.33 X .90 X .06
Thus, the amount payable on a full withdrawal would be:
$37,540.43 = $39,683.33 - $2,142.90
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,158.34 = -.0551589 X $21,000.00
The Market Adjusted Value would be:
$19,841.66 = $21,000.00 - $1,158.34
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$952.39 = ($19,841.46 - .10 X $39,683.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$18.889.07 = $19,841.46 -$952.39
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and KILICO is then crediting 4% for a four-year Guarantee Period. Upon a
full withdrawal, the market value adjustment factor would be:
(1 + .05) (4)
+.0390198 = [ ---------- ] -1
(1 + .04)
The Market Value Adjustment is an increase of $1638.83 to the Guarantee Period
Value:
$1,638.83 = $42,000.00 X .0390198
The Market Adjusted Value would be:
$43,638.33 = $42,000.00 +$1,638.83
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A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,356.47 = $43,638.33 X .90 X .06
Thus, the amount payable on withdrawal would be:
$41,281.85 = $43,638.33 - $2,356.47
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$819.42 = $21,000.00 X .0390198
The Market Adjusted Value of $21,000.00 would be:
$21,819.42 = $21,000.00 + $819.42
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$1,047.34 = ($21,819.42 - .1 X $43,638.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$20,772.08 = $21,819.42 - $1,047.34
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
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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 Contract and receive back 100% of your money. To do so, wire Kemper
Investors Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049, or
call 1-800-621-5001.
B. STATUTORY REQUIREMENTS
This Contract is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), 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 Contract 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 Contract, and does not
represent a determination on the merits of the Contract.
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 Contract must be nontransferable by the owner.
3. The Contract 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 Contract is distributed, unless
otherwise permitted under applicable law, any remaining interest in the Contract
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
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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
Contract will be treated as his or her own IRA, or, where applicable, Roth IRA.
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 Contract used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or tax-
sheltered annuity, or from a direct transfer from another IRA. All or part of
the premium for this Contract used as a SIMPLE IRA may be paid from a rollover
from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the extent
permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE Individual
Retirement Account.
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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.
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 no 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.
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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.
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.
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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 Contract and
Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum
distribution for a particular year must be received by December 31 of that year.
However, you may delay the required minimum distribution for the year you reach
age 70 1/2 until April 1 of the following year (i.e., the required beginning
date).
Annuity payments which begin by April 1 of the year following your 70 1/2 year
satisfy the minimum distribution requirement if they provide for non-increasing
payments over the life or the lives of you and your spouse, provided that, if
installments are guaranteed, the guaranty period does not exceed the lesser of
20 years or the applicable life expectancy.
The applicable life expectancy is your remaining life expectancy or the
remaining joint life and last survivor expectancy of you and your designated
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." To
obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS
toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your
area as shown in your income tax return instructions.
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.
If the actual distribution from your Contract is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. ROTH IRAS
1. If your contract is a special type of individual retirement plan known as a
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to
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an "IRA" are to an "individual retirement plan," within the meaning of section
7701(a)(37) of the 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 Contract 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. The Company
reserves 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
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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 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.
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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 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 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.
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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 Contract. Generally, an excess contribution is the amount contributed to
your Contract that is more than you can contribute. The excess is taxed for the
year of the excess contribution and for each year after that until you correct
it.
2. You will not have to pay the 6% excise tax if you withdraw the excess amount
by the date your tax return is due including extensions for the year of the
contribution. You do not have to include in your gross income an excess
contribution that you withdraw from your Contract before your tax return is due
if the income earned on the excess was also withdrawn and no deduction was
allowed for the excess contribution. You must include in your gross income the
income earned on the excess contribution.
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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 higher education expenses, certain medical expenses, or by an
unemployed individual to pay health insurance premiums.
O. 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, SIMPLE IRA or Roth 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 Contract or use it as security for a loan, the
Contract 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
Contract 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.
136
<PAGE> 291
S. FINANCIAL DISCLOSURE
1. If contributions to the Contract are made by other than rollover
contributions and direct transfers, the following information based on the
charts shown on the next pages, which assumes you were to make a level
contribution to the fixed account at the beginning of each year of $1,000 must
be completed prior to your signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- --------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- --------------------------------------------------------------------------
2 65
- --------------------------------------------------------------------------
3 70
- --------------------------------------------------------------------------
4
- --------------------------------------------------------------------------
5
- --------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
2. If contributions to the Contract are made by rollover contributions and/or
direct transfers, the following information, based on the charts shown on the
next page, and all of which assumes you make one contribution to the fixed
account of $1,000 at the beginning of this year, must be completed prior to your
signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- --------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- --------------------------------------------------------------------------
2 65
- --------------------------------------------------------------------------
3 70
- --------------------------------------------------------------------------
4
- --------------------------------------------------------------------------
5
- --------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
T. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.40% per annum. If you elected the Guaranteed Retirement Income
Benefit option, an additional charge of .25% of the
137
<PAGE> 292
Contract Value will be assessed against the Separate Account, Fixed Account and
Guarantee Periods on a pro-rata basis.
2. An annual records maintenance charge of $30.00 will be assessed ratably each
quarter against the Separate Account, Fixed Account and Guarantee Periods.
3. Withdrawal (early annuitization) charges will be assessed based on the years
elapsed since the purchase payments (in a given contract year) were received by
KILICO; under 1 year, 7%; over 1 to 2 years, 6%; over 2 to 3 years, 5%; over 3
to 4 years, 5%; over 4 to 5 years, 4%; over 5 to 6 years, 3%; over 6 to 7 years,
2%; over 7 years and thereafter, 0%.
4. The method used to compute and allocate the annual earnings is contained in
the Prospectus under the heading "Accumulation Unit Value."
5. The growth in value of your contract is neither guaranteed nor projected but
is based on the investment experience of the Separate Account.
138
<PAGE> 293
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 937.00 14 $16,798.32 27 $40,421.63 40 $ 75,113.26
2 1,913.00 15 18,310.91 28 42,642.92 41 78,375.30
3 2,928.90 16 19,868.88 29 44,930.85 42 81,735.20
4 3,976.63 17 21,473.59 30 47,287.42 43 85,195.89
5 5,066.14 18 23,126.44 31 49,714.68 44 88,760.41
6 6,198.41 19 24,828.87 32 52,214.76 45 92,431.86
7 7,374.46 20 26,582.37 33 54,789.84 46 96,213.46
8 8,604.34 21 28,388.49 34 57,442.18 47 100,108.50
9 9,871.11 22 30,248.78 35 60,174.08 48 104,120.40
10 11,175.88 23 32,164.88 36 62,987.94 49 108,252.65
11 12,519.80 24 34,138.47 37 65,886.22 50 112,508.87
12 13,904.03 25 36,171.26 38 68,871.45
13 15,329.79 26 38,265.04 39 71,946.23
</TABLE>
139
<PAGE> 294
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 937 14 $1,000 27 $1,000 40 $1,000
2 946 15 1,000 28 1,000 41 1,000
3 955 16 1,000 29 1,000 42 1,000
4 955 17 1,000 30 1,000 43 1,000
5 964 18 1,000 31 1,000 44 1,000
6 973 19 1,000 32 1,000 45 1,000
7 982 20 1,000 33 1,000 46 1,000
8 1,000 21 1,000 34 1,000 47 1,000
9 1,000 22 1,000 35 1,000 48 1,000
10 1,000 23 1,000 36 1,000 49 1,000
11 1,000 24 1,000 37 1,000 50 1,000
12 1,000 25 1,000 38 1,000
13 1,000 26 1,000 39 1,000
</TABLE>
* Includes applicable withdrawal charges.
140
<PAGE> 295
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 1999. 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-21
Experts..................................................... B-21
Financial Statements........................................ B-21
</TABLE>
<PAGE> 296
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Fund by
each of the Subaccounts. All expenses incurred in the operations of the Separate
Account, except the charge for mortality and expense risk and administrative
expenses, and records maintenance charge (as described in the Prospectus) are
borne by KILICO.
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the years ended December 31, 1997 and 1998. The firm
performed the annual audit of the financial statements of the Separate Account
and KILICO for the years ended December 31, 1997 and 1998.
The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Contracts are distributed
through the principal underwriter for the Separate Account, Investors Brokerage
Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into
selling group agreements with affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six and one-quarter percent (6 1/4%)
of Purchase Payments. During 1998, KILICO incurred gross commissions payable of
approximately $2.4 million 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, the Kemper Investment Grade Bond Subaccount and the Kemper
Government Securities Subaccount; and "yield" and "effective yield" information
may be provided in the case of the Kemper Money Market Subaccount. These various
measures of performance are described below.
A Subaccount's 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 Contract to all Contract Owner accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. 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 nonstandardized 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 or the
effect of the Records Maintenance Charge, and thus may be higher than if such
charges 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. Both annualized and nonannualized (cumulative) nonstandardized total
return figures may be provided. Annualized nonstandardized total return figures
represent the average annual percentage charge in the value of a Subaccount over
the applicable period while nonannualized (cumulative) figures represent the
actual percentage change over the applicable period.
B-1
<PAGE> 297
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 may 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 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
Investment Grade Bond Subaccount and the Kemper Government Securities
Subaccount, based upon the one month period ended March 31, 1999, were %,
% and %, 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 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 Subaccount's yield is computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit value during
the period is divided by the Accumulation Unit value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Separate Account's portfolio are not included in the
calculation. The Kemper Money Market #1 and #2 Subaccounts' yields for the
seven-day period ended March 31, 1999 were 3.01% and 4.41%, respectively, and
average portfolio maturity was 14 days.
The Kemper Money Market Subaccount's effective yield is determined by taking the
base period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period return
+1) (365) / (7) - 1. The Kemper Money Market #1 and #2 Subaccounts' effective
yields for the seven-day period ended March 31, 1999 were 3.06% and 4.51%,
respectively.
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.
B-2
<PAGE> 298
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 standardized performance figures include the deduction
of all expenses and fees, including a prorated portion of the Records
Maintenance Charge. Redemptions within the first seven years after purchase may
be subject to a Withdrawal Charge that ranges from 7% the first year to 0% after
seven years. Yield, effective yield and nonstandardized total return do not
reflect the effect of the Withdrawal Charge or premium taxes that may be imposed
upon the redemption of units. In addition, nonstandardized total return figures
do not include the effect of the Records Maintenance Charge. Thus, yield,
effective yield and nonstandardized total return figures may be higher than if
these charges were deducted. 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.
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 following tables include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1998, and compares these quotations to various indexes.
B-3
<PAGE> 299
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT..................... 17.62%
Life of Subaccount (from 05/01/96)................... $ 70,398 75.99% 23.59% 21.08%
Life of Portfolio (from 05/01/96).................... 70,398 75.99 23.59 21.08
One Year............................................. 47,048 17.62 17.62 9.73
KEMPER VALUE+GROWTH SUBACCOUNT......................... 18.52
Life of Subaccount (from 05/01/96)................... 66,652 66.63 21.09 18.49
Life of Portfolio (from 05/01/96).................... 66,652 66.63 21.09 18.49
One Year............................................. 47,408 118.52 18.52 10.62
KEMPER HORIZON 20+ SUBACCOUNT.......................... 11.48
Life of Subaccount (from 05/01/96)................... 60,598 51.49 16.84 14.28
Life of Portfolio (from 05/01/96).................... 60,598 51.49 16.84 14.28
One Year............................................. 44,593 11.48 11.48 3.88
JANUS ASPEN GROWTH SUBACCOUNT.......................... 33.79
Life of Subaccount (from 09/15/95)................... 77,416 93.54 22.14 22.22
Life of Portfolio (from 09/13/93).................... 100,505 150.96 18.96 N/A
Five Years........................................... 97,508 143.47 19.48 N/A
Three Years.......................................... 74,943 87.06 23.21 21.02
One Year............................................. 53,515 33.49 33.49 25.55
</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-17 for additional information.
B-4
<PAGE> 300
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------------------------------------------------------------
STANDARD & CONSUMER
DOW JONES DOW JONES POOR'S STANDARD & PRICE CONSUMER
INDUSTRIAL(5) INDUSTRIAL(5) 500(6) POOR'S 500(6) 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)....................
One Year....................... 18.13 18.13 28.58 28.58 1.61 1.61
KEMPER VALUE+GROWTH SUBACCOUNT
Life of Portfolio (from
05/01/96)....................
One Year....................... 18.13 18.13 28.58 28.58 1.61 1.61
KEMPER HORIZON 20+ SUBACCOUNT
Life of Portfolio (from
05/01/96)....................
One Year....................... 18.13 18.13 28.58 28.58 1.61 1.61
JANUS ASPEN GROWTH SUBACCOUNT
Life of Portfolio (from
09/13/93)....................
Three Years.................... 89.86 23.83 110.85 28.23 6.78 2.21
One Year....................... 18.13 18.13 28.58 28.58 1.61 1.61
</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-17 for additional information.
B-5
<PAGE> 301
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
------------------------------- --------------
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)......... 3.71%
Life of Subaccount (from 04/06/82)....... $94,176 135.44% 5.25% 4.85%
Life of Portfolio (from 04/06/82)........ 94,176 135.44 5.25 4.85
Ten Years................................ 59,303 48.26 4.02 3.51
Five Years............................... 47,693 19.23 3.58 2.25
Three Years.............................. 44,603 11.51 3.70 1.54
One Year................................. 41,483 3.71 3.71 -3.40
KEMPER MONEY MARKET SUBACCOUNT #2(20)...... 5.15
Life of Subaccount (from 04/06/82)....... 105,154 162.88 5.94 5.55
Life of Portfolio (from 04/06/82)........ 105,154 162.88 5.94 5.55
Ten Years................................ 65,495 63.74 5.05 4.56
Five Years............................... 50,579 26.70 4.85 3.52
Three Years.............................. 46,371 15.93 5.05 2.87
One Year................................. 42,060 5.15 5.15 -2.05
KEMPER HIGH YIELD SUBACCOUNT(19)........... 0.05
Life of Subaccount (from 04/06/82)....... 241,694 504.23 11.35 11.08
Life of Portfolio (from 04/06/82)........ 241,694 504.23 11.35 11.08
Ten Years................................ 92,885 132.21 8.79 8.33
Five Years............................... 55,374 38.44 6.72 5.39
Three Years.............................. 49,516 23.79 7.37 5.19
One Year................................. 40,021 0.05 0.05 -6.81
KEMPER GOVERNMENT SECURITIES SUBACCOUNT.... 5.55
Life of Subaccount (from 11/03/89)....... 70,786 76.96 6.43 5.94
Life of Portfolio (from 09/03/87)........ 80,552 101.38 6.37 N/A
Ten Years................................ 78,970 97.42 7.04 N/A
Five Years............................... 51,688 29.22 5.26 3.92
Three Years.............................. 45,920 14.80 4.71 2.52
One Year................................. 42,221 5.55 5.55 -1.67
KEMPER INVESTMENT GRADE BOND SUBACCOUNT.... 6.45
Life of Subaccount (from 05/01/96)....... 46,992 17.48 6.22 3.80
Life of Portfolio (from 05/01/96)........ 46,992 17.48 6.22 3.80
One Year................................. 42,578 6.45 6.45 0.83
</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-17 for additional information.
B-6
<PAGE> 302
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
--------------------------------------------------------------------------------------------------------
MERRILL LYNCH MERRILL LYNCH LEHMAN BROS.
CONSUMER CONSUMER CDA CERT CDA CERT HIGH YIELD HIGH YIELD GOVT/CORP
PRICE PRICE OF DEPOSIT OF DEPOSIT MASTER MASTER BOND
INDEX(7) INDEX(7) INDEX(8) INDEX(8) INDEX(9) INDEX(9) INDEX(10)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE %
RETURN RETURN RETURN RETURN RETURN RETURN RETURN
------------ ------------ ------------ ------------ ------------- ------------- ------------
<S> <C> <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 N/A
Ten Years............ 36.02 3.12 65.18 5.15 N/A
Five Years........... 12.41 2.37 26.32 4.78 N/A
Three Years.......... 6.78 2.21 15.78 5.01 N/A
One Year............. 1.61 1.61 5.12 5.12 N/A
KEMPER MONEY MARKET
SUBACCOUNT #2(20)
Life of Portfolio
(from 04/06/82).... N/A N/A N/A N/A N/A N/A N/A
Ten Years............ 36.02 3.12 65.18 5.15 N/A
Five Years........... 12.41 2.37 26.32 4.78 N/A
Three Years.......... 6.78 2.21 15.78 5.01 N/A
One Year............. 1.61 1.61 5.12 5.12 N/A
KEMPER HIGH YIELD
SUBACCOUNT(19)
Life of Portfolio
(from 04/06/82).... N/A N/A N/A N/A N/A N/A N/A
Ten Years............ 36.02 3.12 N/A N/A N/A N/A 144.10
Five Years........... 12.41 2.37 N/A N/A N/A N/A 42.26
Three Years.......... 6.78 2.21 N/A N/A N/A N/A 23.64
One Year............. 1.61 1.61 N/A N/A N/A N/A 9.47
KEMPER GOVERNMENT
SECURITIES SUBACCOUNT
Life of Portfolio
(from 09/03/87).... N/A N/A N/A N/A 191.45 10.91 N/A
Ten Years............ 36.02 3.12 180.09 10.85 144.10
Five Years........... 12.41 2.37 N/A N/A 55.46 9.23 42.26
Three Years.......... 6.78 2.21 N/A N/A 45.69 13.36 23.64
One Year............. 1.61 1.61 N/A N/A 12.96 12.96 9.47
KEMPER INVESTMENT GRADE
BOND SUBACCOUNT
Life of Portfolio
(from 05/01/96).... N/A N/A
One Year............. 1.61 1.61 N/A N/A 12.96 12.96 9.47
<CAPTION>
COMPARED TO
------------
LEHMAN BROS.
GOVT/CORP
BOND
INDEX(10)
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 MONEY MARKET
SUBACCOUNT #2(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............ 9.33
Five Years........... 7.30
Three Years.......... 7.33
One Year............. 9.47
KEMPER GOVERNMENT
SECURITIES SUBACCOUNT
Life of Portfolio
(from 09/03/87).... N/A
Ten Years............ 9.33
Five Years........... 7.30
Three Years.......... 7.33
One Year............. 9.47
KEMPER INVESTMENT GRADE
BOND SUBACCOUNT
Life of Portfolio
(from 05/01/96)....
One Year............. 9.47
</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-17 for additional information.
B-7
<PAGE> 303
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(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 MONEY MARKET SUBACCOUNT
#2(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........................ 144.55 9.35 N/A N/A N/A
Five Years....................... 42.50 7.34 N/A N/A N/A
Three Years...................... 23.81 7.38 N/A N/A N/A
One Year......................... 9.53 9.53 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........................ 144.55 9.35 139.88 9.14
Five Years....................... 42.50 7.34 44.29 7.61 N/A
Three Years...................... 23.81 7.38 34.68 10.43 N/A
One Year......................... 9.53 9.53 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......................... 9.53 9.53 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 MONEY MARKET SUBACCOUNT
#2(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
</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-17 for additional information.
B-8
<PAGE> 304
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
------------------------ --------------
YEAR TO DATE(%) CUMULATIVE ANNUALIZED ANNUALIZED
RETURN(3) ENDING VALUE(4) (%) RETURN (%) RETURN (%) RETURN
--------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER GROWTH SUBACCOUNT................. 13.52%
Life of Subaccount (from 12/09/83)..... $277,058 592.65% 13.71% 13.39%
Life of Portfolio (from 12/09/83)...... 277,058 592.65 13.71 13.39
Ten Years.............................. 185,663 364.16 16.59 16.24
Five Years............................. 81,074 102.68 15.18 13.81
Three Years............................ 64,974 62.43 17.55 15.23
One Year............................... 45,408 13.52 13.52 5.77
KEMPER BLUE CHIP SUBACCOUNT.............. 12.28
Life of Subaccount (from 05/01/97)..... 49,643 24.11 13.82 9.48
Life of Portfolio (from 05/01/97)...... 49,643 24.11 13.82 9.48
One Year............................... 44,911 12.28 12.28 4.61
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT... 21.53
Life of Subaccount (from 05/01/98)..... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85)...... 255,462 538.65 14.76 N/A
Ten Years.............................. 165,792 314.48 15.28 N/A
Five Years............................. 87,141 117.85 16.85 N/A
Three Years............................ 77,096 92.74 24.45 N/A
One Year............................... 48,610 21.53 21.53 N/A
WARBURG POST-VENTURE CAPITAL
SUBACCOUNT............................. 5.04
Life of Subaccount (from 05/01/98)..... N/A N/A N/A N/A
Life of Portfolio (from 09/30/96)...... 45,675 14.19 6.07 N/A
One Year............................... 42,016 5.04 5.04 N/A
KEMPER-DREMAN HIGH RETURN EQUITY
SUBACCOUNT............................. 4.94
Life of Subaccount (from 06/01/98)..... N/A N/A N/A N/A
Life of Portfolio (from 05/01/98)...... 40,766 1.91 N/A N/A
KEMPER-DREMAN FINANCIAL SERVICES
SUBACCOUNT............................. -0.50
Life of Subaccount (from 06/01/98)..... N/A N/A N/A N/A
Life of Portfolio (from 05/01/98)...... 38,758 -3.10 N/A 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-17 for additional information.
B-9
<PAGE> 305
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------------------------------------------
STANDARD & STANDARD &
STANDARD & STANDARD & CONSUMER POOR'S POOR'S
POOR'S 500 POOR'S 500 CONSUMER PRICE INDEX MIDCAP MIDCAP NASDAQ
(5) (6) PRICE INDEX (7) (7) INDEX (14) INDEX (14) COMPOS (15)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE %
RETURN RETURN RETURN RETURN RETURN RETURN RETURN
------------ ------------ --------------- ------------ ------------ ------------ ------------
<S> <C> <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 459.82
Ten Years........... 479.63 19.21 36.02 3.12 483.64 19.29 474.94
Five Years.......... 193.91 24.06 12.41 2.37 137.08 18.84 182.27
Three Years......... 110.85 28.23 6.78 2.21 87.78 23.37 108.40
One Year............ 28.58 28.58 1.61 1.61 19.11 19.11 39.63
KEMPER BLUE CHIP
SUBACCOUNT
Life of Portfolio
(from 05/01/97)... 22.55 22.55 0.69 0.69 30.85 30.85 N/A
SCUDDER VLIF CAPITAL
GROWTH SUBACCOUNT...
Life of Portfolio
(from 07/16/85)... N/A N/A N/A N/A N/A N/A N/A
Ten Years........... 479.63 19.21 36.02 3.12 483.64 19.29 474.94
Five Years.......... 193.91 24.06 12.41 2.37 137.08 18.84 182.27
Three Years......... 110.85 28.23 6.78 2.21 87.78 23.37 108.40
One Year............ 28.58 28.58 1.61 1.61 19.11 19.11 39.63
WARBURG POST-VENTURE
CAPITAL
SUBACCOUNT..........
Life of Portfolio
(from 09/30/96)... N/A N/A N/A N/A N/A N/A N/A
One Year............ 28.58 28.58 1.70 1.70 19.11 19.11 39.63
KEMPER-DREMAN HIGH
RETURN EQUITY
SUBACCOUNT..........
Life of Subaccount
(from 06/01/98)... N/A N/A N/A N/A N/A N/A N/A
Life of Portfolio
(from 05/01/98)... N/A N/A N/A N/A N/A N/A N/A
KEMPER-DREMAN
FINANCIAL SERVICES
SUBACCOUNT..........
Life of Subaccount
(from 06/01/98)... N/A N/A N/A N/A N/A N/A N/A
Life of Portfolio
(from 05/01/98)... N/A N/A N/A N/A N/A N/A N/A
<CAPTION>
COMPARED TO
------------
NASDAQ
COMPOS (15)
ANNUALIZED %
RETURN
------------
<S> <C>
KEMPER GROWTH
SUBACCOUNT
Life of Portfolio
(from 12/09/83)... 13.03
Ten Years........... 19.11
Five Years.......... 23.06
Three Years......... 27.73
One Year............ 39.63
KEMPER BLUE CHIP
SUBACCOUNT
Life of Portfolio
(from 05/01/97)... N/A
SCUDDER VLIF CAPITAL
GROWTH SUBACCOUNT...
Life of Portfolio
(from 07/16/85)... N/A
Ten Years........... 19.11
Five Years.......... 23.06
Three Years......... 27.73
One Year............ 39.63
WARBURG POST-VENTURE
CAPITAL
SUBACCOUNT..........
Life of Portfolio
(from 09/30/96)... N/A
One Year............ 39.63
KEMPER-DREMAN HIGH
RETURN EQUITY
SUBACCOUNT..........
Life of Subaccount
(from 06/01/98)... N/A
Life of Portfolio
(from 05/01/98)... N/A
KEMPER-DREMAN
FINANCIAL SERVICES
SUBACCOUNT..........
Life of Subaccount
(from 06/01/98)... N/A
Life of Portfolio
(from 05/01/98)... 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-17 for additional information.
B-10
<PAGE> 306
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER SMALL CAP GROWTH SUBACCOUNT..................... 16.74%
Life of Subaccount (from 05/02/94)................... $103,332 158.33% 22.54% 21.29%
Life of Portfolio (from 05/02/94).................... 103,332 158.33 22.54 21.29
Three Years.......................................... 78,140 95.35 25.01 22.91
One Year............................................. 46,695 16.74 16.74 8.84
KEMPER SMALL CAP VALUE SUBACCOUNT...................... -12.47
Life of Subaccount (from 05/01/96)................... 42,434 6.09 2.24 -0.09
Life of Portfolio (from 05/01/96).................... 42,434 6.09 2.24 -0.09
One Year............................................. 35,010 -12.47 -12.47 -18.52
</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 SUBACCOUNT
Life of Portfolio (from
05/02/94)....................... 9.91 2.61 72.03 15.96 112.01 22.77
Three Years....................... 6.78 2.21 38.92 11.58 108.40 27.73
One Year.......................... 1.61 1.61 -2.55 -2.55 39.63 39.63
KEMPER SMALL CAP VALUE SUBACCOUNT
Life of Portfolio (from
05/01/96)....................... 3.72 2.21 24.76 14.98 30.90 17.51
One Year.......................... 1.61 1.61 -2.55 -2.55 39.63 39.63
</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-17 for additional information.
B-11
<PAGE> 307
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
------------------------------- --------------
YEAR TO DATE(%) CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED
RETURN(3) ENDING VALUE(4) RETURN RETURN (%) RETURN
--------------- --------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER INTERNATIONAL SUBACCOUNT(18)... 8.51%
Life of Subaccount (from
01/06/92)......................... $ 73,273 83.18% 9.05% 8.26%
Life of Portfolio (from 01/06/92)... 73,273 83.18 9.05 8.26
Five Years.......................... 57,027 42.57 7.35 6.00
Three Years......................... 53,541 33.85 10.21 7.99
One Year............................ 43,403 8.51 8.51 1.10
KEMPER GLOBAL INCOME SUBACCOUNT....... 9.45
Life of Subaccount
(from 05/01/97)................... 44,625 11.56 6.78 2.66
Life of Portfolio (from 05/01/97)... 44,625 11.56 6.78 2.66
One Year............................ 43,782 9.45 9.45 1.97
SCUDDER VLIF GLOBAL DISCOVERY
SUBACCOUNT.......................... 14.84
Life of Subaccount
(from 06/01/98)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/96)... 53,214 33.04 11.29 N/A
One Year............................ 45,935 14.84 14.84 N/A
SCUDDER VLIF INTERNATIONAL
SUBACCOUNT.......................... 16.85
Life of Subaccount (from
06/01/98)......................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/87)... 109,837 174.59 9.04 N/A
Ten Years........................... 107,766 169.41 10.42 N/A
Five Years.......................... 60,976 52.44 8.80 N/A
Three Years......................... 56,903 42.26 12.47 N/A
One Year............................ 46,740 16.85 16.85 N/A
KEMPER INTERNATIONAL GROWTH AND INCOME
SUBACCOUNT(18)...................... -8.37
Life of Subaccount (from
06/01/98)......................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/98)... 36,135 -9.66 N/A N/A
KEMPER GLOBAL BLUE CHIP SUBACCOUNT.... 1.13
Life of Subaccount (from
06/01/98)......................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/98)... 38,802 -2.99 N/A N/A
WARBURG EMERGING MARKETS SUBACCOUNT... -18.44
Life of Subaccount (from
06/01/98)......................... N/A N/A N/A N/A
Life of Portfolio (from 12/31/97)... 32,622 -18.44 -18.44 N/A
One Year............................ 32,622 -18.44 -18.44 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-17 for additional information.
B-12
<PAGE> 308
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<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............................................. 193.91 24.06 12.41 2.37
Three Years............................................ 110.85 28.23 6.78 2.21
One Year............................................... 28.58 28.58 1.61 1.61
KEMPER GLOBAL INCOME SUBACCOUNT
Life of Portfolio (from 05/01/97)...................... 22.55 22.55 0.69 0.69
SCUDDER VLIF GLOBAL DISCOVERY SUBACCOUNT
Life of Portfolio (from 05/01/96)...................... 48.25 26.62 3.72 2.21
One Year............................................... 28.58 28.58 1.61 1.61
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Life of Portfolio (from 05/01/87)...................... N/A N/A N/A N/A
Ten Years.............................................. 479.63 19.21 36.02 3.12
Five Years............................................. 193.91 24.06 12.41 2.37
Three Years............................................ 110.85 28.23 6.78 2.21
One Year............................................... 28.58 28.58 1.61 1.61
KEMPER INTERNATIONAL GROWTH AND INCOME SUBACCOUNT(18)....
Life of Portfolio (from 05/01/98)...................... N/A N/A N/A N/A
KEMPER GLOBAL BLUE CHIP SUBACCOUNT.......................
Life of Portfolio (from 05/01/98)...................... N/A N/A N/A N/A
WARBURG EMERGING MARKETS SUBACCOUNT......................
Life of Portfolio (from 12/31/97)...................... N/A N/A N/A N/A
One Year............................................... N/A N/A N/A 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-17 for additional information.
B-13
<PAGE> 309
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<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................................ 55.23 9.19 107.19 15.68
Three Years............................... 29.52 9.00 63.34 17.77
One Year.................................. 20.00 20.00 24.34 24.34
KEMPER GLOBAL INCOME SUBACCOUNT
Life of Portfolio (from 05/01/97)......... 2.42 1.44 20.83 12.01
SCUDDER VLIF GLOBAL DISCOVERY SUBACCOUNT
Life of Portfolio (from 05/01/96)......... N/A N/A N/A N/A
One Year.................................. 20.00 20.00 24.34 24.34
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Life of Portfolio (from 05/01/87)......... N/A N/A N/A N/A
Ten Years................................. 71.48 5.54 175.33 10.66
Five Years................................ 55.23 9.19 107.19 15.68
Three Years............................... 29.52 9.00 63.34 17.77
One Year.................................. 20.00 20.00 24.34 24.34
KEMPER INTERNATIONAL GROWTH AND INCOME
SUBACCOUNT(18)
Life of Portfolio (from 05/01/98)......... N/A N/A N/A N/A
KEMPER GLOBAL BLUE CHIP SUBACCOUNT
Life of Portfolio (from 05/01/98)......... N/A N/A N/A N/A
WARBURG EMERGING MARKETS SUBACCOUNTS
Life of Portfolio (from 12/31/97)......... N/A N/A N/A N/A
One Year.................................. N/A N/A N/A 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-17 for additional information.
B-14
<PAGE> 310
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
---------------------------------- --------------
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)......... 13.56%
Life of Subaccount (from 04/06/82)....... $281,266 603.17% 12.37% 12.37%
Life of Portfolio (from 04/06/82)........ 281,266 603.17 12.37 12.37
Ten Years................................ 131,889 229.72 12.67 12.67
Five Years............................... 68,721 71.08 11.43 11.43
Three Years.............................. 61,713 54.28 15.55 15.55
One Year................................. 45,422 13.56 13.56 13.56
KEMPER HORIZON 10+ SUBACCOUNT.............. 9.80
Life of Subaccount (from 05/01/96)....... 55,836 39.59 13.31 10.80
Life of Portfolio (from 05/01/96)........ 55,836 39.59 13.31 10.80
One Year................................. 43,919 9.80 9.80 2.30
KEMPER HORIZON 5 SUBACCOUNT................ 8.24
Life of Subaccount (from 05/01/96)....... 52,269 30.67 10.55 8.07
Life of Portfolio (from 05/01/96)........ 52,269 30.67 10.55 8.07
One Year................................. 43,296 8.24 8.24 0.84
SCUDDER VLIF GROWTH AND INCOME
SUBACCOUNT............................... 5.42
Life of Subaccount (from 05/01/98)....... N/A N/A N/A N/A
Life of Portfolio (from 05/02/94)........ 88,276 120.69 18.48 N/A
Three Years.............................. 65,365 63.41 17.79 N/A
One Year................................. 42,169 5.42 5.42 N/A
JANUS ASPEN GROWTH AND INCOME SUBACCOUNT... 21.51
Life of Subaccount (from 06/01/98)....... N/A N/A N/A N/A
Life of Portfolio (from 05/01/98)........ 47,478 18.69 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..................... 479.63 19.21 36.02 3.12 104.54 7.42
Five Years.................... 193.91 24.06 12.41 2.37 33.84 6.00
Three Years................... 110.85 28.23 6.78 2.21 19.95 6.25
One Year...................... 28.58 28.58 1.61 1.61 6.96 6.96
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...................... 28.58 28.58 1.61 1.61 6.96 6.96
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...................... 28.58 28.58 1.61 1.61 6.96 6.96
SCUDDER VLIF GROWTH AND INCOME
SUBACCOUNT
Life of Portfolio (from
05/02/94)................... N/A N/A N/A N/A N/A N/A
Three Years................... 110.85 28.23 6.78 2.21 19.95 6.25
One Year...................... 28.58 28.58 1.61 1.61 6.96 6.96
JANUS ASPEN GROWTH AND INCOME
SUBACCOUNT....................
Life of Subaccount (from
06/01/98)................... N/A N/A N/A N/A N/A N/A
Life of Portfolio (from
05/01/98)................... N/A N/A N/A N/A N/A 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-17 for additional information.
B-15
<PAGE> 311
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(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.............................. 144.55 9.35 144.10 9.33
Five Years............................. 42.50 7.34 42.26 7.30
Three Years............................ 23.81 7.38 23.64 7.33
One Year............................... 9.53 9.53 9.47 9.47
KEMPER HORIZON 10+ SUBACCOUNT
Life of Portfolio (from 05/01/96)...... 18.07 10.48 16.45 9.57
One Year............................... 9.53 9.53 9.47 9.47
KEMPER HORIZON 5 SUBACCOUNT
Life of Portfolio (from 05/01/96)...... 18.07 16.48 16.45 9.57
One Year............................... 9.53 9.53 9.47 9.47
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT
Life of Portfolio (from 05/02/94)...... N/A N/A N/A N/A
Three Years............................ 23.81 7.38 23.64 7.33
One Year............................... 9.53 9.53 9.47 9.47
JANUS ASPEN GROWTH AND INCOME SUBACCOUNT
Life of Portfolio (from 05/01/98....... N/A N/A N/A 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-17 for additional information.
B-16
<PAGE> 312
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Non standardized 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.
(4) The Ending Values quoted are based on a $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.
(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 Merrill Lynch High Yield Master Index consists of fixed-rate,
coupon-bearing bonds with an outstanding par, which is greater than or
equal to $50 million, a maturity range greater than or equal to one year
and must be less than BBB/Baa3 rated but not in default.
(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. (23) From May 1, 1996 to December 31, 1996.
(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.
(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.
B-17
<PAGE> 313
The following tables illustrate an assumed $40,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from the inception date of each Portfolio December 31, 1998.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER MONEY MARKET SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 ............................... $43,058
1983 ............................... 46,405
1984 ............................... 50,672
1985 ............................... 54,097
1986 ............................... 56,930
1987 ............................... 59,890
1988 ............................... 63,522
1989 ............................... 68,411
1990 ............................... 73,006
1991 ............................... 76,284
1992 ............................... 77,837
1993 ............................... 78,986
1994 ............................... 81,032
1995 ............................... 84,457
1996 ............................... 87,474
1997 ............................... 90,808
1998 ............................... 94,176
</TABLE>
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1987 ............................... $40,113
1988 ............................... 40,802
1989 ............................... 46,076
1990 ............................... 49,932
1991 ............................... 56,791
1992 ............................... 59,338
1993 ............................... 62,337
1994 ............................... 59,698
1995 ............................... 70,167
1996 ............................... 71,013
1997 ............................... 76,314
1998 ............................... 80,552
</TABLE>
<TABLE>
<CAPTION>
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $41,050
1997 ............................... 44,146
1998 ............................... 46,992
</TABLE>
<TABLE>
<CAPTION>
KEMPER GLOBAL INCOME SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1997 ............................... $40,770
1998 ............................... 44,625
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 5 SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $43,440
1997 ............................... 48,290
1998 ............................... 52,269
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 .............................. $ 49,485
1983 .............................. 56,063
1984 .............................. 62,318
1985 .............................. 74,896
1986 .............................. 87,063
1987 .............................. 91,000
1988 .............................. 104,083
1989 .............................. 101,388
1990 .............................. 84,543
1991 .............................. 126,809
1992 .............................. 147,400
1993 .............................. 174,590
1994 .............................. 168,495
1995 .............................. 195,244
1996 .............................. 219,431
1997 .............................. 241,567
1998 .............................. 241,694
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 10+ SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $44,149
1997 ............................... 50,854
1998 ............................... 55,836
</TABLE>
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 .............................. $ 49,392
1983 .............................. 57,378
1984 .............................. 53,853
1985 .............................. 68,340
1986 .............................. 77,673
1987 .............................. 77,145
1988 .............................. 85,304
1989 .............................. 104,439
1990 .............................. 108,263
1991 .............................. 147,457
1992 .............................. 147,945
1993 .............................. 163,715
1994 .............................. 145,460
1995 .............................. 182,305
1996 .............................. 209,311
1997 .............................. 247,690
1998 .............................. 281,266
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 20+ SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $45,738
1997 ............................... 54,357
1998 ............................... 60,598
</TABLE>
B-18
<PAGE> 314
<TABLE>
<CAPTION>
KEMPER VALUE+GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $45,433
1997 ............................... 56,237
1998 ............................... 66,652
</TABLE>
<TABLE>
<CAPTION>
KEMPER BLUE CHIP SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1997 ............................... $44,215
1998 ............................... 49,643
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1992 ............................... $39,188
1993 ............................... 51,394
1994 ............................... 48,859
1995 ............................... 54,742
1996 ............................... 62,541
1997 ............................... 67,528
1998 ............................... 73,273
</TABLE>
<TABLE>
<CAPTION>
KEMPER CONTRARIAN VALUE SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $46,528
1997 ............................... 59,851
1998 ............................... 70,398
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $40,372
1997 ............................... 48,482
1998 ............................... 42,434
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1994 ............................... $41,214
1995 ............................... 52,896
1996 ............................... 66,854
1997 ............................... 88,516
1998 ............................... 103,332
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1983 .............................. $ 41,162
1984 .............................. 45,032
1985 .............................. 55,641
1986 .............................. 60,009
1987 .............................. 60,236
1988 .............................. 59,691
1989 .............................. 75,587
1990 .............................. 75,040
1991 .............................. 118,218
1992 .............................. 120,823
1993 .............................. 136,694
1994 .............................. 128,113
1995 .............................. 170,566
1996 .............................. 203,889
1997 .............................. 244,064
1998 .............................. 277,058
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL GROWTH AND
INCOME SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1998 ............................... $36,135
</TABLE>
<TABLE>
<CAPTION>
KEMPER GLOBAL BLUE CHIP SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1998 ............................... $38,802
</TABLE>
<TABLE>
<CAPTION>
KEMPER-DREMAN HIGH RETURN
EQUITY SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1998 ............................... $40,766
</TABLE>
<TABLE>
<CAPTION>
KEMPER-DREMAN FINANCIAL SERVICES
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1998 ............................... $38,758
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF GLOBAL
DISCOVERY SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $41,810
1997 ............................... 46,339
1998 ............................... 53,214
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF GROWTH AND INCOME
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1994 ............................... $41,578
1995 ............................... 54,021
1996 ............................... 65,077
1997 ............................... 83,736
1998 ............................... 88,276
</TABLE>
B-19
<PAGE> 315
<TABLE>
<CAPTION>
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1987 .............................. $ 35,409
1988 .............................. 40,769
1989 .............................. 55,419
1990 .............................. 50,462
1991 .............................. 55,468
1992 .............................. 53,012
1993 .............................. 72,052
1994 .............................. 70,457
1995 .............................. 77,210
1996 .............................. 87,390
1997 .............................. 93,997
1998 .............................. 109,837
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF CAPITAL GROWTH
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1985 .............................. $ 43,878
1986 .............................. 52,927
1987 .............................. 51,190
1988 .............................. 61,634
1989 .............................. 74,624
1990 .............................. 68,087
1991 .............................. 93,734
1992 .............................. 98,364
1993 .............................. 117,263
1994 .............................. 104,465
1995 .............................. 132,542
1996 .............................. 157,011
1997 .............................. 210,213
1998 .............................. 255,462
</TABLE>
<TABLE>
<CAPTION>
JANUS GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1993 .............................. $ 41,230
1994 .............................. 41,785
1995 .............................. 53,645
1996 .............................. 62,659
1997 .............................. 75,123
1998 .............................. 100,505
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN GROWTH AND INCOME
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1998 ............................... $47,478
</TABLE>
<TABLE>
<CAPTION>
WARBURG PINCUS POST-VENTURE CAPITAL
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $38,903
1997 ............................... 43,483
1998 ............................... 45,675
</TABLE>
<TABLE>
<CAPTION>
WARBURG PINCUS EMERGING MARKETS
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1998 ............................... $32,622
</TABLE>
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED
ANNUITY CONVENTIONAL
AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- CONTRIBUTIONS
TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------
<S> <C> <C> <C>
10 Years.......................................... $107,946 $ 86,448 $ 81,693
20 Years.......................................... 233,048 165,137 133,476
30 Years.......................................... 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts. Income on
Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10% tax
penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following annuity charges and
expenses: 1.25% mortality and expense risk; .10% administration charges; 7%
maximum deferred withdrawal charge; and $30 annual records maintenance charge.
The tax-deferred accumulation would be reduced if these charges were reflected.
No implication is intended by the use of these assumptions that the return shown
is guaranteed in any way or that the return shown represents an average or
expected rate of return over the period of the Contracts. [IMPORTANT--THIS IS
NOT AN ILLUSTRATION OF YIELD OR RETURN].
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of
B-20
<PAGE> 316
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.
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, 1998 and the related statement of operations
for the year then ended and the statements of changes in contract owners' equity
for the years ended December 31, 1998 and 1997 have been included herein in
reliance upon the report of PricewaterhouseCoopers LLP, independent 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 Contracts and also
assets attributable to other variable annuity contracts offered by KILICO
through the Separate Account. In addition, the financial statements for the
Separate Account reflect Subaccounts that are not available under the Contracts.
B-21
<PAGE> 317
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Variable Annuity Separate Account:
In our opinion, the accompanying statement of assets and liabilities and
contract owners' equity and the related statement of operations and changes in
owner's equity present fairly, in all material respects, the financial position
of the subaccounts of KILICO Variable Annuity Separate Account, which includes
the Money Market Subaccount, Money Market Subaccount #2, Total Return
Subaccount, High Yield Subaccount, Growth Subaccount, Government Securities
Subaccount, International Subaccount, Small Cap Growth Subaccount, Investment
Grade Bond Subaccount, Contrarian Value Subaccount, Small Cap Value Subaccount,
Value+Growth Subaccount, Horizon 20+ Subaccount, Horizon 10+ Subaccount, Horizon
5 Subaccount, Global Income Subaccount, Blue Chip Subaccount, International
Growth & Income Subaccount, High Return Subaccount, Financial Services
Subaccount, Global Blue Chip Subaccount, (investment options within the
Investors Fund Series), Growth Subaccount, Growth & Income Subaccount,
(investment options within the Janus Aspen Series), Global Discovery Subaccount,
Growth & Income Subaccount, International Subaccount, Capital Growth Subaccount
(investment options within the Scudder Variable Life Investment Fund), Emerging
Markets Subaccount, and Post-Venture Capital Subaccount (investment options
within the Warburg Pincus Trust) thereof, at December 31, 1998, and the changes
in their equity for the year then ended and for each of the period presented,
except for the International Growth & Income Subaccount, High Return Subaccount,
Financial Services Subaccount, Global Blue Chip Subaccount, Growth Subaccount,
Growth & Income Subaccount, Global Discovery Subaccount, Growth & Income
Subaccount, International Subaccount, Capital Growth Subaccount, Emerging
Markets Subaccount, and Post-Venture Capital Subaccount as to which the period
is June 1, 1998 (commencement of operations) to December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of Kemper Investors Life Insurance Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included direct confirmation of investments
owned at December 31, 1998 by correspondence with transfer agents, provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 19, 1999
B-22
<PAGE> 318
(This page intentionally left blank)
B-23
<PAGE> 319
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL HIGH GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... $106,985 4,700 737,296 262,814 538,414 78,453
Dividends and other
receivables................ 223 9 2 1 12 --
-------- ----- ------- ------- ------- ------
Total assets.......... 107,208 4,709 737,298 262,815 538,426 78,453
-------- ----- ------- ------- ------- ------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 103 -- 780 285 559 84
Units of Account
Redeemed................. -- -- 6 -- -- 18
Other...................... 3 -- 133 168 122 6
-------- ----- ------- ------- ------- ------
Total liabilities..... 106 -- 919 453 681 108
-------- ----- ------- ------- ------- ------
Contract owners' equity...... $107,102 4,709 736,379 262,362 537,745 78,345
======== ===== ======= ======= ======= ======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. $ 34,061 3,269 102,938 49,875 131,199 41,028
Accumulated net investment
income (loss).............. 73,041 1,440 415,826 199,073 282,440 34,537
Accumulated net realized gain
on sales of investments.... -- -- 108,949 10,808 69,603 957
Unrealized appreciation
(depreciation) of
investments................ -- -- 108,666 2,606 54,503 1,823
-------- ----- ------- ------- ------- ------
Contract owners' equity...... $107,102 4,709 736,379 262,362 537,745 78,345
======== ===== ======= ======= ======= ======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... 145,348 144,050
Dividends and other
receivables................ 4 13
------- -------
Total assets.......... 145,352 144,063
------- -------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 151 144
Units of Account
Redeemed................. -- --
Other...................... 20 38
------- -------
Total liabilities..... 171 182
------- -------
Contract owners' equity...... 145,181 143,881
======= =======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. 78,316 83,272
Accumulated net investment
income (loss).............. 13,462 25,692
Accumulated net realized gain
on sales of investments.... 29,972 15,321
Unrealized appreciation
(depreciation) of
investments................ 23,431 19,596
------- -------
Contract owners' equity...... 145,181 143,881
======= =======
</TABLE>
See accompanying notes to financial statements.
B-24
<PAGE> 320
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------------------------------
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON
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>
11,490 95,958 33,386 47,062 9,223 15,456 6,805 1,428 8,794
142 2 17 -- -- -- 19 -- --
------ ------ ------ ------ ----- ------ ----- ----- -----
11,632 95,960 33,403 47,062 9,223 15,456 6,824 1,428 8,794
------ ------ ------ ------ ----- ------ ----- ----- -----
11 100 33 47 9 15 7 1 8
-- -- -- -- -- -- -- -- --
-- 10 4 10 1 2 -- -- 2
------ ------ ------ ------ ----- ------ ----- ----- -----
11 110 37 57 10 17 7 1 10
------ ------ ------ ------ ----- ------ ----- ----- -----
11,621 95,850 33,366 47,005 9,213 15,439 6,817 1,427 8,784
====== ====== ====== ====== ===== ====== ===== ===== =====
10,820 68,393 33,364 37,086 7,238 12,897 5,867 1,281 8,056
61 1,365 223 180 57 74 56 28 (44)
384 9,023 2,054 2,345 574 552 334 57 129
356 17,069 (2,275) 7,394 1,344 1,916 560 61 643
------ ------ ------ ------ ----- ------ ----- ----- -----
11,621 95,850 33,366 47,005 9,213 15,439 6,817 1,427 8,784
====== ====== ====== ====== ===== ====== ===== ===== =====
</TABLE>
B-25
<PAGE> 321
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES JANUS ASPEN SERIES
---------------------------------------------------- -----------------------
INTERNATIONAL HIGH GLOBAL
GROWTH & RETURN FINANCIAL BLUE GROWTH &
INCOME EQUITY SERVICES CHIP GROWTH INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... $236 5,439 1,218 288 59,947 2,075
Dividends and other
receivables................ -- -- -- -- 4 --
---- ----- ----- --- ------ -----
Total assets.......... 236 5,439 1,218 288 59,951 2,075
---- ----- ----- --- ------ -----
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. -- -- -- -- 58 --
Units of Account
Redeemed................. -- -- -- -- -- --
Other...................... -- 3 1 -- 19 1
---- ----- ----- --- ------ -----
Total liabilities..... -- 3 1 -- 77 1
---- ----- ----- --- ------ -----
Contract owners' equity...... $236 5,436 1,217 288 59,874 2,074
==== ===== ===== === ====== =====
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. $229 5,160 1,151 274 40,911 1,808
Accumulated net investment
income (loss).............. -- (21) (6) (2) 2,641 (2)
Accumulated net realized gain
(loss) on sales of
investments................ (2) (10) (5) (2) 2,691 --
Unrealized appreciation of
investments................ 9 307 77 18 13,631 268
---- ----- ----- --- ------ -----
Contract owners' equity...... $236 5,436 1,217 288 59,874 2,074
==== ===== ===== === ====== =====
</TABLE>
See accompanying notes to financial statements.
B-26
<PAGE> 322
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUNDS WARBURG PINCUS TRUST
---------------------------------------------------- -----------------------
POST-
GLOBAL GROWTH & CAPITAL EMERGING VENTURE
DISCOVERY INCOME INTERNATIONAL GROWTH MARKETS CAPITAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
744 1,698 869 604 59 85
-- -- -- -- -- --
--- ----- --- --- -- --
744 1,698 869 604 59 85
--- ----- --- --- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- 1 -- -- -- --
--- ----- --- --- -- --
-- 1 -- -- -- --
--- ----- --- --- -- --
744 1,697 869 604 59 85
=== ===== === === == ==
676 1,646 830 559 58 81
(10) (4) (5) (2) -- --
(19) (19) (7) (13) (1) --
97 74 51 60 2 4
--- ----- --- --- -- --
744 1,697 869 604 59 85
=== ===== === === == ==
</TABLE>
B-27
<PAGE> 323
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions.................... $4,272 264 124,719 21,044 87,153 4,579
Expenses:
Mortality and expense risk and
administrative charges......... 1,104 -- 10,155 3,895 7,438 1,010
------ --- ------- ------- ------- -----
Net investment income (loss)....... 3,168 264 114,564 17,149 79,715 3,569
------ --- ------- ------- ------- -----
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments................. -- -- 20,649 4,283 8,570 (67)
Change in unrealized appreciation
(depreciation) of
investments.................... -- -- (41,076) (17,978) (20,871) 553
------ --- ------- ------- ------- -----
Net realized and unrealized gain
(loss) on investments............ -- -- (20,427) (13,695) (12,301) 486
------ --- ------- ------- ------- -----
Net increase (decrease) in contract
owners' equity resulting from
operations....................... $3,168 264 94,137 3,454 67,414 4,055
====== === ======= ======= ======= =====
<CAPTION>
INVESTORS FUND SERIES
--------------------------
SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Dividends and capital gains
distributions.................... 7,607 20,052
Expenses:
Mortality and expense risk and
administrative charges......... 2,132 1,671
------ ------
Net investment income (loss)....... 5,475 18,381
------ ------
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments................. 11,865 4,201
Change in unrealized appreciation
(depreciation) of
investments.................... (3,914) (2,782)
------ ------
Net realized and unrealized gain
(loss) on investments............ 7,951 1,419
------ ------
Net increase (decrease) in contract
owners' equity resulting from
operations....................... 13,426 19,800
====== ======
</TABLE>
See accompanying notes to financial statements.
B-28
<PAGE> 324
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------------------------------------------------
INVESTMENT CONTRARIAN SMALL CAP GLOBAL
GRADE BOND VALUE VALUE VALUE+GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5 INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ------------ ----------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
198 2,907 885 884 253 308 184 36 25
100 1,147 442 480 110 151 81 1 49
--- ------ ------ ----- --- ----- --- --- ---
98 1,760 443 404 143 157 103 35 (24)
--- ------ ------ ----- --- ----- --- --- ---
311 6,261 911 1,727 397 414 236 36 102
78 6,236 (6,089) 3,626 309 604 115 56 589
--- ------ ------ ----- --- ----- --- --- ---
389 12,497 (5,178) 5,353 706 1,018 351 92 691
--- ------ ------ ----- --- ----- --- --- ---
487 14,257 (4,735) 5,757 849 1,175 454 127 667
=== ====== ====== ===== === ===== === === ===
</TABLE>
B-29
<PAGE> 325
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES JANUS ASPEN SERIES
------------------------------------------------------------- -----------------------------
INTERNATIONAL HIGH
GROWTH & RETURN FINANCIAL GLOBAL BLUE GROWTH &
INCOME EQUITY SERVICES CHIP GROWTH INCOME
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT SUBACCOUNT(A)
------------- ------------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions................. $-- -- -- -- 2,569 3
Expenses:
Mortality and expense risk and
administrative charges...... -- 21 6 2 596 5
--- --- -- -- ------ ---
Net investment income (loss).... -- (21) (6) (2) 1,973 (2)
--- --- -- -- ------ ---
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on
sales of investments........ (2) (10) (5) (2) 1,775 --
Change in unrealized
appreciation of
investments................. 9 307 77 18 9,281 268
--- --- -- -- ------ ---
Net realized and unrealized gain
on investments................ 7 297 72 16 11,056 268
--- --- -- -- ------ ---
Net increase in contract owners'
equity resulting from
operations.................... $ 7 276 66 14 13,029 266
=== === == == ====== ===
</TABLE>
(a) For the period June 1, 1998 (commencement of operations) to December 31,
1998.
See accompanying notes to financial statements.
B-30
<PAGE> 326
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUNDS WARBURG PINCUS TRUST
------------------------------------------------------------- -----------------------------
GLOBAL GROWTH & CAPITAL EMERGING POST-VENTURE
DISCOVERY INCOME INTERNATIONAL GROWTH MARKETS CAPITAL
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
-- 5 -- 1 -- --
10 9 5 3 -- --
--- --- -- --- -- --
(10) (4) (5) (2) -- --
--- --- -- --- -- --
(19) (19) (7) (13) (1) --
97 74 51 60 2 4
--- --- -- --- -- --
78 55 44 47 1 4
--- --- -- --- -- --
68 51 39 45 1 4
=== === == === == ==
</TABLE>
B-31
<PAGE> 327
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL HIGH GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss).... $ 3,168 264 114,564 17,149 79,715 3,569
Net realized gain (loss) on
sales of investments.......... -- -- 20,649 4,283 8,570 (67)
Change in unrealized
appreciation (depreciation) of
investments................... -- -- (41,076) (17,978) (20,871) 553
-------- ------ -------- ------- ------- -------
Net increase (decrease) in
contract owners' equity
resulting from operations... 3,168 264 94,137 3,454 67,414 4,055
-------- ------ -------- ------- ------- -------
Account unit transactions:
Proceeds from units sold........ 22,035 6,045 35,608 27,800 29,595 10,692
Net transfers (to) from
affiliate and subaccounts..... 29,478 (7,639) (47,643) (40,100) (26,086) 5,342
Payments for units redeemed..... (21,333) (355) (88,507) (34,613) (60,278) (14,565)
-------- ------ -------- ------- ------- -------
Net increase (decrease) in
contract owners' equity from
account unit transactions... 30,180 (1,949) (100,542) (46,913) (56,769) 1,469
-------- ------ -------- ------- ------- -------
Total increase (decrease) in
contract owners' equity......... 33,348 (1,685) (6,405) (43,459) 10,645 5,524
Beginning of period............... 73,754 6,394 742,784 305,821 527,100 72,821
-------- ------ -------- ------- ------- -------
End of period..................... $107,102 4,709 736,379 262,362 537,745 78,345
======== ====== ======== ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income (loss).... 5,475 18,381
Net realized gain (loss) on
sales of investments.......... 11,865 4,201
Change in unrealized
appreciation (depreciation) of
investments................... (3,914) (2,782)
------- -------
Net increase (decrease) in
contract owners' equity
resulting from operations... 13,426 19,800
------- -------
Account unit transactions:
Proceeds from units sold........ 8,825 17,275
Net transfers (to) from
affiliate and subaccounts..... (20,766) 2,566
Payments for units redeemed..... (16,900) (8,623)
------- -------
Net increase (decrease) in
contract owners' equity from
account unit transactions... (28,841) 11,218
------- -------
Total increase (decrease) in
contract owners' equity......... (15,415) 31,018
Beginning of period............... 160,596 112,863
------- -------
End of period..................... 145,181 143,881
======= =======
</TABLE>
See accompanying notes to financial statements.
B-32
<PAGE> 328
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------------------------------
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON
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> <C>
98 1,760 443 404 143 157 103 35 (24)
311 6,261 911 1,727 397 414 236 36 102
78 6,236 (6,089) 3,626 309 604 115 56 589
------ ------ ------ ------ ----- ------ ----- ----- -----
487 14,257 (4,735) 5,757 849 1,175 454 127 667
------ ------ ------ ------ ----- ------ ----- ----- -----
2,850 15,517 6,528 7,814 2,155 2,644 1,628 47 2,261
3,781 (5,407) 1,040 8,749 116 3,301 221 933 4,001
(955) (6,599) (2,717) (3,236) (375) (841) (384) (6) (223)
------ ------ ------ ------ ----- ------ ----- ----- -----
5,676 3,511 4,851 13,327 1,896 5,104 1,465 974 6,039
------ ------ ------ ------ ----- ------ ----- ----- -----
6,163 17,768 116 19,084 2,745 6,279 1,919 1,101 6,706
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
------ ------ ------ ------ ----- ------ ----- ----- -----
11,621 95,850 33,366 47,005 9,213 15,439 6,817 1,427 8,784
====== ====== ====== ====== ===== ====== ===== ===== =====
</TABLE>
B-33
<PAGE> 329
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES JANUS ASPEN SERIES
------------------------------------------------------------- -----------------------------
INTERNATIONAL HIGH
GROWTH & RETURN FINANCIAL GLOBAL BLUE GROWTH &
INCOME EQUITY SERVICES CHIP GROWTH INCOME
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)... $ -- (21) (6) (2) 1,973 (2)
Net realized gain (loss) on
sales of investments......... (2) (10) (5) (2) 1,775 --
Change in unrealized
appreciation of
investments.................. 9 307 77 18 9,281 268
---- ----- ----- --- ------ -----
Net increase in contract
owners' equity resulting
from operations............ 7 276 66 14 13,029 266
---- ----- ----- --- ------ -----
Account unit transactions:
Proceeds from units sold....... 211 4,774 952 262 9,559 1,565
Net transfers from affiliate
and subaccounts.............. 21 524 224 21 10,386 292
Payments for units redeemed.... (3) (138) (25) (9) (2,747) (49)
---- ----- ----- --- ------ -----
Net increase in contract
owners' equity from account
unit transactions.......... 229 5,160 1,151 274 17,198 1,808
---- ----- ----- --- ------ -----
Total increase in contract
owners' equity................. 236 5,436 1,217 288 30,227 2,074
Beginning of period.............. -- -- -- -- 29,647 --
---- ----- ----- --- ------ -----
End of period.................... $236 5,436 1,217 288 59,874 2,074
==== ===== ===== === ====== =====
</TABLE>
(a) For the period June 1, 1998 (commencement of operations) to December 31,
1998.
See accompanying notes to financial statements.
B-34
<PAGE> 330
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUNDS WARBURG PINCUS TRUST
------------------------------------------------------------- -----------------------------
GLOBAL GROWTH & CAPITAL EMERGING POST-VENTURE
DISCOVERY INCOME INTERNATIONAL GROWTH MARKETS CAPITAL
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(10) (4) (5) (2) -- --
(19) (19) (7) (13) (1) --
97 74 51 60 2 4
--- ----- --- --- --- -----
68 51 39 45 1 4
--- ----- --- --- --- -----
555 1,453 731 559 58 79
123 278 99 19 -- 2
(2) (85) -- (19) -- --
--- ----- --- --- --- -----
676 1,646 830 559 58 81
--- ----- --- --- --- -----
744 1,697 869 604 59 85
-- -- -- -- -- --
--- ----- --- --- --- -----
744 1,697 869 604 59 85
=== ===== === === === =====
</TABLE>
B-35
<PAGE> 331
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
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)..................... $ 2,939 373 97,860 20,076 105,197 5,218
Net realized gain (loss) on
sales of investments....... -- -- 21,466 5,634 13,791 (133)
Change in unrealized
appreciation (depreciation)
of investments............. -- -- 1,837 2,376 (29,191) 284
-------- ------- -------- ------- ------- -------
Net increase in contract
owners' equity resulting
from operations.......... 2,939 373 121,163 28,086 89,797 5,369
-------- ------- -------- ------- ------- -------
Account unit transactions:
Proceeds from units sold..... 21,938 7,884 36,774 26,456 32,804 6,125
Net transfers (to) from
affiliate and
subaccounts................ 7,054 (10,145) (30,823) (473) (35,916) (6,847)
Payments for units
redeemed................... (17,525) (213) (75,741) (34,745) (43,779) (11,513)
-------- ------- -------- ------- ------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions............. 11,467 (2,474) (69,790) (8,762) (46,891) (12,235)
-------- ------- -------- ------- ------- -------
Total increase (decrease) in
contract owners' equity...... 14,406 (2,101) 51,373 19,324 42,906 (6,866)
Beginning of period............ 59,348 8,495 691,411 286,497 484,194 79,687
-------- ------- -------- ------- ------- -------
End of period.................. $ 73,754 6,394 742,784 305,821 527,100 72,821
======== ======= ======== ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income
(loss)..................... 6,840 7,284
Net realized gain (loss) on
sales of investments....... 9,738 8,226
Change in unrealized
appreciation (depreciation)
of investments............. (2,788) 8,507
------- -------
Net increase in contract
owners' equity resulting
from operations.......... 13,790 24,017
------- -------
Account unit transactions:
Proceeds from units sold..... 14,396 14,943
Net transfers (to) from
affiliate and
subaccounts................ (14,865) 11,461
Payments for units
redeemed................... (15,633) (6,408)
------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions............. (16,102) 19,996
------- -------
Total increase (decrease) in
contract owners' equity...... (2,312) 44,013
Beginning of period............ 162,908 68,850
------- -------
End of period.................. 160,596 112,863
======= =======
</TABLE>
- ---------------
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
1997.
See accompanying notes to financial statements.
B-36
<PAGE> 332
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------------------------------------------------
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> <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
===== ====== ====== ====== ===== ===== ===== === =====
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
429
842
3,150
------
4,421
------
5,841
2,785
(1,058)
------
7,568
------
11,989
17,658
------
29,647
======
</TABLE>
B-37
<PAGE> 333
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Kemper Investors Life Insurance Company 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 Zurich Financial
Services ("ZFS"). ZFS was formed with the September 7, 1998 merger of the Zurich
Group with the financial services business of B.A.T. Industries. ZFS is owned by
Zurich Allied AG and Allied Zurich p.l.c., fifty-seven percent and forty-three
percent, respectively. Zurich Allied AG, representing the financial interest of
the former Zurich Group, is listed on the Swiss Market Index (SMI) replacing
Zurich. Allied Zurich p.l.c., representing the financial interest of the
financial services business of B.A.T. Industries, is included in the FTSE-100
Share Index in London.
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, PASSPORT individual and group variable and market
value adjusted deferred annuity contracts and DESTINATIONS individual and group
variable, fixed and market value adjusted deferred annuity contracts. The
Separate Account is divided into a total of thirty-nine subaccounts with various
subaccount options available to Contract Owners depending upon their respective
Contracts. A total of only twenty-eight subaccount options are presented in the
accompanying financial statements (the Money Market Subaccounts represent only
one subaccount), as available subaccount options to Contract Owners. ADVANTAGE
III Contract Owners have eleven additional subaccounts which invest in the
shares of subaccounts in the Janus Aspen Series, the Lexington Funds, and the
Fidelity VIP Funds which are not reflected in the accompanying financial
statements. Each subaccount invests exclusively in the shares of a corresponding
portfolio of one of the underlying investment funds; the Investors Fund Series,
the Janus Aspen Series, the Scudder Variable Life Investment Funds and the
Warburg Pincus Trust Funds, all of which are open-end diversified management
investment companies.
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, 1998.
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.
(Central 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-38
<PAGE> 334
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.
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
INVESTMENTS
INVESTORS FUND SERIES:
Money Market Subaccount (Money Market and Money Market #2
Subaccounts).............................................. 111,685 $ 111,685
Total Return Subaccount..................................... 264,617 628,630
High Yield Subaccount....................................... 214,127 260,208
Growth Subaccount........................................... 182,099 483,911
Government Securities Subaccount............................ 64,938 76,630
International Subaccount.................................... 105,017 121,917
Small Cap Growth Subaccount................................. 73,037 124,454
Investment Grade Bond Subaccount............................ 9,866 11,134
Contrarian Value Subaccount................................. 54,611 78,889
Small Cap Value Subaccount.................................. 31,336 35,661
Value+Growth Subaccount..................................... 28,166 39,668
Horizon 20+ Subaccount...................................... 6,121 7,879
Horizon 10+ Subaccount...................................... 11,087 13,540
Horizon 5 Subaccount........................................ 5,228 6,245
Global Income Subaccount.................................... 1,287 1,367
Blue Chip Subaccount........................................ 6,981 8,151
International Growth & Income Subaccount.................... 259 227
Dreman High Return Equity Subaccount........................ 5,288 5,132
Dreman Financial Services Subaccount........................ 1,245 1,141
Global Blue Chip Subaccount................................. 295 270
JANUS ASPEN SERIES FUNDS:
Growth Subaccount........................................... 2,547 46,316
Growth & Income Subaccount.................................. 173 1,807
SCUDDER VARIABLE LIFE INVESTMENT FUNDS:
Global Discovery Subaccount................................. 93 647
Growth & Income Subaccount.................................. 151 1,624
International Subaccount.................................... 60 818
Capital Growth Subaccount................................... 25 544
WARBURG PINCUS TRUST FUNDS:
Emerging Markets Subaccounts................................ 7 57
Post-Venture Capital Subaccount............................. 7 81
----------
TOTAL INVESTMENTS AT COST........................... $2,068,633
==========
</TABLE>
A description of the underlying investments of the subaccounts are summarized
below.
INVESTORS FUND SERIES
MONEY MARKET SUBACCOUNT: This subaccount seeks maximum current income to the
extent consistent with stability of principal from a portfolio of high quality
money market instruments. The Portfolio seeks to maintain a net asset value of
$1.00 per share but there is no assurance that the Portfolio will be able to do
so. The Money Market Subaccount represents the ADVANTAGE III Money Market
Subaccount and the PASSPORT and DESTINATIONS Money Market Subaccount #1. Money
Market Subaccount #2 represents funds allocated by the owner of a contract to
the dollar cost averaging ("DCA") 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 and DESTINATIONS
individual and group variable, fixed and market value adjusted deferred annuity
contracts.
TOTAL RETURN SUBACCOUNT: This subaccount seeks a high return, a combination of
income and capital appreciation, consistent with reasonable risk.
B-39
<PAGE> 335
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
HIGH YIELD SUBACCOUNT: This subaccount seeks to provide a high level of current
income.
GROWTH SUBACCOUNT: This subaccount seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
GOVERNMENT SECURITIES SUBACCOUNT: This subaccount seeks high current return
consistent with preservation of capital.
INTERNATIONAL SUBACCOUNT: This subaccount seeks total return, a combination of
capital growth and income, principally through an internationally diversified
portfolio of equity securities.
SMALL CAP GROWTH SUBACCOUNT: This subaccount seeks maximum appreciation of
investors' capital.
INVESTMENT GRADE BOND SUBACCOUNT: This subaccount seeks high current income.
CONTRARIAN VALUE SUBACCOUNT: This subaccount seeks to achieve a high rate of
total return.
SMALL CAP VALUE SUBACCOUNT: This subaccount seeks long-term capital
appreciation.
VALUE+GROWTH SUBACCOUNT: This subaccount seeks growth of capital. A secondary
objective of the Portfolio is the reduction of risk over a full market cycle
compared to a portfolio of only growth stocks or only value stocks.
HORIZON 20+ SUBACCOUNT: This subaccount, designed for investors with
approximately a 20+ year investment horizon, seeks growth of capital, with
income as a secondary objective.
HORIZON 10+ SUBACCOUNT: This subaccount, designed for investors with
approximately a 10+year investment horizon, seeks balance between growth of
capital and income, consistent with moderate risk.
HORIZON 5 SUBACCOUNT: This subaccount, designed for investors with approximately
a 5 year investment horizon, seeks income consistent with a preservation of
capital, with growth of capital as a secondary objective.
GLOBAL INCOME SUBACCOUNT: This subaccount seeks to provide high current income
consistent with prudent total return asset management.
BLUE CHIP SUBACCOUNT: This subaccount seeks growth of capital and of income.
INTERNATIONAL GROWTH AND INCOME SUBACCOUNT: This subaccount seeks long-term
growth of capital and current income primarily from foreign equity securities.
HIGH RETURN EQUITY SUBACCOUNT: This subaccount seeks to achieve a high rate of
total return.
FINANCIAL SERVICES SUBACCOUNT: This subaccount seeks long-term capital
appreciation.
GLOBAL BLUE CHIP SUBACCOUNT: This subaccount seeks long-term growth of capital
through a diversified worldwide portfolio of marketable securities, primarily
equity securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
JANUS ASPEN SERIES FUNDS
GROWTH SUBACCOUNT: This subaccount seeks long-term growth of capital in a manner
consistent with the preservation of capital.
GROWTH & INCOME SUBACCOUNT: This subaccount seeks long-term capital growth and
current income.
SCUDDER VARIABLE LIFE INVESTMENT FUNDS
GLOBAL DISCOVERY SUBACCOUNT: This subaccount seeks above-average capital
appreciation over the long term by investing primarily in the equity securities
of small companies located throughout the world.
GROWTH & INCOME SUBACCOUNT: This subaccount seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
INTERNATIONAL SUBACCOUNT: This subaccount seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
CAPITAL GROWTH SUBACCOUNT: This subaccount seeks to maximize long-term capital
growth from a portfolio consisting primarily of equity securities.
B-40
<PAGE> 336
WARBURG PINCUS TRUST FUNDS
EMERGING MARKETS SUBACCOUNT: This subaccount seeks long-term growth of capital.
POST-VENTURE CAPITAL SUBACCOUNT: This subaccount seeks long-term growth of
capital by investing primarily in equity securities of issuers in their
post-venture-capital stage of development and pursues an aggressive investment
strategy.
(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. KILICO
assesses that portion of each subaccount representing assets under DESTINATIONS
individual and group variable, fixed 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 four-tenths
percent (1.40%) per annum. The PASSPORT and DESTINATIONS DCA Money Market
Subaccount #2, available for participation in the dollar cost averaging program,
has no daily asset charge deduction. For the year ended December 31, 1998, asset
charges totaled $25,943,505, $7,117,285 and $81,806 for ADVANTAGE III, PASSPORT
and DESTINATIONS contracts, respectively.
KILICO also assesses against each ADVANTAGE III contract participating in one or
more of the subaccounts at any time during the year a records maintenance
charge. For contracts purchased prior to June 1, 1993, the charge is $25 and is
assessed on December 31st of each calendar year. For contracts purchased June 1,
1993 and subsequent, the charge is $36 and is assessed ratably every quarter of
each calendar year, except in those states which have yet to approve these
contract changes. The charge is assessed whether or not any purchase payments
have been made during the year. KILICO also assesses against each PASSPORT and
DESTINATIONS 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 ADVANTAGE III, PASSPORT and DESTINATIONS contracts are
waived for all individual contracts whose investment value exceeds $50,000 on
the date of assessment. For the year ended December 31, 1998, records
maintenance charges totaled $2,044,611, $151,021 and $60 for ADVANTAGE III,
PASSPORT and DESTINATIONS contracts, respectively.
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Money Market, Total Return, High Yield, and 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, 1998, no such payment was made.
KILICO assesses an optional annual charge for the Guaranteed Retirement Income
Benefit ("GRIB"), related to the DESTINATIONS contracts. The annual charge of
.25% of Contract Value, if taken, will be deducted pro rata from each invested
subaccount on each Contract Quarter anniversary. For the year ended December 31,
1998, GRIB charges totaled $9,477.
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., an affiliated company, is the investment
manager of the Investors Fund Series Portfolios and the Scudder Variable Life
Investment Fund Portfolios.
Janus Capital Corporation is the investment manager of the Janus Aspen Series
Fund Portfolios and Warburg Pincus Asset Management, Inc. is the investment
manager of the Warburg Pincus Trust Fund Portfolios. Neither of these entities
are affiliated with KILICO.
B-41
<PAGE> 337
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)
Investors Brokerage Services, Inc., a wholly-owned subsidiary of KILICO, is the
principal underwriter for the Separate Account.
(4) NET TRANSFERS (TO) FROM AFFILIATE AND SUBACCOUNTS
Net transfers (to) from affiliate or subaccounts include transfers of all or
part of the Contract Owner's interest to or from another eligible 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.
Contract Owners' equity at December 31, 1998, 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
INVESTORS FUND SERIES
MONEY MARKET SUBACCOUNT
Flexible Payment, Qualified............................... 309 $ 2.493 $ 770
Flexible Payment, Nonqualified............................ 3,812 2.493 9,502
Periodic Payment, Qualified............................... 14,508 2.372 34,415
Periodic Payment, Nonqualified............................ 11,095 2.372 26,316
----------
71,003
----------
TOTAL RETURN SUBACCOUNT
Flexible Payment, Qualified............................... 772 7.411 5,719
Flexible Payment, Nonqualified............................ 3,348 6.862 22,973
Periodic Payment, Qualified............................... 72,971 7.052 514,620
Periodic Payment, Nonqualified............................ 11,360 6.571 74,644
----------
617,956
----------
HIGH YIELD SUBACCOUNT
Flexible Payment, Qualified............................... 260 6.369 1,655
Flexible Payment, Nonqualified............................ 1,480 6.098 9,025
Periodic Payment, Qualified............................... 20,199 6.061 122,423
Periodic Payment, Nonqualified............................ 6,036 5.904 35,637
----------
168,740
----------
GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 178 7.261 1,292
Flexible Payment, Nonqualified............................ 1,063 7.236 7,692
Periodic Payment, Qualified............................... 50,548 6.945 351,046
Periodic Payment, Nonqualified............................ 9,612 6.935 66,657
----------
426,687
----------
GOVERNMENT SECURITIES SUBACCOUNT
Flexible Payment, Qualified............................... 146 1.828 266
Flexible Payment, Nonqualified............................ 1,073 1.828 1,962
Periodic Payment, Qualified............................... 16,997 1.779 30,243
Periodic Payment, Nonqualified............................ 10,270 1.779 18,273
----------
50,744
----------
INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified............................... 212 1.877 398
Flexible Payment, Nonqualified............................ 744 1.877 1,397
Periodic Payment, Qualified............................... 45,058 1.839 82,855
Periodic Payment, Nonqualified............................ 7,278 1.839 13,383
----------
98,033
----------
</TABLE>
B-42
<PAGE> 338
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
SMALL CAP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 166 $ 2.625 $ 437
Flexible Payment, Nonqualified............................ 494 2.625 1,297
Periodic Payment, Qualified............................... 38,394 2.589 99,412
Periodic Payment, Nonqualified............................ 4,843 2.589 12,540
----------
113,686
----------
INVESTMENT GRADE BOND SUBACCOUNT
Flexible Payment, Qualified............................... 19 $ 1.187 $ 23
Flexible Payment, Nonqualified............................ 750 1.187 890
Periodic Payment, Qualified............................... 2,529 1.178 2,978
Periodic Payment, Nonqualified............................ 1,033 1.178 1,216
----------
5,107
----------
CONTRARIAN VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 94 1.777 168
Flexible Payment, Nonqualified............................ 80 1.777 142
Periodic Payment, Qualified............................... 23,159 1.763 40,832
Periodic Payment, Nonqualified............................ 3,847 1.763 6,782
----------
47,924
----------
SMALL CAP VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 4 1.072 4
Flexible Payment, Nonqualified............................ 94 1.072 101
Periodic Payment, Qualified............................... 12,832 1.063 13,643
Periodic Payment, Nonqualified............................ 1,756 1.063 1,867
----------
15,615
----------
VALUE+GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 60 1.683 101
Flexible Payment, Nonqualified............................ 173 1.683 291
Periodic Payment, Qualified............................... 7,994 1.669 13,345
Periodic Payment, Nonqualified............................ 2,094 1.669 3,496
----------
17,233
----------
HORIZON 20+ SUBACCOUNT
Flexible Payment, Qualified............................... 21 1.530 32
Flexible Payment, Nonqualified............................ -- 1.530 --
Periodic Payment, Qualified............................... 1,764 1.518 2,679
Periodic Payment, Nonqualified............................ 195 1.518 295
----------
3,006
----------
HORIZON 10+ SUBACCOUNT
Flexible Payment, Qualified............................... 13 1.410 18
Flexible Payment, Nonqualified............................ 9 1.410 12
Periodic Payment, Qualified............................... 3,391 1.399 4,744
Periodic Payment, Nonqualified............................ 419 1.399 586
----------
5,360
----------
HORIZON 5 SUBACCOUNT
Flexible Payment, Qualified............................... -- 1.320 --
Flexible Payment, Nonqualified............................ 35 1.320 46
Periodic Payment, Qualified............................... 1,248 1.310 1,635
Periodic Payment, Nonqualified............................ 357 1.310 468
----------
2,149
----------
JANUS ASPEN SERIES
GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 7 26.152 180
Flexible Payment, Nonqualified............................ 16 26.152 407
Periodic Payment, Qualified............................... 1,931 25.897 50,001
Periodic Payment, Nonqualified............................ 243 25.897 6,281
----------
56,869
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY......... $1,700,112
==========
</TABLE>
B-43
<PAGE> 339
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
PASSPORT CONTRACTS
INVESTORS FUND SERIES
MONEY MARKET #1 SUBACCOUNT
Qualified................................................. 6,657 $ 1.245 $ 8,289
Nonqualified.............................................. 21,661 1.245 26,976
----------
35,265
----------
MONEY MARKET #2 SUBACCOUNT
Qualified................................................. 1,442 1.358 1,958
Nonqualified.............................................. 1,870 1.358 2,540
----------
4,498
----------
TOTAL RETURN SUBACCOUNT
Qualified................................................. 14,282 1.917 27,374
Nonqualified.............................................. 46,822 1.917 89,744
----------
117,118
----------
HIGH YIELD SUBACCOUNT
Qualified................................................. 10,995 1.887 20,743
Nonqualified.............................................. 36,787 1.887 69,400
----------
90,143
----------
GROWTH SUBACCOUNT
Qualified................................................. 12,369 2.349 29,057
Nonqualified.............................................. 34,697 2.349 81,506
----------
110,563
----------
GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 4,337 1.437 6,231
Nonqualified.............................................. 14,321 1.437 20,573
----------
26,804
----------
INTERNATIONAL SUBACCOUNT
Qualified................................................. 5,866 1.845 10,825
Nonqualified.............................................. 19,399 1.845 35,794
----------
46,619
----------
SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 2,884 2.595 7,486
Nonqualified.............................................. 8,298 2.595 21,536
----------
29,022
----------
INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 1,230 1.179 1,450
Nonqualified.............................................. 3,715 1.179 4,381
----------
5,831
----------
CONTRARIAN VALUE SUBACCOUNT
Qualified................................................. 6,817 1.765 12,036
Nonqualified.............................................. 19,663 1.765 34,715
----------
46,751
----------
SMALL CAP VALUE SUBACCOUNT
Qualified................................................. 4,178 1.065 4,448
Nonqualified.............................................. 11,505 1.065 12,248
----------
16,696
----------
VALUE+GROWTH SUBACCOUNT
Qualified................................................. 4,694 1.672 7,846
Nonqualified.............................................. 12,758 1.672 21,328
----------
29,174
----------
HORIZON 20+ SUBACCOUNT
Qualified................................................. 1,141 1.520 1,734
Nonqualified.............................................. 2,631 1.520 4,000
----------
5,734
----------
</TABLE>
B-44
<PAGE> 340
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
HORIZON 10+ SUBACCOUNT
Qualified................................................. 1,544 $ 1.401 $ 2,162
Nonqualified.............................................. 5,198 1.401 7,280
----------
9,442
----------
HORIZON 5 SUBACCOUNT
Qualified................................................. 394 1.311 517
Nonqualified.............................................. 2,992 1.311 3,924
----------
4,441
----------
GLOBAL INCOME SUBACCOUNT
Qualified................................................. 62 1.118 69
Nonqualified.............................................. 1,144 1.118 1,280
----------
1,349
----------
BLUE CHIP SUBACCOUNT
Qualified................................................. 1,227 1.244 1,526
Nonqualified.............................................. 4,798 1.244 5,968
----------
7,494
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY.............. $ 586,944
==========
DESTINATIONS CONTRACTS
INVESTOR FUND SERIES
MONEY MARKET #1 SUBACCOUNT
Qualified................................................. 20 10.213 200
Nonqualified.............................................. 62 10.213 634
----------
834
----------
MONEY MARKET #2 SUBACCOUNT
Qualified................................................. 19 10.297 191
Nonqualified.............................................. 2 10.297 20
----------
211
----------
TOTAL RETURN SUBACCOUNT
Qualified................................................. 38 10.542 406
Nonqualified.............................................. 85 10.542 899
----------
1,305
----------
HIGH YIELD SUBACCOUNT
Qualified................................................. 121 9.646 1,166
Nonqualified.............................................. 240 9.646 2,313
----------
3,479
----------
GROWTH SUBACCOUNT
Qualified................................................. 24 10.007 239
Nonqualified.............................................. 26 10.007 256
----------
495
----------
GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 28 10.332 293
Nonqualified.............................................. 49 10.332 504
----------
797
----------
INTERNATIONAL SUBACCOUNT
Qualified................................................. 20 9.429 186
Nonqualified.............................................. 36 9.429 343
----------
529
----------
SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 34 11.070 378
Nonqualified.............................................. 72 11.070 795
----------
1,173
----------
INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 23 10.417 240
Nonqualified.............................................. 43 10.417 443
----------
683
----------
</TABLE>
B-45
<PAGE> 341
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
INVESTORS FUND SERIES (CONTINUED)
CONTRARIAN VALUE SUBACCOUNT
Qualified................................................. 31 $10.712 $ 334
Nonqualified.............................................. 79 10.712 841
----------
1,175
----------
SMALL CAP VALUE SUBACCOUNT
Qualified................................................. 50 8.431 419
Nonqualified.............................................. 75 8.431 636
----------
1,055
----------
VALUE+GROWTH SUBACCOUNT
Qualified................................................. 18 10.697 190
Nonqualified.............................................. 38 10.697 408
----------
598
----------
HORIZON 20+ SUBACCOUNT
Qualified................................................. 28 10.228 289
Nonqualified.............................................. 18 10.228 184
----------
473
----------
HORIZON 10+ SUBACCOUNT
Qualified................................................. 27 10.290 275
Nonqualified.............................................. 35 10.290 362
----------
637
----------
HORIZON 5 SUBACCOUNT
Qualified................................................. 6 10.354 59
Nonqualified.............................................. 16 10.354 168
----------
227
----------
GLOBAL INCOME SUBACCOUNT
Qualified................................................. 0 10.755 2
Nonqualified.............................................. 7 10.755 76
----------
78
----------
BLUE CHIP SUBACCOUNT
Qualified................................................. 35 10.386 360
Nonqualified.............................................. 90 10.386 930
----------
1,290
----------
INTERNATIONAL GROWTH & INCOME SUBACCOUNT
Qualified................................................. 6 9.130 58
Nonqualified.............................................. 19 9.130 178
----------
236
----------
DREMAN HIGH RETURN EQUITY SUBACCOUNT
Qualified................................................. 221 10.491 2,318
Nonqualified.............................................. 297 10.491 3,118
----------
5,436
----------
DREMAN FINANCIAL SERVICES SUBACCOUNT
Qualified................................................. 49 9.998 495
Nonqualified.............................................. 72 9.998 722
----------
1,217
----------
GLOBAL BLUE CHIP SUBACCOUNT
Qualified................................................. 3 10.103 26
Nonqualified.............................................. 26 10.103 262
----------
288
----------
JANUS ASPEN SERIES
GROWTH SUBACCOUNT
Qualified................................................. 112 11.943 1,332
Nonqualified.............................................. 140 11.943 1,673
----------
3,005
----------
</TABLE>
B-46
<PAGE> 342
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
GROWTH & INCOME SUBACCOUNT
Qualified................................................. 76 $12.038 $ 910
Nonqualified.............................................. 97 12.038 1,164
----------
2,074
----------
SCUDDER VARIABLE LIFE INVESTMENT FUNDS
GLOBAL DISCOVERY SUBACCOUNT
Qualified................................................. 35 10.043 355
Nonqualified.............................................. 39 10.043 389
----------
744
----------
GROWTH & INCOME SUBACCOUNT
Qualified................................................. 91 9.651 882
Nonqualified.............................................. 84 9.651 815
----------
1,697
----------
INTERNATIONAL SUBACCOUNT
Qualified................................................. 26 9.837 258
Nonqualified.............................................. 62 9.837 611
----------
869
----------
CAPITAL GROWTH SUBACCOUNT
Qualified................................................. 19 10.823 204
Nonqualified.............................................. 37 10.823 400
----------
604
----------
WARBURG PINCUS TRUST FUNDS
EMERGING MARKETS SUBACCOUNT
Qualified................................................. 0 7.994 1
Nonqualified.............................................. 7 7.994 58
----------
59
----------
POST-VENTURE CAPITAL SUBACCOUNT
Qualified................................................. 1 9.720 9
Nonqualified.............................................. 8 9.720 76
----------
85
----------
TOTAL DESTINATIONS CONTRACT OWNERS' EQUITY.......... $ 31,353
==========
</TABLE>
B-47
<PAGE> 343
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
------------------------------------
QUALIFIED NON-QUALIFIED
PLANS PLANS
STATE --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Contract Value.
B-48
<PAGE> 344
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 1999. 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-8
Experts..................................................... B-8
Financial Statements........................................ B-8
</TABLE>
<PAGE> 345
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Fund by
each of the Subaccounts. All expenses incurred in the operations of the Separate
Account, except the charge for mortality and expense risk and administrative
expenses, and records maintenance charge (as described in the Prospectus) are
borne by KILICO.
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the years ended December 31, 1997 and 1998. The firm
performed the annual audit of the financial statements of the Separate Account
and KILICO for the years ended December 31, 1997 and 1998.
The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Contracts are distributed
through the principal underwriter for the Separate Account, Investors Brokerage
Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into
selling group agreements with affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six and one-quarter percent (6 1/4%)
of Purchase Payments.
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, the Kemper Government Securities Subaccount, Scudder VLIF Bond
Subaccount, PIMCO Low Duration Bond Subaccount and PIMCO Foreign Bond
Subaccount; and "yield" and "effective yield" information may be provided in the
case of the Scudder VLIF Money Market Subaccount. 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 Contract to all Contract Owner accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. 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 nonstandardized 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 or the
effect of the Records Maintenance Charge, and thus may be higher than if such
charges 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. Both annualized and nonannualized (cumulative) nonstandardized total
return figures may be provided. Annualized nonstandardized total return figures
represent the average annual percentage charge in the value of a Subaccount over
the applicable period while nonannualized (cumulative) figures represent the
actual percentage change over the applicable period.
B-1
<PAGE> 346
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 may 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 High Yield 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 and the Kemper Government
Securities Subaccount is computed in accordance with a standard method
prescribed by rules of the Securities and Exchange Commission. 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 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 Scudder VLIF Money Market Subaccount's yield is computed in accordance with
a standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit value during
the period is divided by the Accumulation Unit value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Separate Account's portfolio are not included in the
calculation. The Scudder VLIF Money Market Subaccount's yield for the seven-day
period ended March 31, 1999 was % and average portfolio maturity was days.
The Scudder VLIF Money Market Subaccount's effective yield is determined by
taking the base period return (computed as described above) and calculating the
effect of assumed compounding. The formula for the effective yield is: (base
period return +1) (365) / (7) - 1. The Scudder VLIF Money Market Subaccount's
effective yield for the seven day period ended March 31, 1999 was %.
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 standardized performance figures include the
B-2
<PAGE> 347
deduction of all expenses and fees, including a prorated portion of the Records
Maintenance Charge. Redemptions within the first seven years after purchase may
be subject to a Withdrawal Charge that ranges from 7% the first year to 0% after
seven years. Yield, effective yield and nonstandardized total return do not
reflect the effect of the Withdrawal Charge or premium taxes that may be imposed
upon the redemption of units. In addition, nonstandardized total return figures
do not include the effect of the Records Maintenance Charge. Thus, yield,
effective yield and nonstandardized total return figures may be higher than if
these charges were deducted. 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.
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. 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 following tables include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1998.
B-3
<PAGE> 348
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
------------------------------- --------------
YEAR TO DATE (%) ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
RETURN(3) VALUE(4) RETURN RETURN RETURN
---------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
SCUDDER VLIF MONEY MARKET SUBACCOUNT....... 3.85%
Life of Subaccount (from 06/01/98)....... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85)........ $69,234 73.08% 4.16% N/A
Ten Years................................ 58,526 46.32 3.88 N/A
Five Years............................... 47,651 19.13 3.56 N/A
Three Years.............................. 44,700 11.75 3.77 N/A
One Year................................. 41,538 3.85 3.85 N/A
SCUDDER VLIF BOND SUBACCOUNT............... 5.10
Life of Subaccount (from 06/01/98)....... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85)........ 98,204 145.51 6.90 N/A
Ten Years................................ 79,931 99.83 7.17 N/A
Five Years............................... 50,196 25.49 4.65 N/A
Three Years.............................. 45,862 14.66 4.66 N/A
One Year................................. 42,041 5.10 5.10 N/A
KEMPER HIGH YIELD SUBACCOUNT(5)............ 0.05
Life of Subaccount (from 04/06/82)....... 241,834 504.59 11.36 11.09%
Life of Portfolio (from 04/06/82)........ 241,834 504.59 11.36 11.09
Ten Years................................ 92,917 132.29 8.79 8.33
Five Years............................... 55,382 38.46 6.72 5.39
Three Years.............................. 49,522 23.80 7.38 5.19
One Year................................. 40,021 0.05 0.05 -6.81
KEMPER GOVERNMENT SECURITIES SUBACCOUNT.... 5.56
Life of Subaccount (from 11/03/89)....... 70,820 77.05 6.44 5.95
Life of Portfolio (from 09/03/87)........ 80,597 101.49 6.38 N/A
Ten Years................................ 79,012 97.53 7.04 N/A
Five Years............................... 51,703 29.26 5.27 3.93
Three Years.............................. 45,928 14.82 4.71 2.53
One Year................................. 42,224 5.56 5.56 -1.66
</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. See page B-6 for additional information.
B-4
<PAGE> 349
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT.............. 5.70%
Life of Subaccount (from 06/01/98)................... N/A N/A N/A N/A
Life of Portfolio (from 05/02/94).................... $ 88,512 121.28% 18.55% N/A
Three Years.......................................... 65,539 63.85 17.89 N/A
One Year............................................. 42,282 5.70 5.70 N/A
KEMPER SMALL CAP GROWTH SUBACCOUNT..................... 16.75
Life of Subaccount (from 05/02/94)................... 103,390 158.48 22.56 21.31%
Life of Portfolio (from 05/02/94).................... 103,390 158.48 22.56 21.31
Three Years.......................................... 78,175 95.44 25.03 22.93
One Year............................................. 46,700 16.75 16.75 8.85
JANUS ASPEN CAPITAL APPRECIATION SUBACCOUNT(6)......... 55.93
Life of Subaccount (from 06/01/98)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/97).................... 78,235 95.59 49.49 N/A
One Year............................................. 62,372 55.93 55.93 N/A
SCUDDER VLIF INTERNATIONAL SUBACCOUNT.................. 17.00
Life of Subaccount (from 06/01/98)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/87).................... 109,981 174.95 9.05 N/A
Ten Years............................................ 107,907 169.77 10.43 N/A
Five Years........................................... 61,056 52.64 8.83 N/A
Three Years.......................................... 56,978 42.44 12.52 N/A
One Year............................................. 46,802 17.00 17.00 N/A
TEMPLETON DEVELOPING MARKETS SUBACCOUNT(7)............. -22.12
Life of Subaccount (from 06/01/98)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/97)(8)................. 20,741 48.15 -32.54 N/A
One Year............................................. 31,150 -22.12 -22.12 N/A
KEMPER-DREMAN HIGH RETURN EQUITY SUBACCOUNT............ 1.91
Life of Subaccount (from 06/01/98)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/98).................... 40,766 1.91 N/A 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. See page B-6 for additional information.
B-5
<PAGE> 350
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Non standardized 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.
(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 high yield potential offered by these Subaccounts reflect the
substantial risks associated with investments in high-yield bonds.
(6) There is presently no standardized performance data for the Janus Aspen
Capital Appreciation Subaccount because it is newly formed. Standardized
data will be included when it becomes available.
(7) Performance of Class 2 Shares for periods after May 1, 1997 reflects Class
2's higher annual fees and expenses resulting from its Rule 12b-1 plan.
Maximum annual plan expenses are 0.25%. Post expense reductions by the
portfolio's manager increased returns.
B-6
<PAGE> 351
The following tables illustrate an assumed $40,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from the inception date of each Portfolio to December 31, 1998.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCUDDER VLIF MONEY MARKET SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1985 ............................... $41,035
1986 ............................... 42,868
1987 ............................... 44,800
1988 ............................... 47,318
1989 ............................... 50,806
1990 ............................... 54,043
1991 ............................... 56,399
1992 ............................... 57,472
1993 ............................... 58,118
1994 ............................... 59,454
1995 ............................... 61,954
1996 ............................... 64,214
1997 ............................... 66,670
1998 ............................... 69,234
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1987 .............................. $ 35,409
1988 .............................. 40,768
1989 .............................. 55,419
1990 .............................. 50,462
1991 .............................. 55,468
1992 .............................. 53,012
1993 .............................. 72,052
1994 .............................. 70,457
1995 .............................. 77,209
1996 .............................. 87,390
1997 .............................. 93,997
1998 .............................. 109,981
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF BOND SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1985 ............................... $42,748
1986 ............................... 47,334
1987 ............................... 47,250
1988 ............................... 49,145
1989 ............................... 54,117
1990 ............................... 57,674
1991 ............................... 66,903
1992 ............................... 70,603
1993 ............................... 78,257
1994 ............................... 73,480
1995 ............................... 85,651
1996 ............................... 86,839
1997 ............................... 93,437
1998 ............................... 98,204
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF GROWTH AND INCOME
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1994 ............................... $41,578
1995 ............................... 54,021
1996 ............................... 65,077
1997 ............................... 83,736
1998 ............................... 88,512
</TABLE>
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1987 ............................... $40,113
1988 ............................... 40,803
1989 ............................... 46,079
1990 ............................... 49,938
1991 ............................... 56,802
1992 ............................... 59,351
1993 ............................... 62,354
1994 ............................... 59,715
1995 ............................... 70,195
1996 ............................... 71,044
1997 ............................... 76,353
1998 ............................... 80,597
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 .............................. $ 49,487
1983 .............................. 56,067
1984 .............................. 62,325
1985 .............................. 74,906
1986 .............................. 87,079
1987 .............................. 91,017
1988 .............................. 104,107
1989 .............................. 101,410
1990 .............................. 84,555
1991 .............................. 126,846
1992 .............................. 147,452
1993 .............................. 174,666
1994 .............................. 168,562
1995 .............................. 195,336
1996 .............................. 219,548
1997 .............................. 241,708
1998 .............................. 241,834
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1994 .............................. $ 41,215
1995 .............................. 52,902
1996 .............................. 66,871
1997 .............................. 88,557
1998 .............................. 103,390
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN CAPITAL
APPRECIATION SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1997 ............................... $50,173
1998 ............................... 78,235
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON DEVELOPING
MARKETS SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1997 ............................... $26,634
1998 ............................... 20,741
</TABLE>
<TABLE>
<CAPTION>
KEMPER-DREMAN HIGH RETURN
EQUITY SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1998 ............................... $40,766
</TABLE>
B-7
<PAGE> 352
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED
ANNUITY CONVENTIONAL
AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- CONTRIBUTIONS
TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------
<S> <C> <C> <C>
10 Years.......................................... $107,946 $ 86,448 $ 81,693
20 Years.......................................... 233,048 165,137 133,476
30 Years.......................................... 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts. Income on
Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10% tax
penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following annuity charges and
expenses: 1.25% mortality and expense risk; .10% administration charges; 7%
maximum deferred withdrawal charge; and $30 annual records maintenance charge.
The tax-deferred accumulation would be reduced if these charges were reflected.
No implication is intended by the use of these assumptions that the return shown
is guaranteed in any way or that the return shown represents an average or
expected rate of return over the period of the Contracts. [IMPORTANT--THIS IS
NOT AN ILLUSTRATION OF YIELD OR RETURN].
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
EXPERTS
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1998 and the related statement of operations
for the year then ended and the statements of changes in contract owners' equity
for the years ended December 31, 1998 and 1997 have been included herein in
reliance upon the report of PricewaterhouseCoopers LLP, independent public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
FINANCIAL STATEMENTS
This Statement of Additional Information contains financial statements for the
Separate Account which reflect assets attributable to other variable annuity
contracts offered by KILICO through the Separate Account. As of the date of this
Statement of Additional Information, no assets attributable to the Contracts are
reflected as no Contracts were issued prior to such date. In addition, the
financial statements for the Separate Account reflect Subaccounts that are not
available under the Contracts.
B-8
<PAGE> 353
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Variable Annuity Separate Account:
In our opinion, the accompanying statement of assets and liabilities and
contract owners' equity and the related statement of operations and changes in
owner's equity present fairly, in all material respects, the financial position
of the subaccounts of KILICO Variable Annuity Separate Account, which includes
the Money Market Subaccount, Money Market Subaccount #2, Total Return
Subaccount, High Yield Subaccount, Growth Subaccount, Government Securities
Subaccount, International Subaccount, Small Cap Growth Subaccount, Investment
Grade Bond Subaccount, Contrarian Value Subaccount, Small Cap Value Subaccount,
Value+Growth Subaccount, Horizon 20+ Subaccount, Horizon 10+ Subaccount, Horizon
5 Subaccount, Global Income Subaccount, Blue Chip Subaccount, International
Growth & Income Subaccount, High Return Subaccount, Financial Services
Subaccount, Global Blue Chip Subaccount, (investment options within the Investor
Fund Series), Growth Subaccount, Growth & Income Subaccount, (investment options
within the Janus Aspen Series), Global Discovery Subaccount, Growth & Income
Subaccount, International Subaccount, Capital Growth Subaccount (investment
options within the Scudder Variable Life Investment Fund), Emerging Markets
Subaccount, and Post-Venture Capital Subaccount (investment options within the
Warburg Pincus Trust) thereof, at December 31, 1998, and the changes in their
equity for the year then ended and for each of the period presented, except for
the International Growth & Income Subaccount, High Return Subaccount, Financial
Services Subaccount, Global Blue Chip Subaccount, Growth Subaccount, Growth &
Income Subaccount, Global Discovery Subaccount, Growth & Income Subaccount,
International Subaccount, Capital Growth Subaccount, Emerging Markets
Subaccount, and Post-Venture Capital Subaccount as to which the period is June
1, 1998 (commencement of operations) to December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of Kemper Investors Life Insurance Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included direct confirmation of investments
owned at December 31, 1998 by correspondence with transfer agents, provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 19, 1999
B-9
<PAGE> 354
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL HIGH GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... $106,985 4,700 737,296 262,814 538,414 78,453
Dividends and other
receivables................ 223 9 2 1 12 --
-------- ----- ------- ------- ------- ------
Total assets.......... 107,208 4,709 737,298 262,815 538,426 78,453
-------- ----- ------- ------- ------- ------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 103 -- 780 285 559 84
Units of Account
Redeemed................. -- -- 6 -- -- 18
Other...................... 3 -- 133 168 122 6
-------- ----- ------- ------- ------- ------
Total liabilities..... 106 -- 919 453 681 108
-------- ----- ------- ------- ------- ------
Contract owners' equity...... $107,102 4,709 736,379 262,362 537,745 78,345
======== ===== ======= ======= ======= ======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. $ 34,061 3,269 102,938 49,875 131,199 41,028
Accumulated net investment
income (loss).............. 73,041 1,440 415,826 199,073 282,440 34,537
Accumulated net realized gain
on sales of investments.... -- -- 108,949 10,808 69,603 957
Unrealized appreciation
(depreciation) of
investments................ -- -- 108,666 2,606 54,503 1,823
-------- ----- ------- ------- ------- ------
Contract owners' equity...... $107,102 4,709 736,379 262,362 537,745 78,345
======== ===== ======= ======= ======= ======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... 145,348 144,050
Dividends and other
receivables................ 4 13
------- -------
Total assets.......... 145,352 144,063
------- -------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 151 144
Units of Account
Redeemed................. -- --
Other...................... 20 38
------- -------
Total liabilities..... 171 182
------- -------
Contract owners' equity...... 145,181 143,881
======= =======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. 78,316 83,272
Accumulated net investment
income (loss).............. 13,462 25,692
Accumulated net realized gain
on sales of investments.... 29,972 15,321
Unrealized appreciation
(depreciation) of
investments................ 23,431 19,596
------- -------
Contract owners' equity...... 145,181 143,881
======= =======
</TABLE>
See accompanying notes to financial statements.
B-10
<PAGE> 355
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------------------------------
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON
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> <C>
11,490 95,958 33,386 47,062 9,223 15,456 6,805 1,428 8,794
142 2 17 -- -- -- 19 -- --
------ ------ ------ ------ ----- ------ ----- ----- -----
11,632 95,960 33,403 47,062 9,223 15,456 6,824 1,428 8,794
------ ------ ------ ------ ----- ------ ----- ----- -----
11 100 33 47 9 15 7 1 8
-- -- -- -- -- -- -- -- --
-- 10 4 10 1 2 -- -- 2
------ ------ ------ ------ ----- ------ ----- ----- -----
11 110 37 57 10 17 7 1 10
------ ------ ------ ------ ----- ------ ----- ----- -----
11,621 95,850 33,366 47,005 9,213 15,439 6,817 1,427 8,784
====== ====== ====== ====== ===== ====== ===== ===== =====
10,820 68,393 33,364 37,086 7,238 12,897 5,867 1,281 8,056
61 1,365 223 180 57 74 56 28 (44)
384 9,023 2,054 2,345 574 552 334 57 129
356 17,069 (2,275) 7,394 1,344 1,916 560 61 643
------ ------ ------ ------ ----- ------ ----- ----- -----
11,621 95,850 33,366 47,005 9,213 15,439 6,817 1,427 8,784
====== ====== ====== ====== ===== ====== ===== ===== =====
</TABLE>
B-11
<PAGE> 356
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES JANUS ASPEN SERIES
---------------------------------------------------- -----------------------
INTERNATIONAL HIGH GLOBAL
GROWTH & RETURN FINANCIAL BLUE GROWTH &
INCOME EQUITY SERVICES CHIP GROWTH INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... $236 5,439 1,218 288 59,947 2,075
Dividends and other
receivables................ -- -- -- -- 4 --
---- ----- ----- --- ------ -----
Total assets.......... 236 5,439 1,218 288 59,951 2,075
---- ----- ----- --- ------ -----
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. -- -- -- -- 58 --
Units of Account
Redeemed................. -- -- -- -- -- --
Other...................... -- 3 1 -- 19 1
---- ----- ----- --- ------ -----
Total liabilities..... -- 3 1 -- 77 1
---- ----- ----- --- ------ -----
Contract owners' equity...... $236 5,436 1,217 288 59,874 2,074
==== ===== ===== === ====== =====
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. $229 5,160 1,151 274 40,911 1,808
Accumulated net investment
income (loss).............. -- (21) (6) (2) 2,641 (2)
Accumulated net realized gain
(loss) on sales of
investments................ (2) (10) (5) (2) 2,691 --
Unrealized appreciation of
investments................ 9 307 77 18 13,631 268
---- ----- ----- --- ------ -----
Contract owners' equity...... $236 5,436 1,217 288 59,874 2,074
==== ===== ===== === ====== =====
</TABLE>
See accompanying notes to financial statements.
B-12
<PAGE> 357
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUNDS WARBURG PINCUS TRUST
---------------------------------------------------- -----------------------
POST-
GLOBAL GROWTH & CAPITAL EMERGING VENTURE
DISCOVERY INCOME INTERNATIONAL GROWTH MARKETS CAPITAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
744 1,698 869 604 59 85
-- -- -- -- -- --
--- ----- --- --- -- --
744 1,698 869 604 59 85
--- ----- --- --- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- 1 -- -- -- --
--- ----- --- --- -- --
-- 1 -- -- -- --
--- ----- --- --- -- --
744 1,697 869 604 59 85
=== ===== === === == ==
676 1,646 830 559 58 81
(10) (4) (5) (2) -- --
(19) (19) (7) (13) (1) --
97 74 51 60 2 4
--- ----- --- --- -- --
744 1,697 869 604 59 85
=== ===== === === == ==
</TABLE>
B-13
<PAGE> 358
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions.................... $4,272 264 124,719 21,044 87,153 4,579
Expenses:
Mortality and expense risk and
administrative charges......... 1,104 -- 10,155 3,895 7,438 1,010
------ --- ------- ------- ------- -----
Net investment income (loss)....... 3,168 264 114,564 17,149 79,715 3,569
------ --- ------- ------- ------- -----
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments................. -- -- 20,649 4,283 8,570 (67)
Change in unrealized appreciation
(depreciation) of
investments.................... -- -- (41,076) (17,978) (20,871) 553
------ --- ------- ------- ------- -----
Net realized and unrealized gain
(loss) on investments............ -- -- (20,427) (13,695) (12,301) 486
------ --- ------- ------- ------- -----
Net increase (decrease) in contract
owners' equity resulting from
operations....................... $3,168 264 94,137 3,454 67,414 4,055
====== === ======= ======= ======= =====
<CAPTION>
INVESTORS FUND SERIES
--------------------------
SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Dividends and capital gains
distributions.................... 7,607 20,052
Expenses:
Mortality and expense risk and
administrative charges......... 2,132 1,671
------ ------
Net investment income (loss)....... 5,475 18,381
------ ------
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments................. 11,865 4,201
Change in unrealized appreciation
(depreciation) of
investments.................... (3,914) (2,782)
------ ------
Net realized and unrealized gain
(loss) on investments............ 7,951 1,419
------ ------
Net increase (decrease) in contract
owners' equity resulting from
operations....................... 13,426 19,800
====== ======
</TABLE>
See accompanying notes to financial statements.
B-14
<PAGE> 359
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------------------------------------------------
INVESTMENT CONTRARIAN SMALL CAP GLOBAL
GRADE BOND VALUE VALUE VALUE+GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5 INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ------------ ----------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2,907 885 884 253 308 184 36 25
198
1,147 442 480 110 151 81 1 49
100
--- ------ ------ ----- --- ----- --- --- ---
98 1,760 443 404 143 157 103 35 (24)
--- ------ ------ ----- --- ----- --- --- ---
6,261 911 1,727 397 414 236 36 102
311
6,236 (6,089) 3,626 309 604 115 56 589
78
--- ------ ------ ----- --- ----- --- --- ---
12,497 (5,178) 5,353 706 1,018 351 92 691
389
--- ------ ------ ----- --- ----- --- --- ---
14,257 (4,735) 5,757 849 1,175 454 127 667
487
=== ====== ====== ===== === ===== === === ===
</TABLE>
B-15
<PAGE> 360
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES JANUS ASPEN SERIES
------------------------------------------------------------- --------------------------
INTERNATIONAL
GROWTH & HIGH RETURN FINANCIAL GLOBAL BLUE GROWTH &
INCOME EQUITY SERVICES CHIP GROWTH INCOME
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT SUBACCOUNT(A)
------------- ------------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions................... $-- -- -- -- 2,569 3
Expenses:
Mortality and expense risk and
administrative charges........ -- 21 6 2 596 5
--- --- -- -- ------ ---
Net investment income (loss)...... -- (21) (6) (2) 1,973 (2)
--- --- -- -- ------ ---
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on
sales of investments.......... (2) (10) (5) (2) 1,775 --
Change in unrealized
appreciation of investments... 9 307 77 18 9,281 268
--- --- -- -- ------ ---
Net realized and unrealized gain
on investments.................. 7 297 72 16 11,056 268
--- --- -- -- ------ ---
Net increase in contract owners'
equity resulting from
operations...................... $ 7 276 66 14 13,029 266
=== === == == ====== ===
</TABLE>
(a) For the period June 1, 1998 (commencement of operations) to December 31,
1998.
See accompanying notes to financial statements.
B-16
<PAGE> 361
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUNDS WARBURG PINCUS TRUST
------------------------------------------------------------- -----------------------------
GLOBAL GROWTH & CAPITAL EMERGING POST-VENTURE
DISCOVERY INCOME INTERNATIONAL GROWTH MARKETS CAPITAL
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
-- 5 -- 1 -- --
10 9 5 3 -- --
--- --- -- --- -- --
(10) (4) (5) (2) -- --
--- --- -- --- -- --
(19) (19) (7) (13) (1) --
97 74 51 60 2 4
--- --- -- --- -- --
78 55 44 47 1 4
--- --- -- --- -- --
68 51 39 45 1 4
=== === == === == ==
</TABLE>
B-17
<PAGE> 362
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL HIGH GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss).... $ 3,168 264 114,564 17,149 79,715 3,569
Net realized gain (loss) on
sales of investments.......... -- -- 20,649 4,283 8,570 (67)
Change in unrealized
appreciation (depreciation) of
investments................... -- -- (41,076) (17,978) (20,871) 553
-------- ------ -------- ------- ------- -------
Net increase (decrease) in
contract owners' equity
resulting from operations... 3,168 264 94,137 3,454 67,414 4,055
-------- ------ -------- ------- ------- -------
Account unit transactions:
Proceeds from units sold........ 22,035 6,045 35,608 27,800 29,595 10,692
Net transfers (to) from
affiliate and subaccounts..... 29,478 (7,639) (47,643) (40,100) (26,086) 5,342
Payments for units redeemed..... (21,333) (355) (88,507) (34,613) (60,278) (14,565)
-------- ------ -------- ------- ------- -------
Net increase (decrease) in
contract owners' equity from
account unit transactions... 30,180 (1,949) (100,542) (46,913) (56,769) 1,469
-------- ------ -------- ------- ------- -------
Total increase (decrease) in
contract owners' equity......... 33,348 (1,685) (6,405) (43,459) 10,645 5,524
Beginning of period............... 73,754 6,394 742,784 305,821 527,100 72,821
-------- ------ -------- ------- ------- -------
End of period..................... $107,102 4,709 736,379 262,362 537,745 78,345
======== ====== ======== ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income (loss).... 5,475 18,381
Net realized gain (loss) on
sales of investments.......... 11,865 4,201
Change in unrealized
appreciation (depreciation) of
investments................... (3,914) (2,782)
------- -------
Net increase (decrease) in
contract owners' equity
resulting from operations... 13,426 19,800
------- -------
Account unit transactions:
Proceeds from units sold........ 8,825 17,275
Net transfers (to) from
affiliate and subaccounts..... (20,766) 2,566
Payments for units redeemed..... (16,900) (8,623)
------- -------
Net increase (decrease) in
contract owners' equity from
account unit transactions... (28,841) 11,218
------- -------
Total increase (decrease) in
contract owners' equity......... (15,415) 31,018
Beginning of period............... 160,596 112,863
------- -------
End of period..................... 145,181 143,881
======= =======
</TABLE>
See accompanying notes to financial statements.
B-18
<PAGE> 363
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------------------------------
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON
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> <C>
98 1,760 443 404 143 157 103 35 (24)
311 6,261 911 1,727 397 414 236 36 102
78 6,236 (6,089) 3,626 309 604 115 56 589
------ ------ ------ ------ ----- ------ ----- ----- -----
487 14,257 (4,735) 5,757 849 1,175 454 127 667
------ ------ ------ ------ ----- ------ ----- ----- -----
2,850 15,517 6,528 7,814 2,155 2,644 1,628 47 2,261
3,781 (5,407) 1,040 8,749 116 3,301 221 933 4,001
(955) (6,599) (2,717) (3,236) (375) (841) (384) (6) (223)
------ ------ ------ ------ ----- ------ ----- ----- -----
5,676 3,511 4,851 13,327 1,896 5,104 1,465 974 6,039
------ ------ ------ ------ ----- ------ ----- ----- -----
6,163 17,768 116 19,084 2,745 6,279 1,919 1,101 6,706
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
------ ------ ------ ------ ----- ------ ----- ----- -----
11,621 95,850 33,366 47,005 9,213 15,439 6,817 1,427 8,784
====== ====== ====== ====== ===== ====== ===== ===== =====
</TABLE>
B-19
<PAGE> 364
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES JANUS ASPEN SERIES
------------------------------------------------------------- --------------------------
INTERNATIONAL
GROWTH & HIGH RETURN FINANCIAL GLOBAL BLUE GROWTH &
INCOME EQUITY SERVICES CHIP GROWTH INCOME
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT SUBACCOUNT(A)
------------- ------------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)...... $ -- (21) (6) (2) 1,973 (2)
Net realized gain (loss) on sales
of investments.................. (2) (10) (5) (2) 1,775 --
Change in unrealized appreciation
of investments.................. 9 307 77 18 9,281 268
---- ----- ----- --- ------ -----
Net increase in contract owners'
equity resulting from
operations.................... 7 276 66 14 13,029 266
---- ----- ----- --- ------ -----
Account unit transactions:
Proceeds from units sold.......... 211 4,774 952 262 9,559 1,565
Net transfers from affiliate and
subaccounts..................... 21 524 224 21 10,386 292
Payments for units redeemed....... (3) (138) (25) (9) (2,747) (49)
---- ----- ----- --- ------ -----
Net increase in contract owners'
equity from account unit
transactions.................. 229 5,160 1,151 274 17,198 1,808
---- ----- ----- --- ------ -----
Total increase in contract owners'
equity............................ 236 5,436 1,217 288 30,227 2,074
Beginning of period................. -- -- -- -- 29,647 --
---- ----- ----- --- ------ -----
End of period....................... $236 5,436 1,217 288 59,874 2,074
==== ===== ===== === ====== =====
</TABLE>
(a) For the period June 1, 1998 (commencement of operations) to December 31,
1998.
See accompanying notes to financial statements.
B-20
<PAGE> 365
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUNDS WARBURG PINCUS TRUST
------------------------------------------------------------- -------------------------------
GLOBAL GROWTH & CAPITAL EMERGING POST-VENTURE
DISCOVERY INCOME INTERNATIONAL GROWTH MARKETS CAPITAL
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
(10) (4) (5) (2) -- --
(19) (19) (7) (13) (1) --
97 74 51 60 2 4
--- ----- --- --- --- -----
68 51 39 45 1 4
--- ----- --- --- --- -----
555 1,453 731 559 58 79
123 278 99 19 -- 2
(2) (85) -- (19) -- --
--- ----- --- --- --- -----
676 1,646 830 559 58 81
--- ----- --- --- --- -----
744 1,697 869 604 59 85
-- -- -- -- -- --
--- ----- --- --- --- -----
744 1,697 869 604 59 85
=== ===== === === === =====
</TABLE>
B-21
<PAGE> 366
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
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)...................... $ 2,939 373 97,860 20,076 105,197 5,218
Net realized gain (loss) on
sales of investments........ -- -- 21,466 5,634 13,791 (133)
Change in unrealized
appreciation (depreciation)
of investments.............. -- -- 1,837 2,376 (29,191) 284
-------- ------- -------- ------- ------- -------
Net increase in contract
owners' equity resulting
from operations........... 2,939 373 121,163 28,086 89,797 5,369
-------- ------- -------- ------- ------- -------
Account unit transactions:
Proceeds from units sold...... 21,938 7,884 36,774 26,456 32,804 6,125
Net transfers (to) from
affiliate and subaccounts... 7,054 (10,145) (30,823) (473) (35,916) (6,847)
Payments for units redeemed... (17,525) (213) (75,741) (34,745) (43,779) (11,513)
-------- ------- -------- ------- ------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions.............. 11,467 (2,474) (69,790) (8,762) (46,891) (12,235)
-------- ------- -------- ------- ------- -------
Total increase (decrease) in
contract owners' equity....... 14,406 (2,101) 51,373 19,324 42,906 (6,866)
Beginning of period............. 59,348 8,495 691,411 286,497 484,194 79,687
-------- ------- -------- ------- ------- -------
End of period................... $ 73,754 6,394 742,784 305,821 527,100 72,821
======== ======= ======== ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income
(loss)...................... 6,840 7,284
Net realized gain (loss) on
sales of investments........ 9,738 8,226
Change in unrealized
appreciation (depreciation)
of investments.............. (2,788) 8,507
------- -------
Net increase in contract
owners' equity resulting
from operations........... 13,790 24,017
------- -------
Account unit transactions:
Proceeds from units sold...... 14,396 14,943
Net transfers (to) from
affiliate and subaccounts... (14,865) 11,461
Payments for units redeemed... (15,633) (6,408)
------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions.............. (16,102) 19,996
------- -------
Total increase (decrease) in
contract owners' equity....... (2,312) 44,013
Beginning of period............. 162,908 68,850
------- -------
End of period................... 160,596 112,863
======= =======
</TABLE>
- ---------------
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
1997.
See accompanying notes to financial statements.
B-22
<PAGE> 367
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------------------------------------------------
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> <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
===== ====== ====== ====== ===== ===== ===== === =====
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
429
842
3,150
------
4,421
------
5,841
2,785
(1,058)
------
7,568
------
11,989
17,658
------
29,647
======
</TABLE>
B-23
<PAGE> 368
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Kemper Investors Life Insurance Company 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 Zurich Financial
Services ("ZFS"). ZFS was formed with the September 7, 1998 merger of the Zurich
Group with the financial services business of B.A.T. Industries. ZFS is owned by
Zurich Allied AG and Allied Zurich p.l.c., fifty-seven percent and forty-three
percent, respectively. Zurich Allied AG, representing the financial interest of
the former Zurich Group, is listed on the Swiss Market Index (SMI) replacing
Zurich. Allied Zurich p.l.c., representing the financial interest of the
financial services business of B.A.T. Industries, is included in the FTSE-100
Share Index in London.
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, PASSPORT individual and group variable and market
value adjusted deferred annuity contracts and DESTINATIONS individual and group
variable, fixed and market value adjusted deferred annuity contracts. The
Separate Account is divided into a total of thirty-nine subaccounts with various
subaccount options available to Contract Owners depending upon their respective
Contracts. A total of only twenty-eight subaccount options are presented in the
accompanying financial statements (the Money Market Subaccounts represent only
one subaccount), as available subaccount options to Contract Owners. ADVANTAGE
III Contract Owners have eleven additional subaccounts which invest in the
shares of subaccounts in the Janus Aspen Series, the Lexington Funds, and the
Fidelity VIP Funds which are not reflected in the accompanying financial
statements. Each subaccount invests exclusively in the shares of a corresponding
portfolio of one of the underlying investment funds; the Investors Fund Series,
the Janus Aspen Series, the Scudder Variable Life Investment Funds and the
Warburg Pincus Trust Funds, all of which are open-end diversified management
investment companies.
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, 1998.
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.
(Central 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-24
<PAGE> 369
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.
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
INVESTMENTS
INVESTORS FUND SERIES:
Money Market Subaccount (Money Market and Money Market #2
Subaccounts).............................................. 111,685 $ 111,685
Total Return Subaccount..................................... 264,617 628,630
High Yield Subaccount....................................... 214,127 260,208
Growth Subaccount........................................... 182,099 483,911
Government Securities Subaccount............................ 64,938 76,630
International Subaccount.................................... 105,017 121,917
Small Cap Growth Subaccount................................. 73,037 124,454
Investment Grade Bond Subaccount............................ 9,866 11,134
Contrarian Value Subaccount................................. 54,611 78,889
Small Cap Value Subaccount.................................. 31,336 35,661
Value+Growth Subaccount..................................... 28,166 39,668
Horizon 20+ Subaccount...................................... 6,121 7,879
Horizon 10+ Subaccount...................................... 11,087 13,540
Horizon 5 Subaccount........................................ 5,228 6,245
Global Income Subaccount.................................... 1,287 1,367
Blue Chip Subaccount........................................ 6,981 8,151
International Growth & Income Subaccount.................... 259 227
Dreman High Return Equity Subaccount........................ 5,288 5,132
Dreman Financial Services Subaccount........................ 1,245 1,141
Global Blue Chip Subaccount................................. 295 270
JANUS ASPEN SERIES FUND:
Growth Subaccount........................................... 2,547 46,316
Growth & Income Subaccount.................................. 173 1,807
SCUDDER VARIABLE LIFE INVESTMENT FUNDS:
Global Discovery Subaccount................................. 93 647
Growth & Income Subaccount.................................. 151 1,624
International Subaccount.................................... 60 818
Capital Growth Subaccount................................... 25 544
WARBURG PINCUS TRUST FUNDS:
Emerging Markets Subaccounts................................ 7 57
Post-Venture Capital Subaccount............................. 7 81
----------
TOTAL INVESTMENTS AT COST........................... $2,068,633
==========
</TABLE>
A description of the underlying investments of the subaccounts are summarized
below.
INVESTORS FUND SERIES
MONEY MARKET SUBACCOUNT: This subaccount seeks maximum current income to the
extent consistent with stability of principal from a portfolio of high quality
money market instruments. The Portfolio seeks to maintain a net asset value of
$1.00 per share but there is no assurance that the Portfolio will be able to do
so. The Money Market Subaccount represents the ADVANTAGE III Money Market
Subaccount and the PASSPORT and DESTINATIONS Money Market Subaccount #1. Money
Market Subaccount #2 represents funds allocated by the owner of a contract to
the dollar cost averaging ("DCA") 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 and DESTINATIONS
individual and group variable, fixed and market value adjusted deferred annuity
contracts.
TOTAL RETURN SUBACCOUNT: This subaccount seeks a high return, a combination of
income and capital appreciation consistent with reasonable risk.
B-25
<PAGE> 370
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
HIGH YIELD SUBACCOUNT: This subaccount seeks to provide a high level of current
income.
GROWTH SUBACCOUNT: This subaccount seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
GOVERNMENT SECURITIES SUBACCOUNT: This subaccount seeks high current return
consistent with preservation of capital.
INTERNATIONAL SUBACCOUNT: This subaccount seeks total return, a combination of
capital growth and income, principally through an internationally diversified
portfolio of equity securities.
SMALL CAP GROWTH SUBACCOUNT: This subaccount seeks maximum appreciation of
investors' capital.
INVESTMENT GRADE BOND SUBACCOUNT: This subaccount seeks high current income
return.
CONTRARIAN VALUE SUBACCOUNT: This subaccount seeks to achieve a high rate of
total return.
SMALL CAP VALUE SUBACCOUNT: This subaccount seeks long-term capital
appreciation.
VALUE+GROWTH SUBACCOUNT: This subaccount seeks growth of capital. A secondary
objective of the Portfolio is for reduction of risk over a full market cycle
compared to a portfolio of only growth stocks or only value stocks.
HORIZON 20+ SUBACCOUNT: This subaccount, designed for investors with
approximately a 20+ year investment horizon, seeks growth of capital, with
income as a secondary objective.
HORIZON 10+ SUBACCOUNT: This subaccount, designed for investors with
approximately a 10+year investment horizon, seeks a balance between growth of
capital and income, consistent with moderate risk.
HORIZON 5 SUBACCOUNT: This subaccount, designed for investors with approximately
a 5 year investment horizon, seeks income consistent with a preservation of
capital, with growth of capital as a secondary objective.
GLOBAL INCOME SUBACCOUNT: This subaccount seeks to provide high current income
consistent with prudent total return asset management.
BLUE CHIP SUBACCOUNT: This subaccount seeks growth of capital and of income.
INTERNATIONAL GROWTH AND INCOME SUBACCOUNT: This subaccount seeks long-term
growth of capital and current income primarily from foreign equity securities.
HIGH RETURN EQUITY SUBACCOUNT: This subaccount seeks to achieve a high rate of
total return.
FINANCIAL SERVICES SUBACCOUNT: This subaccount seeks long-term capital
appreciation.
GLOBAL BLUE CHIP SUBACCOUNT: This subaccount seeks long-term growth of capital
through a diversified worldwide portfolio of marketable securities, primarily
equity securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
JANUS ASPEN SERIES FUNDS
GROWTH SUBACCOUNT: This subaccount seeks long-term growth of capital in a manner
consistent with the preservation of capital.
GROWTH & INCOME SUBACCOUNT: This subaccount seeks long-term capital growth and
current income.
SCUDDER VARIABLE LIFE INVESTMENT FUNDS
GLOBAL DISCOVERY SUBACCOUNT: This subaccount seeks above-average capital
appreciation over the long term by investing primarily in the equity securities
of small companies located throughout the world.
GROWTH & INCOME SUBACCOUNT: This subaccount seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
INTERNATIONAL SUBACCOUNT: This subaccount seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
CAPITAL GROWTH SUBACCOUNT: This subaccount seeks to maximize long-term capital
growth from a portfolio consisting primarily of equity securities.
B-26
<PAGE> 371
WARBURG PINCUS TRUST FUNDS
EMERGING MARKETS SUBACCOUNT: This subaccount seeks long-term growth of capital.
POST-VENTURE CAPITAL SUBACCOUNT: This subaccount seeks long-term growth of
capital by investing primarily in equity securities of issuers in their
post-venture-capital stage of development and pursues an aggressive investment
strategy.
(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. KILICO
assesses that portion of each subaccount representing assets under DESTINATIONS
individual and group variable, fixed 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 four-tenths
percent (1.40%) per annum. The PASSPORT and DESTINATIONS DCA Money Market
Subaccount #2, available for participation in the dollar cost averaging program,
has no daily asset charge deduction. For the year ended December 31, 1998, asset
charges totaled $25,943,505, $7,117,285 and $81,806 for ADVANTAGE III, PASSPORT
and DESTINATIONS contracts, respectively.
KILICO also assesses against each ADVANTAGE III contract participating in one or
more of the subaccounts at any time during the year a records maintenance
charge. For contracts purchased prior to June 1, 1993, the charge is $25 and is
assessed on December 31st of each calendar year. For contracts purchased June 1,
1993 and subsequent, the charge is $36 and is assessed ratably every quarter of
each calendar year, except in those states which have yet to approve these
contract changes. The charge is assessed whether or not any purchase payments
have been made during the year. KILICO also assesses against each PASSPORT and
DESTINATIONS 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 ADVANTAGE III, PASSPORT and DESTINATIONS contracts are
waived for all individual contracts whose investment value exceeds $50,000 on
the date of assessment. For the year ended December 31, 1998, records
maintenance charges total $2,044,611, $151,021 and $60 for ADVANTAGE III,
PASSPORT and DESTINATIONS contracts, respectively.
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Money Market, Total Return, High Yield, and 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, 1998, no such payment was made.
KILICO assesses an optional annual charge for the Guaranteed Retirement Income
Benefit ("GRIB"), related to the DESTINATIONS Contracts. The annual charge of
.25% of Contract Value, if taken, will be deducted pro rata from each invested
subaccount on each Contract Quarter anniversary. For the year ended December 31,
1998, GRIB charges totaled $9,477.
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., an affiliated company, is the investment
manager of the Investors Fund Series Portfolios and the Scudder Variable Life
Investment Fund Portfolios.
Janus Capital Corporation is the investment manager of the Janus Aspen Series
Fund Portfolios and Warburg Pincus Asset Management, Inc. is the investment
manager of the Warburg Pincus Trust Fund Portfolios. Neither of these entities
are affiliated with KILICO.
B-27
<PAGE> 372
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)
Investors Brokerage Services, Inc., a wholly-owned subsidiary of KILICO, is the
principal underwriter for the Separate Account.
(4) NET TRANSFERS (TO) FROM AFFILIATE AND SUBACCOUNTS
Net transfers (to) from affiliate or subaccounts include transfers of all or
part of the Contract Owner's interest to or from another eligible 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.
Contract Owners' equity at December 31, 1998, 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
INVESTORS FUND SERIES
MONEY MARKET SUBACCOUNT
Flexible Payment, Qualified............................... 309 $ 2.493 $ 770
Flexible Payment, Nonqualified............................ 3,812 2.493 9,502
Periodic Payment, Qualified............................... 14,508 2.372 34,415
Periodic Payment, Nonqualified............................ 11,095 2.372 26,316
----------
71,003
----------
TOTAL RETURN SUBACCOUNT
Flexible Payment, Qualified............................... 772 7.411 5,719
Flexible Payment, Nonqualified............................ 3,348 6.862 22,973
Periodic Payment, Qualified............................... 72,971 7.052 514,620
Periodic Payment, Nonqualified............................ 11,360 6.571 74,644
----------
617,956
----------
HIGH YIELD SUBACCOUNT
Flexible Payment, Qualified............................... 260 6.369 1,655
Flexible Payment, Nonqualified............................ 1,480 6.098 9,025
Periodic Payment, Qualified............................... 20,199 6.061 122,423
Periodic Payment, Nonqualified............................ 6,036 5.904 35,637
----------
168,740
----------
GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 178 7.261 1,292
Flexible Payment, Nonqualified............................ 1,063 7.236 7,692
Periodic Payment, Qualified............................... 50,548 6.945 351,046
Periodic Payment, Nonqualified............................ 9,612 6.935 66,657
----------
426,687
----------
GOVERNMENT SECURITIES SUBACCOUNT
Flexible Payment, Qualified............................... 146 1.828 266
Flexible Payment, Nonqualified............................ 1,073 1.828 1,962
Periodic Payment, Qualified............................... 16,997 1.779 30,243
Periodic Payment, Nonqualified............................ 10,270 1.779 18,273
----------
50,744
----------
INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified............................... 212 1.877 398
Flexible Payment, Nonqualified............................ 744 1.877 1,397
Periodic Payment, Qualified............................... 45,058 1.839 82,855
Periodic Payment, Nonqualified............................ 7,278 1.839 13,383
----------
98,033
----------
</TABLE>
B-28
<PAGE> 373
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
SMALL CAP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 166 $ 2.625 $ 437
Flexible Payment, Nonqualified............................ 494 2.625 1,297
Periodic Payment, Qualified............................... 38,394 2.589 99,412
Periodic Payment, Nonqualified............................ 4,843 2.589 12,540
----------
113,686
----------
INVESTMENT GRADE BOND SUBACCOUNT
Flexible Payment, Qualified............................... 19 $ 1.187 $ 23
Flexible Payment, Nonqualified............................ 750 1.187 890
Periodic Payment, Qualified............................... 2,529 1.178 2,978
Periodic Payment, Nonqualified............................ 1,033 1.178 1,216
----------
5,107
----------
CONTRARIAN VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 94 1.777 168
Flexible Payment, Nonqualified............................ 80 1.777 142
Periodic Payment, Qualified............................... 23,159 1.763 40,832
Periodic Payment, Nonqualified............................ 3,847 1.763 6,782
----------
47,924
----------
SMALL CAP VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 4 1.072 4
Flexible Payment, Nonqualified............................ 94 1.072 101
Periodic Payment, Qualified............................... 12,832 1.063 13,643
Periodic Payment, Nonqualified............................ 1,756 1.063 1,867
----------
15,615
----------
VALUE+GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 60 1.683 101
Flexible Payment, Nonqualified............................ 173 1.683 291
Periodic Payment, Qualified............................... 7,994 1.669 13,345
Periodic Payment, Nonqualified............................ 2,094 1.669 3,496
----------
17,233
----------
HORIZON 20+ SUBACCOUNT
Flexible Payment, Qualified............................... 21 1.530 32
Flexible Payment, Nonqualified............................ -- 1.530 --
Periodic Payment, Qualified............................... 1,764 1.518 2,679
Periodic Payment, Nonqualified............................ 195 1.518 295
----------
3,006
----------
HORIZON 10+ SUBACCOUNT
Flexible Payment, Qualified............................... 13 1.410 18
Flexible Payment, Nonqualified............................ 9 1.410 12
Periodic Payment, Qualified............................... 3,391 1.399 4,744
Periodic Payment, Nonqualified............................ 419 1.399 586
----------
5,360
----------
HORIZON 5 SUBACCOUNT
Flexible Payment, Qualified............................... -- 1.320 --
Flexible Payment, Nonqualified............................ 35 1.320 46
Periodic Payment, Qualified............................... 1,248 1.310 1,635
Periodic Payment, Nonqualified............................ 357 1.310 468
----------
2,149
JANUS ASPEN SERIES
GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 7 26.152 180
Flexible Payment, Nonqualified............................ 16 26.152 407
Periodic Payment, Qualified............................... 1,931 25.897 50,001
Periodic Payment, Nonqualified............................ 243 25.897 6,281
----------
56,869
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY......... $1,700,112
==========
</TABLE>
B-29
<PAGE> 374
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
PASSPORT CONTRACTS
INVESTOR FUND SERIES
MONEY MARKET #1 SUBACCOUNT
Qualified................................................. 6,657 $ 1.245 $ 8,289
Nonqualified.............................................. 21,661 1.245 26,976
----------
35,265
----------
MONEY MARKET #2 SUBACCOUNT
Qualified................................................. 1,442 1.358 1,958
Nonqualified.............................................. 1,870 1.358 2,540
----------
4,498
----------
TOTAL RETURN SUBACCOUNT
Qualified................................................. 14,282 1.917 27,374
Nonqualified.............................................. 46,822 1.917 89,744
----------
117,118
----------
HIGH YIELD SUBACCOUNT
Qualified................................................. 10,995 1.887 20,743
Nonqualified.............................................. 36,787 1.887 69,400
----------
90,143
----------
GROWTH SUBACCOUNT
Qualified................................................. 12,369 2.349 29,057
Nonqualified.............................................. 34,697 2.349 81,506
----------
110,563
----------
GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 4,337 1.437 6,231
Nonqualified.............................................. 14,321 1.437 20,573
----------
26,804
----------
INTERNATIONAL SUBACCOUNT
Qualified................................................. 5,866 1.845 10,825
Nonqualified.............................................. 19,399 1.845 35,794
----------
46,619
----------
SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 2,884 2.595 7,486
Nonqualified.............................................. 8,298 2.595 21,536
----------
29,022
----------
INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 1,230 1.179 1,450
Nonqualified.............................................. 3,715 1.179 4,381
----------
5,831
----------
CONTRARIAN VALUE SUBACCOUNT
Qualified................................................. 6,817 1.765 12,036
Nonqualified.............................................. 19,663 1.765 34,715
----------
46,751
----------
SMALL CAP VALUE SUBACCOUNT
Qualified................................................. 4,178 1.065 4,448
Nonqualified.............................................. 11,505 1.065 12,248
----------
16,696
----------
VALUE+GROWTH SUBACCOUNT
Qualified................................................. 4,694 1.672 7,846
Nonqualified.............................................. 12,758 1.672 21,328
----------
29,174
----------
HORIZON 20+ SUBACCOUNT
Qualified................................................. 1,141 1.520 1,734
Nonqualified.............................................. 2,631 1.520 4,000
----------
5,734
----------
</TABLE>
B-30
<PAGE> 375
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
HORIZON 10+ SUBACCOUNT
Qualified................................................. 1,544 $ 1.401 $ 2,162
Nonqualified.............................................. 5,198 1.401 7,280
----------
9,442
----------
HORIZON 5 SUBACCOUNT
Qualified................................................. 394 1.311 517
Nonqualified.............................................. 2,992 1.311 3,924
----------
4,441
----------
GLOBAL INCOME SUBACCOUNT
Qualified................................................. 62 1.118 69
Nonqualified.............................................. 1,144 1.118 1,280
----------
1,349
----------
BLUE CHIP SUBACCOUNT
Qualified................................................. 1,227 1.244 1,526
Nonqualified.............................................. 4,798 1.244 5,968
----------
7,494
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY.............. $ 586,944
==========
DESTINATIONS CONTRACTS
INVESTORS FUND SERIES
MONEY MARKET #1 SUBACCOUNT
Qualified................................................. 20 10.213 200
Nonqualified.............................................. 62 10.213 634
----------
834
----------
MONEY MARKET #2 SUBACCOUNT
Qualified................................................. 19 10.297 191
Nonqualified.............................................. 2 10.297 20
----------
211
----------
TOTAL RETURN SUBACCOUNT
Qualified................................................. 38 10.542 406
Nonqualified.............................................. 85 10.542 899
----------
1,305
----------
HIGH YIELD SUBACCOUNT
Qualified................................................. 121 9.646 1,166
Nonqualified.............................................. 240 9.646 2,313
----------
3,479
----------
GROWTH SUBACCOUNT
Qualified................................................. 24 10.007 239
Nonqualified.............................................. 26 10.007 256
----------
495
----------
GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 28 10.332 293
Nonqualified.............................................. 49 10.332 504
----------
797
----------
INTERNATIONAL SUBACCOUNT
Qualified................................................. 20 9.429 186
Nonqualified.............................................. 36 9.429 343
----------
529
----------
SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 34 11.070 378
Nonqualified.............................................. 72 11.070 795
----------
1,173
----------
INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 23 10.417 240
Nonqualified.............................................. 43 10.417 443
----------
683
----------
</TABLE>
B-31
<PAGE> 376
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
INVESTORS FUND SERIES (CONTINUED)
CONTRARIAN VALUE SUBACCOUNT
Qualified................................................. 31 $10.712 $ 334
Nonqualified.............................................. 79 10.712 841
----------
1,175
----------
SMALL CAP VALUE SUBACCOUNT
Qualified................................................. 50 8.431 419
Nonqualified.............................................. 75 8.431 636
----------
1,055
----------
VALUE+GROWTH SUBACCOUNT
Qualified................................................. 18 10.697 190
Nonqualified.............................................. 38 10.697 408
----------
598
----------
HORIZON 20+ SUBACCOUNT
Qualified................................................. 28 10.228 289
Nonqualified.............................................. 18 10.228 184
----------
473
----------
HORIZON 10+ SUBACCOUNT
Qualified................................................. 27 10.290 275
Nonqualified.............................................. 35 10.290 362
----------
637
----------
HORIZON 5 SUBACCOUNT
Qualified................................................. 6 10.354 59
Nonqualified.............................................. 16 10.354 168
----------
227
----------
GLOBAL INCOME SUBACCOUNT
Qualified................................................. 0 10.755 2
Nonqualified.............................................. 7 10.755 76
----------
78
----------
BLUE CHIP SUBACCOUNT
Qualified................................................. 35 10.386 360
Nonqualified.............................................. 90 10.386 930
----------
1,290
----------
INTERNATIONAL GROWTH & INCOME SUBACCOUNT
Qualified................................................. 6 9.130 58
Nonqualified.............................................. 19 9.130 178
----------
236
----------
DREMAN HIGH RETURN EQUITY SUBACCOUNT
Qualified................................................. 221 10.491 2,318
Nonqualified.............................................. 297 10.491 3,118
----------
5,436
----------
DREMAN FINANCIAL SERVICES SUBACCOUNT
Qualified................................................. 49 9.998 495
Nonqualified.............................................. 72 9.998 722
----------
1,217
----------
GLOBAL BLUE CHIP SUBACCOUNT
Qualified................................................. 3 10.103 26
Nonqualified.............................................. 26 10.103 262
----------
288
----------
JANUS ASPEN SERIES
GROWTH SUBACCOUNT
Qualified................................................. 112 11.943 1,332
Nonqualified.............................................. 140 11.943 1,673
----------
3,005
----------
</TABLE>
B-32
<PAGE> 377
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
GROWTH & INCOME SUBACCOUNT
Qualified................................................. 76 $12.038 $ 910
Nonqualified.............................................. 97 12.038 1,164
----------
2,074
----------
SCUDDER VARIABLE LIFE INVESTMENT FUNDS
GLOBAL DISCOVERY SUBACCOUNT
Qualified................................................. 35 10.043 355
Nonqualified.............................................. 39 10.043 389
----------
744
----------
GROWTH & INCOME SUBACCOUNT
Qualified................................................. 91 9.651 882
Nonqualified.............................................. 84 9.651 815
----------
1,697
----------
INTERNATIONAL SUBACCOUNT
Qualified................................................. 26 9.837 258
Nonqualified.............................................. 62 9.837 611
----------
869
----------
CAPITAL GROWTH SUBACCOUNT
Qualified................................................. 19 10.823 204
Nonqualified.............................................. 37 10.823 400
----------
604
----------
WARBURG PINCUS TRUST FUNDS
EMERGING MARKETS SUBACCOUNT
Qualified................................................. 0 7.994 1
Nonqualified.............................................. 7 7.994 58
----------
59
----------
POST-VENTURE CAPITAL SUBACCOUNT
Qualified................................................. 1 9.720 9
Nonqualified.............................................. 8 9.720 76
----------
85
----------
TOTAL DESTINATIONS CONTRACT OWNERS' EQUITY.......... $ 31,353
==========
</TABLE>
B-33
<PAGE> 378
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
------------------------------------
QUALIFIED NON-QUALIFIED
PLANS PLANS
STATE --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Contract Value.
B-34
<PAGE> 379
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of issuance and distribution of the Contracts, other than any
underwriting discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Registration Fees........ $15,151.52
Printing and Engraving...................................... $50,000.00
Accounting Fees and Expenses................................ $15,000.00
Legal Fees and Expenses..................................... $15,000.00
----------
Total Expenses............................... $95,151.52
==========
</TABLE>
- ---------------
* Expenses are estimated and are for period ending May 1, 2000 for continuous
offering of interest pursuant to Rule 415 but are not deducted from proceeds.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI, Section 1. of the Bylaws of Kemper Investors Life Insurance Company
provides for indemnification of Directors and Officers as follows:
SECTION 1. The company shall indemnify any person against all expenses
(including attorneys fees), judgments, fines, amounts paid in settlement
and other costs actually and reasonably incurred by him in connection with
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by
or in the right of the company) in which he is a party or is threatened to
be made a party by reason of his being or having been a director, officer,
employee or agent of the company, or serving or having served, at the
request of the company, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
or by reason of his holding a fiduciary position in connection with the
management or administration of retirement, pension, profit sharing or
other benefit plans including, but not limited to, any fiduciary liability
under the Employee Retirement Income Security Act of 1974 and any amendment
thereof, if he acted in good faith and in a manner he reasonably believed
to be in and not opposed to the best interests of the company, and with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that he did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, Registrant has sold, in reliance on Rule 506 of
Regulation D under the Securities Act of 1933, as amended, unregistered Private
Placement Group and Individual Variable Life Insurance Policies ("Policies") to
banks and other corporations as a financing or cost recovery vehicle for pre-
and post-retirement employee benefits. There was no predetermined 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 of the Policies were made directly by the Registrant and not
through a principal underwriter. When offered directly by the Registrant, no
commissions were paid for the sale of the Policies. Certain offerings of the
Policies were made through Zurich Capital Markets Securities Inc. or Life
Insurance Solutions, LLC, doing its securities business as LIS Securities,
affiliates of Registrant, as principal underwriter for the Policies. In these
instances, compensation of up to 3% of premium may be paid to registered
broker-dealers for distribution-related activities involving the Policies.
Registrant has also sold unregistered Private Placement Individual Variable Life
Insurance Policies and Group Flexible Premium Variable Deferred Annuity
Contracts (collectively "HNW Policies") to certain high net worth
II-1
<PAGE> 380
"qualified purchasers", as that term is defined under Section 3(c)(7) of the
Securities Act of 1933. There was no predetermined aggregate offering price as
purchase amounts are premium payments under life insurance policies which are
based on the lives insured and insurance underwriting or purchase payments under
annuity contracts. Life Insurance Solutions, LLC, or Investors Brokerage
Services, Inc., affiliates of Registrant, serves as principal underwriter of
these offerings. Compensation up to 3% of premium may be paid to registered
broker-dealers for distribution-related activities involving the HNW Policies.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
(1)1(a) Distribution Agreement
(7)1(b) Fund Participation Agreement among KILICO, Investors Fund
Series (formerly known as Kemper Investors Fund), Zurich
Kemper Investments, Inc. and Kemper Distributors, Inc.
(4)1(c)(i) Fund Participation Agreement among KILICO, Janus Aspen
Series and Janus Capital Corporation.
(5)1(c)(ii) Service Agreement between KILICO and Janus Capital
Corporation.
(7)1(d)(i) Participation Agreement by and among Kemper Investors Life
Insurance Company and Warburg, Pincus Trust and Warburg
Pincus Asset Management, Inc. (f/k/a Warburg, Pincus
Counsellors, Inc.) and Counsellors Securities, Inc.
(6)1(d)(ii) Service Agreement between Warburg Pincus Counsellors, Inc.
and Federal Kemper Life Assurance Company and Kemper
Investors Life Insurance Company.
(2)1(e) Specimen Selling Group Agreement of Investors Brokerage
Services, Inc.
(2)1(f) General Agent Agreement
1(g)(i) Participation Agreement among Kemper Investors Life
Insurance Company, PIMCO Variable Insurance Trust, and PIMCO
Funds Distributors LLC.
1(g)(ii) Services Agreement between Pacific Investment Management
Company and Kemper Investors Life Insurance Company.
1(h) Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and
Kemper Investors Life Insurance Company.
1(i) Participation Agreement between Kemper Investors Life
Insurance Company and Scudder Variable Life Investment Fund
1(j) Participating Contract and Policy Agreement between Kemper
Investors Life Insurance Company and Scudder Kemper
Investments, Inc.
1(k) Indemnification Agreement between Kemper Investors Life
Insurance Company and Scudder Kemper Investments, Inc.
(1)3(a) Articles of Incorporation
(1)3(b) Bylaws
(7)4(a) Form of Group Variable, Fixed and Market Value Adjusted
Annuity Contract
(7)4(b) Form of Certificate to Group Variable, Fixed and Market
Value Adjusted Annuity Contract.
(7)4(c) Form of Individual Variable, Fixed and Market Value Adjusted
Annuity Contract.
(7)4(d) Form of Application
(3)5 Opinion and Consent of Counsel regarding legality
23(a) Consents of PricewaterhouseCoopers LLP, Independent
Accountants
23(b) Consent of KPMG LLP, Independent Auditors
(3)23(c) Consent of Counsel (See Exhibit 5)
(10)99(a) Schedule IV: Reinsurance (year ended December 31, 1998)
</TABLE>
II-2
<PAGE> 381
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
(8)99(b) Schedule IV: Reinsurance (year ended December 31, 1997)
(9)99(c) Schedule IV: Reinsurance (year ended December 31, 1996)
(10)99(d) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1998)
(8)99(e) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1997)
(9)99(f) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1996)
</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. 333-22389) filed on or about November 3,
1997.
(4) Incorporated herein by reference to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
September 14, 1995.
(5) Incorporated herein by reference to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1997.
(6) Incorporated herein by reference to Post-Effective Amendment No. 4 to the
Registration Statement on Form S-6 (File No. 33-79808) filed on or about
April 30, 1997.
(7) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 333-22389) filed on or about April 8, 1998.
(8) 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.
(9) Incorporated herein by reference to Form 10-K for Kemper Investors Life
Insurance Company for fiscal year ended 12/31/96 filed on or about March
25, 1997.
(10) Incorporated herein by reference to Amendment No. 4 to the Registration
Statement on Form S-1 (File No. 333-02491) filed on or about April 20,
1999.
(B) FINANCIAL STATEMENTS
Reports of Independent Public Accountants
KILICO and Subsidiaries Consolidated Balance Sheets, as of December 31,
1998 and 1997
KILICO and Subsidiaries Consolidated Statements of Operations, years ended
December 31, 1998, 1997 and 1996
KILICO and Subsidiaries Consolidated Statements of Comprehensive Income,
years ended December 31, 1998, 1997 and 1996
KILICO and Subsidiaries Consolidated Statements of Stockholder's Equity,
years ended December 31, 1998, 1997 and 1996
KILICO and Subsidiaries Consolidated Statements of Cash Flows, years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
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-3
<PAGE> 382
(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, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 383
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 16th day of April, 1999.
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 16th day of April, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN B. SCOTT Chief Executive Officer, President and Director
- ----------------------------------------------------- (Principal Executive Officer)
John B. Scott
/s/ W.H. BOLINDER Chairman of the Board and Director
- -----------------------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial Officer
- ----------------------------------------------------- (Principal Financial Officer and Principal
Frederick L. Blackmon Accounting Officer)
/s/ LOREN J. ALTER Director
- -----------------------------------------------------
Loren J. Alter
/s/ DAVID A. BOWERS Director
- -----------------------------------------------------
David A. Bowers
/s/ ELIANE C. FRYE Director
- -----------------------------------------------------
Eliane C. Frye
/s/ GUNTHER GOSE Director
- -----------------------------------------------------
Gunther Gose
/s/ JAMES E. HOHMANN Director
- -----------------------------------------------------
James E. Hohmann
</TABLE>
II-5
<PAGE> 384
EXHIBIT LIST
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGES*
- ------- DESCRIPTION ------------
<C> <S> <C>
1(g)(i) Participation Agreement among Kemper Investors Life
Insurance Company, PIMCO Variable Insurance Trust and PIMCO
Funds Distributors LLC
1(g)(ii) Services Agreement between Pacific Investment Management
Company and Kemper Investors Life Insurance Company
1(h) Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and
Kemper Investors Life Insurance Company
1(i) Participation Agreement between Kemper Investors Life
Insurance Company and Scudder Variable Life Investment Fund
1(j) Participating Contract and Policy Agreement between Kemper
Investors Life Insurance Company and Scudder Kemper
Investments, Inc.
1(k) Indemnification Agreement between Kemper Investors Life
Insurance Company and Scudder Kemper Investments, Inc.
23(a) Consents of PricewaterhouseCoopers LLP, Independent
Accountants
23(b) Consent of KPMG LLP, Independent Auditors
</TABLE>
- ---------------
* In manually signed original only.
<PAGE> 1
EXHIBIT 1(g)(i)
PARTICIPATION AGREEMENT
Among
KEMPER INVESTORS LIFE INSURANCE COMPANY,
PIMCO VARIABLE INSURANCE TRUST,
and
PIMCO FUNDS DISTRIBUTORS LLC
THIS AGREEMENT, dated as of the 5th day of January, 1999 by and among
Kemper Investors Life Insurance Company, (the "Company"), an Illinois life
insurance company, on its own behalf and on behalf of each segregated asset
account of the Company set forth on Schedule A hereto as may be amended from
time to time (each account hereinafter referred to as the "Account"), PIMCO
Variable Insurance Trust (the "Fund"), a Delaware business trust, and PIMCO
Funds Distributors LLC (the "Underwriter"), a Delaware limited liability
company.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance and variable annuity
contracts (the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
Underwriter ("Participating Insurance Companies");
WHEREAS, the shares of beneficial interest of the Fund are divided into
several series of shares, each designated a "Portfolio" and representing the
interest in a particular managed portfolio of securities and other assets;
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission (the "SEC") granting Participating Insurance Companies and
variable annuity and variable life insurance separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment
Company Act of 1940, as amended, (the "1940 Act") and Rules 6e-2(b)(15) and
6e3(T)(b)(15) thereunder, if and to the extent necessary to permit shares of the
Fund to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
(the "Mixed and Shared Funding Exemptive Order");
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933, as amended (the "1933 Act");
WHEREAS, Pacific Investment Management Company (the "Adviser"), which
serves as investment adviser to the Fund, is duly registered as an investment
adviser under the federal Investment Advisers Act of 1940, as amended;
<PAGE> 2
WHEREAS, the Company has issued or will issue certain variable life
insurance and/or variable annuity contracts supported wholly or partially by the
Account (the "Contracts"), and said Contracts are listed in Schedule A hereto,
as it may be amended from time to time by mutual written agreement;
WHEREAS, the Account is duly established and maintained as a segregated
asset account, duly established by the Company, on the date shown for such
Account on Schedule A hereto, to set aside and invest assets attributable to the
aforesaid Contracts;
WHEREAS, the Underwriter, which serves as distributor to the Fund, is
registered as a broker dealer with the SEC under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts, and the Underwriter is authorized to sell such shares to
the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund
and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1. The Fund has granted to the Underwriter exclusive authority
to distribute the Fund's shares, and has agreed to instruct, and has so
instructed, the Underwriter to make available to the Company for purchase on
behalf of the Account Fund shares of those Designated Portfolios selected by the
Underwriter. Pursuant to such authority and instructions, and subject to Article
X hereof, the Underwriter agrees to make available to the Company for purchase
on behalf of the Account, shares of those Designated Portfolios listed on
Schedule A to this Agreement, such purchases to be effected at net asset value
in accordance with Section 1.3 of this Agreement. Notwithstanding the foregoing,
(i) Fund series (other than those listed on Schedule A) in existence now or that
may be established in the future will be made available to the Company only as
the Underwriter may so provide, and (ii) the Board of Trustees of the Fund (the
"Board") may suspend or terminate the offering of Fund shares of any Designated
Portfolio or class thereof, if such action is required by law or by regulatory
authorities having jurisdiction or if, in the sole discretion of the Board
acting in good faith and in light of its fiduciary duties under federal and any
applicable state laws, suspension or termination is necessary in the best
interests of the shareholders of such Designated Portfolio.
1.2. The Fund shall redeem, at the Company's request, any full
or fractional Designated Portfolio shares held by the Company on behalf of the
Account, such redemptions to be effected at net asset value in accordance with
Section 1.3 of this Agreement. Notwithstanding the foregoing, (i) the Company
shall not redeem Fund shares attributable to Contract owners except in the
circumstances permitted in Section 10.3 of this Agreement, and (ii) the Fund may
delay redemption of Fund shares of any Designated Portfolio to the extent
permitted by the 1940 Act, and any rules, regulations or orders thereunder.
1.3. Purchase and Redemption Procedures
2
<PAGE> 3
(a) The Fund hereby appoints the Company as an agent of the
Fund for the limited purpose of receiving purchase and redemption requests on
behalf of the Account (but not with respect to any Fund shares that may be held
in the general account of the Company) for shares of those Designated Portfolios
made available hereunder, based on allocations of amounts to the Account or
subaccounts thereof under the Contracts and other transactions relating to the
Contracts or the Account. Receipt of any such request (or relevant transactional
information therefor) on any day the New York Stock Exchange is open for trading
and on which the Fund calculates its net asset value pursuant to the rules of
the SEC (a "Business Day") by the Company as such limited agent of the Fund
prior to the time that the Fund ordinarily calculates its net asset value as
described from time to time in the Fund Prospectus (which as of the date of
execution of this Agreement is 4:00 p.m. Eastern Time) shall constitute receipt
by the Fund on that same Business Day, provided that the Fund receives notice of
such request by 9:30 a.m. Eastern Time on the next following Business Day.
(b) The Company shall pay for shares of each Designated
Portfolio on the same day that it notifies the Fund of a purchase request for
such shares. Payment for Designated Portfolio shares shall be made in federal
funds transmitted to the Fund by wire to be received by the Fund by 4:00 p.m.
Eastern Time on the day the Fund is notified of the purchase request for
Designated Portfolio shares (unless the Fund determines and so advises the
Company that sufficient proceeds are available from redemption of shares of
other Designated Portfolios effected pursuant to redemption requests tendered by
the Company on behalf of the Account). If federal funds are not received on
time, such funds will be invested, and Designated Portfolio shares purchased
thereby will be issued, as soon as practicable and the Company shall promptly,
upon the Fund's request, reimburse the Fund for any charges, costs, fees,
interest or other expenses incurred by the Fund in connection with any advances
to, or borrowing or overdrafts by, the Fund, or any similar expenses incurred by
the Fund, as a result of portfolio transactions effected by the Fund based upon
such purchase request. Upon receipt of federal funds so wired, such funds shall
cease to be the responsibility of the Company and shall become the
responsibility of the Fund.
(c) Payment for Designated Portfolio shares redeemed by the
Account or the Company shall be made in federal funds transmitted by wire to the
Company or any other designated person on the next Business Day after the Fund
is properly notified of the redemption order of such shares (unless redemption
proceeds are to be applied to the purchase of shares of other Designated
Portfolios in accordance with Section 1.3(b) of this Agreement), except that the
Fund reserves the right to redeem Designated Portfolio shares in assets other
than cash and to delay payment of redemption proceeds to the extent permitted
under Section 22(e) of the 1940 Act and any Rules thereunder, and in accordance
with the procedures and policies of the Fund as described in the then current
prospectus. The Fund shall not bear any responsibility whatsoever for the proper
disbursement or crediting of redemption proceeds by the Company; the Company
alone shall be responsible for such action.
(d) Any purchase or redemption request for Designated
Portfolio shares held or to be held in the Company's general account shall be
effected at the net asset value per share next determined after the Fund's
receipt of such request, provided that, in the case of a purchase request,
payment for Fund shares so requested is received by the Fund in federal funds
prior to close of business for determination of such value, as defined from time
to time in the Fund Prospectus.
1.4. The Fund shall use its best efforts to make the net asset
value per share for each Designated Portfolio available to the Company by 6:30
p.m. Eastern Time each Business Day, and in any event, as soon as reasonably
practicable after the net asset value per share for such Designated Portfolio is
calculated, and shall calculate such net asset value in accordance with the
Fund's Prospectus. Neither
3
<PAGE> 4
the Fund, any Designated Portfolio, the Underwriter, nor any of their affiliates
shall be liable for any information provided to the Company pursuant to this
Agreement which information is based on incorrect information supplied by the
Company or any other Participating Insurance Company to the Fund or the
Underwriter.
1.5. The Fund shall furnish notice (by wire or telephone followed
by written confirmation) to the Company as soon as reasonably practicable of any
income dividends or capital gain distributions payable on any Designated
Portfolio shares. The Company, on its behalf and on behalf of the Account,
hereby elects to receive all such dividends and distributions as are payable on
any Designated Portfolio shares in the form of additional shares of that
Designated Portfolio. The Company reserves the right, on its behalf and on
behalf of the Account, to revoke this election and to receive all such dividends
and capital gain distributions in cash. The Fund shall notify the Company
promptly of the number of Designated Portfolio shares so issued as payment of
such dividends and distributions.
1.6. Issuance and transfer of Fund shares shall be by book entry
only. Stock certificates will not be issued to the Company or the Account.
Purchase and redemption orders for Fund shares shall be recorded in an
appropriate ledger for the Account or the appropriate subaccount of the Account.
1.7. (a) The parties hereto acknowledge that the arrangement
contemplated by this Agreement is not exclusive; the Fund's shares may be sold
to other insurance companies (subject to Section 1.8 hereof) and the cash value
of the Contracts may be invested in other investment companies, provided,
however, that until this Agreement is terminated pursuant to Article X, the
Company shall promote the Designated Portfolios on the same basis as other
funding vehicles available under the Contracts. Funding vehicles other than
those listed on Schedule A to this Agreement may be available for the investment
of the cash value of the Contracts, provided, however, (i) any such vehicle or
series thereof, has investment objectives or policies that are substantially
different from the investment objectives and policies of the Designated
Portfolios available hereunder; (ii) the Company gives the Fund and the
Underwriter 45 days written notice of its intention to make such other
investment vehicle available as a funding vehicle for the Contracts; and (iii)
unless such other investment company was available as a Funding vehicle for the
Contracts prior to the date of this Agreement and the Company has so informed
the Fund and the Underwriter prior to their signing this Agreement, the Fund or
Underwriter consents in writing to the use of such other vehicle, such consent
not to be unreasonably withheld.
(b) The Company shall not, without prior notice to the
Underwriter (unless otherwise required by applicable law), take any action to
operate the Account as a management investment company under the 1940 Act.
(c) The Company shall not, without prior notice to the
Underwriter (unless otherwise required by applicable law), induce Contract
owners to change or modify the Fund or change the Fund's distributor or
investment adviser.
(d) The Company shall not, without prior notice to the Fund,
induce Contract owners to vote on any matter submitted for consideration by the
shareholders of the Fund in a manner other than as recommended by the Board of
Trustees of the Fund.
1.8. The Underwriter and the Fund shall sell Fund shares only
to Participating Insurance Companies and their separate accounts and to persons
or plans ("Qualified Persons") that communicate to the Underwriter and the Fund
that they qualify to purchase shares of the Fund under
4
<PAGE> 5
Section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code") and
the regulations thereunder without impairing the ability of the Account to
consider the portfolio investments of the Fund as constituting investments of
the Account for the purpose of satisfying the diversification requirements of
Section 817(ii). The Underwriter and the Fund shall not sell Fund shares to any
insurance company or separate account unless an agreement complying with Article
VI of this Agreement is in effect to govern such sales, to the extent required.
The Company hereby represents and warrants that it and the Account are Qualified
Persons. The Fund reserves the right to cease offering shares of any Designated
Portfolio in the discretion of the Fund.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts (a)
are, or prior to issuance will be, registered under the 1933 Act, or (b) are not
registered because they are properly exempt from registration under the 1933 Act
or will be offered exclusively in transactions that are properly exempt from
registration under the 1933 Act. The Company further represents and warrants
that the Contracts will be issued and sold in compliance in all material
respects with all applicable federal securities and state securities and
insurance laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law, that it has legally and validly established
the Account prior to any issuance or sale thereof as a segregated asset account
under Illinois insurance laws, and that it (a) has registered or, prior to any
issuance or sale of the Contracts, will register the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts, or alternatively (b) has not
registered the Account in proper reliance upon an exclusion from registration
under the 1940 Act. The Company shall register and qualify the Contracts or
interests therein as securities in accordance with the laws of the various
states only if and to the extent deemed advisable by the Company.
2.2. The Fund represents and warrants that Fund shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with applicable state and federal
securities laws and that the Fund is and shall remain registered under the 1940
Act. The Fund shall amend the registration statement for its shares under the
1933 Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Fund shall register and qualify the
shares for sale in accordance with the laws of the various states only if and to
the extent deemed advisable by the Fund or the Underwriter.
2.3. The Fund may make payments to finance distribution expenses
pursuant to Rule 12b-1 under the 1940 Act. Prior to financing distribution
expenses pursuant to Rule 12b-1, the Fund will have the Board, a majority of
whom are not interested persons of the Fund, formulate and approve a plan
pursuant to Rule 12b-1 under the 1940 Act to finance distribution expenses.
2.4. The Fund makes no representations as to whether any aspect of
its operations, including, but not limited to, investment policies, fees and
expenses, complies with the insurance and other applicable laws of the various
states.
2.5. The Fund represents that it is lawfully organized and
validly existing under the laws of the State of Delaware and that it does and
will comply in all material respects with the 1940 Act.
5
<PAGE> 6
2.6. The Underwriter represents and warrants that it is a member
in good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with any applicable state and federal securities laws.
2.7. The Fund and the Underwriter represent and warrant that all
of their trustees/directors, officers, employees, investment advisers, and other
individuals or entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimum coverage as required currently by Rule 17g-1 of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.8. The Company represents and warrants that all of its
directors, officers, employees, and other individuals/entities employed or
controlled by the Company dealing with the money and/or securities of the
Account are covered by a blanket fidelity bond or similar coverage for the
benefit of the Account, in an amount not less than $5 million. The aforesaid
bond includes coverage for larceny and embezzlement and is issued by a reputable
bonding company. The Company agrees to hold for the benefit of the Fund and to
pay to the Fund any amounts lost from larceny, embezzlement or other events
covered by the aforesaid bond to the extent such amounts properly belong to the
Fund pursuant to the terms of this Agreement. The Company agrees to make all
reasonable efforts to see that this bond or another bond containing these
provisions is always in effect, and agrees to notify the Fund and the
Underwriter in the event that such coverage no longer applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company with as many copies
of the Fund's current prospectus (describing only the Designated Portfolios
listed on Schedule A) or, to the extent permitted, the Fund's profiles as the
Company may reasonably request. The Company shall bear the expense of printing
copies of the current prospectus and profiles for the Contracts that will be
distributed to existing Contract owners, and the Company shall bear the expense
of printing copies of the Fund's prospectus and profiles that are used in
connection with offering the Contracts issued by the Company. If requested by
the Company in lieu thereof, the Fund shall provide such documentation
(including a final copy of the new prospectus on diskette at the Fund's expense)
and other assistance as is reasonably necessary in order for the Company once
each year (or more frequently if the prospectus for the Fund is amended) to have
the prospectus for the Contracts and the Fund's prospectus or profile printed
together in one document (such printing to be at the Company's expense).
3.2. The Fund's prospectus shall state that the current Statement
of Additional Information ("SAI") for the Fund is available, and the Underwriter
(or the Fund), at its expense, shall provide a reasonable number of copies of
such SAI free of charge to the Company for itself and for any owner of a
Contract who requests such SAI.
3.3. The Fund shall provide the Company with information regarding
the Fund's expenses, which information may include a table of fees and related
narrative disclosure for use in any prospectus or other descriptive document
relating to a Contract. The Company agrees that it will use such information in
the form provided. The Company shall provide prior written notice of any
proposed modification of such information, which notice will describe in detail
the manner in which the Company
6
<PAGE> 7
proposes to modify the information, and agrees that it may not modify such
information in any way without the prior consent of the Fund.
3.4. The Fund, at its expense, shall provide the Company with
copies of its proxy material, reports to shareholders, and other communications
to shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners.
3.5. The Company shall:
(ii) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
portfolio for which instructions have been received,
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners or to the
extent otherwise required by law. The Company will vote Fund shares held in any
segregated asset account in the same proportion as Fund shares of such portfolio
for which voting instructions have been received from Contract owners, to the
extent permitted by law.
3.6. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in a Designated
Portfolio calculates voting privileges as required by the Shared Funding
Exemptive Order and consistent with any reasonable standards that the Fund may
adopt and provide in writing.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material that the Company develops and in which the Fund (or a Designated
Portfolio thereof) or the Adviser or the Underwriter is named. No such material
shall be used until approved by the Fund or its designee, and the Fund will use
its best efforts for it or its designee to review such sales literature or
promotional material within ten Business Days after receipt of such material.
The Fund or its designee reserves the right to reasonably object to the
continued use of any such sales literature or other promotional material in
which the Fund (or a Designated Portfolio thereof) or the Adviser or the
Underwriter is named, and no such material shall be used if the Fund or its
designee so object.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund or
the Adviser or the Underwriter in connection with the sale of the Contracts
other than the information or representations contained in the registration
statement or prospectus or SAI for the Fund shares, as such registration
statement and prospectus or SAI may be amended or supplemented from time to
time, or in reports or proxy statements for the Fund, or in sales literature or
other promotional material approved by the Fund or its designee or by the
Underwriter, except with the permission of the Fund or the Underwriter or the
designee of either.
7
<PAGE> 8
4.3. The Fund and the Underwriter, or their designee, shall
furnish, or cause to be furnished, to the Company, each piece of sales
literature or other promotional material that it develops and in which the
Company, and/or its Account, is named. No such material shall be used until
approved by the Company, and the Company will use its best efforts to review
such sales literature or promotional material within ten Business Days after
receipt of such material. The Company reserves the right to reasonably object to
the continued use of any such sales literature or other promotional material in
which the Company and/or its Account is named, and no such material shall be
used if the Company so objects.
4.4. The Fund and the Underwriter shall not give any information
or make any representations on behalf of the Company or concerning the Company,
the Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus (which shall include an
offering memorandum, if any, if the Contracts issued by the Company or interests
therein are not registered under the 1933 Act), or SAI for the Contracts, as
such registration statement, prospectus, or SAI may be amended or supplemented
from time to time, or in published reports for the Account which are in the
public domain or approved by the Company for distribution to Contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete
copy of all registration statements, prospectuses, SAIs, reports, proxy
statements, sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of the
above, that relate to the Fund or its shares, promptly after the filing of such
documents) with the SEC or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete
copy of all registration statements, prospectuses (which shall include an
offering memorandum, if any, if the Contracts issued by the Company or interests
therein are not registered under the 1933 Act), SAIs, reports, solicitations for
voting instructions, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Contracts or the Account, promptly after
the filing of such documents) with the SEC or other regulatory authorities. The
Company shall provide to the Fund and the Underwriter any complaints received
from the Contract owners pertaining to the Fund or the Designated Portfolio.
4.7. The Fund will provide the Company with as much notice as is
reasonably practicable of any proxy solicitation for any Designated Portfolio,
and of any material change in the Fund's registration statement, particularly
any change resulting in a change to the registration statement or prospectus for
any Account. The Fund will work with the Company so as to enable the Company to
solicit proxies from Contract owners, or to make changes to its prospectus or
registration statement, in an orderly manner. The Fund will make reasonable
efforts to attempt to have changes affecting Contract prospectuses become
effective simultaneously with the annual updates for such prospectuses.
4.8. For purposes of this Article IV, the phrase "sales literature
and other promotional materials" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature,
8
<PAGE> 9
or published article), educational or training materials or other communications
distributed or made generally available to some or all agents or employees, and
registration statements, prospectuses, SAls, shareholder reports, proxy
materials, and any other communications distributed or made generally available
with regard to the Fund.
ARTICLE V. Fees and Expenses
5.1. The Fund and the Underwriter shall pay no fee or other
compensation to the Company under this Agreement, except that if the Fund or any
Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance
distribution expenses, then the Fund or Underwriter may make payments to the
Company or to the underwriter for the Contracts if and in amounts agreed to by
the Underwriter in writing, and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter, or other
resources available to the Underwriter. Currently, no such payments are
contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the
Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. Diversification and Qualification
6.1. The Fund will invest its assets in such a manner as to ensure
that the Contracts will be treated as annuity or life insurance contracts,
whichever is appropriate, under the Code and the regulations issued thereunder
(or any successor provisions). Without limiting the scope of the foregoing, each
Designated Portfolio has compiled and will continue to comply with Section
817(h) of the Code and Treasury Regulation ss.1.817-5, and any Treasury
interpretations thereof, relating to the diversification requirements for
variable annuity, endowment, or life insurance contracts, and any amendments or
other modifications or successor provisions to such Section or Regulations. In
the event of a breach of this Article VI by the Fund, it will take all
reasonable steps (a) to notify the Company of such breach and (b) to adequately
diversify the Fund so as to achieve compliance within the grace period afforded
by Regulation 1.817-5.
6.2. The Fund represents that it is or will be qualified as a
Regulated Investment Company under Subchapter M of the Code, and that it will
make every effort to maintain such
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<PAGE> 10
qualification (under Subchapter M or any successor or similar provisions) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
6.3. The Company represents that the Contracts are currently, and
at the time of issuance shall be, treated as life insurance or annuity insurance
contracts, under applicable provisions of the Code, and that it will make every
effort to maintain such treatment, and that it will notify the Fund and the
Underwriter immediately upon having a reasonable basis for believing the
Contracts have ceased to be so treated or that they might not be so treated in
the future. The Company agrees that any prospectus offering a contract that is a
"modified endowment contract" as that term is defined in Section 7702A of the
Code (or any successor or similar provision), shall identify such contract as a
modified endowment contract.
ARTICLE VII. Potential Conflicts
The following provisions shall apply only upon issuance of the Mixed and Shared
Funding Order and the sale of shares of the Fund to variable life insurance
separate accounts, and then only to the extent required under the 1940 Act.
7.1. The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the Contract owners of
all separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial similar decision in any relevant proceeding; (d) the manner in which
the investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts
of which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Mixed and Shared Funding Exemptive Order, by
providing the Board with all information reasonably necessary for the Board to
consider any issues raised. This includes, but is not limited to, an obligation
by the Company to inform the Board whenever Contract owner voting instructions
are disregarded.
7.3. If it is determined by a majority of the Board, or a majority
of its disinterested members, that a material irreconcilable conflict exists,
the Company and other Participating Insurance Companies shall, at their expense
and to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in
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<PAGE> 11
favor of such segregation, or offering to the affected contract owners the
option of making such a change; and (2) establishing a new registered management
investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the Account's
investment in the Fund and terminate this Agreement with respect to each
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Fund shall continue to accept and implement orders
by the Company for the purchase (and redemption) of shares of the Fund.
7.5 If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Fund and terminate this
Agreement with respect to such Account within six months after the Board informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board. Until the end of the foregoing six month period, the Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6 For purposes of Section 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contract if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination; provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7 If and to the extent the Mixed and Shared Funding Exemption
Order or any amendment thereto contains terms and conditions different from
Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5, of this Agreement, then the
Fund and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with the Mixed and Shared Funding
Exemptive Order, and Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5 of this
Agreement shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in the Mixed and Shared
Funding Exemptive Order or any amendment thereto. If and to the extent that Rule
6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive
relief from any provision of the 1940 Act or the rules promulgated thereunder
with respect to mixed or shared funding (as defined in the Mixed and Shared
Funding Exemptive Order) on terms and conditions materially different from those
contained in the Mixed and Shared Funding Exemptive Order, then (a) the Fund
and/or the Participating Insurance Companies, as appropriate shall take such
steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and
Rule 6e-3 as adopted, to the extent such rules are applicable; and (b) Sections
3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect
only to the extent that terms and conditions substantially identical to such
Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By the Company
8.1(a). The Company agrees to indemnify and hold harmless
the Fund and the Underwriter and each of its trustees/directors and officers,
and each person, if any, who controls the Fund or Underwriter within the meaning
of Section 15 of the 1933 Act or who is under common control with the
Underwriter (collectively, the "Indemnified Parties" for purposes of this
Section 8.1) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements:
(i) arise out of or are based upon any untrue statement or
alleged untrue statements of any material fact contained in
the registration statement, prospectus (which shall include a
written description of a Contract that is not registered
under the 1933 Act), or SAI for the Contracts or contained in
the Contracts or sales literature for the Contracts (or any
amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to
the Company by or on behalf of the Fund for use in the
registration statement, prospectus or SAI for the Contracts
or in the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale
of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI, or
sales literature of the Fund not supplied by the Company or
persons under its control) or wrongful conduct of the Company
or its agents or persons under the Company's authorization or
control, with respect to the sale or distribution of the
Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, SAI, or sales literature of the Fund
or any amendment thereof or supplement thereto or the
omission or
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<PAGE> 12
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading if such a statement or omission was made in
reliance upon information furnished to the Fund by or on
behalf of the Company; or
(iv) arise as a result of any material failure by the
Company to provide the services and furnish the materials
under the terms of this Agreement (including a failure,
whether unintentional or in good faith or otherwise, to
comply with the qualification requirements specified in
Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company; or
(vi) as limited by and in accordance with the provisions of
Sections 8.1(b) and 8.1 (c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of its obligations or
duties under this Agreement.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have if notified the Company in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, the Company shall be entitled to participate, at
its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund shares or the Contracts or the
operation of the Fund.
8.2. Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless
the Company and each of its directors and officers and each
person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this Section 8.2) against any and
all losses,
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<PAGE> 13
claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Underwriter) or
litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute or
regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions
in respect thereof) or settlements:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement or prospectus or SAI or sales
literature of the Fund (or any amendment or supplement to any
of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with
information furnished to the Underwriter or Fund by or on
behalf of the Company for use in the registration statement,
prospectus or SAI for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI or
sales literature for-the Contracts not supplied by the
Underwriter or persons under its control) or wrongful conduct
of the Fund or Underwriter or persons under their control,
with respect to the sale or distribution of the Contracts or
Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, SAI or sales literature covering the
Contracts, or any amendment thereof or supplement thereto, or
the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statement or statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to the Company by or on behalf of the Fund or the
Underwriter; or
(iv) arise as a result of any failure by the Fund or the
Underwriter to provide the services and furnish the materials
under the terms of this Agreement (including a failure of the
Fund, whether unintentional or in good faith or otherwise, to
comply with the diversification and other qualification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of Sections
8.2(b) and 8.2(c) hereof.
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<PAGE> 14
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance or such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Party, the Underwriter will be entitled to participate,
at its own expense, in the defense thereof. The Underwriter also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Underwriter to such party of the
Underwriter's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Underwriter will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account.
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or litigation
(including legal and other expenses) to which the Indemnified Parties may be
required to pay or may become subject under any statute or regulation, at common
law or otherwise, insofar as such losses, claims, expenses, damages, liabilities
or expenses (or actions in respect thereof) or settlements, are related to the
operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide
the services and furnish the materials under the terms of
this Agreement (including a failure, whether unintentional or
in good faith or otherwise, to comply with the
diversification and other qualification requirements
specified in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and 8.3
(c) hereof.
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<PAGE> 15
8.3(b). The Fund shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company, the Fund, the Underwriter or the
Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Fund in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to
notify the Fund of the commencement of any litigation or proceeding against it
or any of its respective officers or directors in connection with the Agreement,
the issuance or sale of the Contracts, the operation of the Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of California.
9.2. This Agreement shall be subject to the provisions of the
1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant (including, but not limited to, any Mixed and Shared Funding Exemptive
Order) and the terms hereof shall be interpreted and construed in accordance
therewith. If, in the future, the Mixed and Shared Funding Exemptive Order
should no longer be necessary under applicable law, then Article VII shall no
longer apply.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until
the first to occur of:
(a) termination by any party, for any reason with respect to some
or all Designated Portfolios, by three (3) months advance
written notice delivered to the other parties; or
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<PAGE> 16
(b) termination by the Company by written notice to the Fund and
the Underwriter based upon the Company's determination that
shares of the Fund are not reasonably available to meet the
requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and
the Underwriter in the event any of the Designated
Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or such
law precludes the use of such shares as the underlying
investment media of the Contracts issued or to be issued by
the Company; or
(d) termination by the Fund or Underwriter in the event that
formal administrative proceedings are instituted against the
Company by the NASD, the SEC, the Insurance Commissioner or
like official of any state or any other regulatory body
regarding the Company's duties under this Agreement or
related to the sale of the Contracts, the operation of any
Account, or the purchase of the Fund's shares; provided,
however, that the Fund or Underwriter determines in its sole
judgment exercised in good faith, that any such
administrative proceedings will have a material adverse
effect upon the ability of the Company to perform its
obligations under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund or
Underwriter by the NASD, the SEC, or any state securities or
insurance department or any other regulatory body; provided,
however, that the Company determines in its sole judgment
exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the
ability of the Fund or Underwriter to perform its obligations
under this Agreement; or
(f) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Designated Portfolio in
the event that such Portfolio ceases to qualify as a
Regulated Investment Company under Subchapter M or fails to
comply with the Section 817(h) diversification requirements
specified in Article VI hereof, or if the Company reasonably
believes that such Portfolio may fail to so qualify or
comply; or
(g) termination by the Fund or Underwriter by written notice to
the Company in the event that the Contracts fall to meet the
qualifications specified in Article VI hereof, or
(h) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or
the Underwriter respectively, shall determine, in their sole
judgment exercised in good faith, that the Company has
suffered a material adverse change in its business,
operations, financial condition, or prospects since the date
of this Agreement or is the subject of material adverse
publicity; or
(i) termination by the Company by written notice to the Fund and
the Underwriter, if the Company shall determine, in its sole
judgment exercised in good faith, that
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<PAGE> 17
the Fund, Adviser, or the Underwriter has suffered a
material adverse change in its business, operations,
financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(j) termination by the Fund or the Underwriter by written notice
to the Company, if the Company gives the Fund and the
Underwriter the written notice specified in Section
1.7(a)(ii) hereof and at the time such notice was given
there was no notice of termination outstanding under any
other provision of this Agreement; provided, however, any
termination under this Section 10.1(j) shall be effective
forty-five days after the notice specified in Section
1.7(a)(ii) was given; or
(k) termination by the Company upon any substitution of the
shares of another investment company or series thereof for
shares of a Designated Portfolio of the Fund in accordance
with the terms of the Contracts, provided that the Company
has given at least 45 days prior written notice to the Fund
and Underwriter of the date of substitution; or
(1) termination by any party in the event that the Fund's Board
of Trustees determines that a material irreconcilable
conflict exists as provided in Article VII.
10.2. Notwithstanding any termination of this Agreement, the Fund
and the Underwriter shall, at the option of the Company, continue to make
available additional shares of the Fund pursuant to the terms and conditions of
this Agreement, for all Contracts in effect on the effective date of termination
of this Agreement (hereinafter referred to as "Existing Contracts"), unless the
Underwriter requests that the Company seek an order pursuant to Section 26(b) of
the 1940 Act to permit the substitution of other securities for the shares of
the Designated Portfolios. The Underwriter agrees to split the cost of seeking
such an order, and the Company agrees that it shall reasonably cooperate with
the Underwriter and seek such an order upon request. Specifically, the owners of
the Existing Contracts may be permitted to reallocate investments in the Fund,
redeem investments in the Fund and/or invest in the Fund upon the making of
additional purchase payments under the Existing Contracts (subject to any such
election by the Underwriter). The parties agree that this Section 10.2 shall not
apply to any terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement. The parties
further agree that this Section 10.2 shall not apply to any terminations under
Section 10.1 (g) of this Agreement.
10.3. The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), (iii) upon 45 days
prior written notice to the Fund and Underwriter, as permitted by an order of
the SEC pursuant to Section 26(b) of the 1940 Act, but only if a substitution of
other securities for the shares of the Designated Portfolios is consistent with
the terms of the Contracts, or (iv) as permitted under the terms of the
Contract. Upon request, the Company will promptly furnish to the Fund and the
Underwriter reasonable assurance that any redemption pursuant to clause (ii)
above is a Legally Required Redemption. Furthermore, except in cases where
permitted under the terms of the Contacts, the Company shall not prevent
Contract owners from allocating payments to a Portfolio that was otherwise
available under the Contracts without first giving the Fund or the Underwriter
45 days notice of its intention to do so.
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<PAGE> 18
10.4. Notwithstanding any termination of this Agreement, each
party's obligation under Article VIII to indemnify the other parties shall
survive.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to the Fund: PIMCO Variable Insurance Trust
840 Newport Center Drive, Suite 300
Newport Beach, CA 92660
If to the Company: Allen R. Reed
Assistant General Counsel
Zurich Kemper Life
I Kemper Drive
Long Grove, IL 60049-0001
If to Underwriter: PIMCO Funds Distributors LLC
2187 Atlantic Street
Stamford, CT 06902
ARTICLE XII. Miscellaneous
12.1. All persons dealing with the Fund must look solely to the
property of the Fund, and in the case of a series company, the respective
Designated Portfolios listed on Schedule A hereto as though each such Designated
Portfolio had separately contracted with the Company and the Underwriter for the
enforcement of any claims against the Fund. The parties agree that neither the
Board, officers, agents or shareholders of the Fund assume any personal
liability or responsibility for obligations entered into by or on behalf of the
Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written consent
of the affected party until such time as such information has come into the
public domain.
12.3. The captions in this Agreement are included for convenience
of reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
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<PAGE> 19
12.5. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and
all appropriate governmental authorities (including without limitation the SEC,
the NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Illinois Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable annuity
operations of the Company are being conducted in a manner consistent with the
Illinois variable annuity laws and regulations and any other applicable law or
regulations.
12.7. The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies,
and obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
12.8. This Agreement or any of the rights and obligations
hereunder may not be assigned by any party without the prior written consent of
all parties hereto.
12.9. The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles) filed with any
state or federal regulatory body or otherwise made available
to the public, as soon as practicable and in any event within
90 days after the end of each fiscal year; and
(b) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and Exchange
Commission or any state insurance regulatory, as soon as
practicable after the filing thereof.
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IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
KEMPER INVESTORS LIFE INSURANCE COMPANY:
By its authorized officer
By: /s/ Allen R. Reed
Title: Assistant General Counsel
Date: December 30, 1998
PIMCO VARIABLE INSURANCE TRUST
By its authorized officer
By: /s/ Brent R. Harris
Title: Chairman
Date: January 5, 1999
PIMCO FUNDS DISTRIBUTORS LLC
By its authorized officer
By: Newton R. Schottf
Title: Executive Vice President
Date: January 5, 1999
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<PAGE> 21
Schedule A
PIMCO Variable Insurance Trust Portfolios:
PIMCO Low Duration Portfolio
PIMCO Foreign Bond Portfolio
Dated January 5, 1999
21
<PAGE> 1
EXHIBIT 1(g)(ii)
SERVICES AGREEMENT
The terms and conditions of this Services Agreement between Pacific Investment
Management Company ("PIMCO") and Kemper Investors Life Insurance Company (the
"Company") are effective as of January 5, 1999.
WHEREAS, the Company, PIMCO Funds Distributors LLC and PIMCO Variable
Insurance Trust (the "Trust") have entered into a Fund Participation Agreement
dated January 5, 1999, as may be amended from time to time (the "Participation
Agreement"), pursuant to which the Company, on behalf of certain of its separate
accounts (the "Separate Accounts"), purchases shares ("Shares") of certain
Portfolios of the Trust ("Portfolios") to serve as an investment vehicle under
certain variable annuity and/or variable life insurance contracts ("Variable
Contracts") offered by the Company, which Portfolios may be one of several
investment options available under the Variable Contracts; and
WHEREAS, PIMCO recognizes that it will derive substantial savings in
administrative expenses by virtue of having a sole shareholder rather than
multiple shareholders in connection with each Separate Account's investments in
the Portfolios, and that in the course of soliciting applications for Variable
Contracts issued by the Company and in servicing owners of such Variable
Contracts, the Company will provide information about the Trust and its
Portfolios from time to time, answer questions concerning the Trust and its
Portfolios, including questions respecting Variable Contract owners' interests
in one or more Portfolios, and provide services respecting investments in the
Portfolios; and
WHEREAS, PIMCO wishes to compensate the Company for the efforts of the
Company in providing written and oral information and services regarding the
Trust to Variable Contract owners; and
WHEREAS, the following represents the collective intention and
understanding of the service fee agreement between PIMCO and the Company.
NOW, THEREFORE, in consideration of their mutual promises, the Company
and PIMCO agree as follows:
1. Services. The Company and/or its affiliates agree to provide
services ("Services") to owners of Variable Contracts including, but not limited
to: teleservicing support in connection with the Portfolios; delivery of current
Trust prospectuses, reports, notices, proxies and proxy statements and other
informational materials; facilitation of the tabulation of Variable Contract
owners' votes in the event of a Trust shareholder vote; maintenance of Variable
Contract records reflecting Shares purchased and redeemed and Share balances,
and the conveyance of that information to the Trust or PIMCO as may be
reasonably requested; provision of support services, including providing
information about the Trust and its Portfolios and answering questions
concerning the Trust and its Portfolios, including questions respecting Variable
Contract owners' interests in one or more Portfolios; provision and
administration of Variable Contract features for the benefit of Variable
Contract owners in connection with the Portfolios, which may include fund
transfers, dollar cost averaging, asset allocation, portfolio rebalancing,
earnings sweep, and pre-authorized deposits and withdrawals; and provision of
other services as may be agreed upon from time to time.
<PAGE> 2
2. Compensation. In consideration of the Services, PIMCO agrees
to pay to the Company a service fee at an annual rate equal to twenty-five (25)
basis points (0.25%) of the average daily value of the Shares held in the
Separate Accounts. Such payments will be made monthly in arrears. For purposes
of computing the payment to the Company under this paragraph 2, the average
daily value of Shares held in the Separate Accounts over a monthly period shall
be computed by totaling such Separate Accounts' aggregate investment (Share net
asset value multiplied by total number of Shares held by such Separate Accounts)
on each business day during the calendar month, and dividing by the total number
of business days during such month. The payment to the Company under this
paragraph 2 shall be calculated by PIMCO at the end of each calendar month and
will be paid to the Company within 30 days thereafter. Payment will be
accompanied by a statement showing the calculation of the monthly amounts
payable by PIMCO and such other supporting data as may be reasonably requested
by the Company. Notwithstanding any other provision of this Services Agreement
or the Participation Agreement, PIMCO agrees to reimburse the Company for costs
related to the printing, mailing and tabulation of any proxy initiated by the
Trust or Underwriter.
3. Term. This Services Agreement shall remain in full force and
effect for an initial term of one year, and shall automatically renew for
successive one year periods. This Services Agreement may be terminated by either
party hereto upon 30 days written notice to the other. This Services Agreement
shall terminate automatically upon the redemption of all Shares held in the
Separate Accounts, upon termination of the Participation Agreement, upon a
material, unremedied breach of the Participation Agreement, as to a Portfolio
upon termination of the investment advisory agreement between the Trust, on
behalf of such Portfolio, and PIMCO, or upon assignment of the Participation
Agreement by either the Company or PIMCO. Notwithstanding the termination of
this Services Agreement, PIMCO will continue to pay the service fees in
accordance with paragraph 2 so long as net assets of the Separate Accounts
remain in a Portfolio, provided such continued payment is permitted in
accordance with applicable law and regulation.
4. Amendment. This Services Agreement may be amended only upon
mutual agreement of the parties hereto in writing.
5. Effect on Other Terms, Obligations and Covenants. Nothing
herein shall amend, modify or supersede any contractual terms, obligations or
covenants among or between any of the Company, PIMCO or the Trust previously or
currently in effect, including those contractual terms, obligations or covenants
contained in the Participation Agreement.
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<PAGE> 3
In witness whereof, the parties have caused their duly authorized
officers to execute this Services Agreement.
PACIFIC INVESTMENT MANAGEMENT COMPANY
/s/ Brent R. Harris
By: Brent Harris
Title: Managing Director
Date:
KEMPER INVESTORS LIFE INSURANCE COMPANY
/s/ Allen R. Reed
By: Allen R. Reed
Title: Assistant General Counsel
Date: 12/30/98
3
<PAGE> 1
EXHIBIT 1(h)
PARTICIPATION AGREEMENT
AMONG TEMPLETON VARIABLE PRODUCTS SERIES FUND,
FRANKLIN TEMPLETON DISTRIBUTORS, INC. AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
THIS AGREEMENT made as of February 15, 1999, among Templeton Variable
Products Series Fund (the "Trust"), an open-end management investment company
organized as a business trust under Massachusetts law, Franklin Templeton
Distributors, Inc., a California corporation, the Trust's principal underwriter
("Underwriter"), and Kemper Investors Life Insurance Company, a life insurance
company organized under the laws of the State of Illinois (the "Company"), on
its own behalf and on behalf of each segregated asset account of the Company set
forth in Schedule A, as may be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Underwriter desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets, and certain of those series, named in
Schedule B, (the "Portfolios") are to be made available for purchase by the
Company for the Accounts; and
WHEREAS, the Trust has received an order from the SEC, dated November
16, 1993 (File No. 812-8546), granting Participating Insurance Companies and
their separate accounts exemptions from the provisions of Sections 9(a), 13(a),
15(a) and 15(b) of the 1940 Act, and Rules 6e-2 (b) (15) and 6e-3 (T) (b) (15)
thereunder, to the extent necessary to permit shares of the Trust to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised; and has
registered or will register certain variable annuity contracts and variable life
insurance policies, listed on Schedule C attached hereto, under which the
portfolios are to be made available as investment vehicles (the
<PAGE> 2
"Contracts") under the 1933 Act unless such interests under the Contracts in the
Accounts are exempt from registration under the 1933 Act and the Trust has been
so advised;
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such account on Schedule A hereto, to set aside
and invest assets attributable to one or more Contracts; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and is a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, each investment adviser listed on Schedule B (each, an
"Adviser") is duly registered as an investment adviser under the Investment
Advisers Act of 1940, as amended ("Advisers Act") and any applicable state
securities laws;
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid Contracts and the Underwriter
is authorized to sell such shares to unit investment trusts such as each Account
at net asset value;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
1.1. For purposes of this Article I, the Company shall be the Trust's
agent for receipt of purchase orders and requests for redemption relating to
each Portfolio from each Account, provided that the Company notifies the Trust
of such purchase orders and requests for redemption by 9:00 a.m. Eastern time on
the next following Business Day, as defined in Section 1.3.
1.2. The Trust agrees to make shares of the Portfolios available to the
Accounts for purchase at the net asset value per share next computed after
receipt of a purchase order by the Trust (or its agent), as established in
accordance with the provisions of the then current prospectus of the Trust
describing Portfolio purchase procedures on those days on which the Trust
calculates its net asset value pursuant to rules of the SEC, and the Trust shall
use its best efforts to calculate such net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for trading. The Company will transmit
orders from time to time to the Trust for the purchase of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Trustees acting in good
faith
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<PAGE> 3
and in light of their fiduciary duties under federal and any applicable state
laws, such action is deemed in the best interests of the shareholders of such
Portfolio.
1.3 The Company shall submit payment for the purchase of shares of a
Portfolio on behalf of an Account no later than the close of business on the
next Business Day after the Trust receives the purchase order. Payment shall be
made in federal funds transmitted by wire to the Trust or its designated
custodian. Upon receipt by the Trust of the federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Trust for this purpose. "Business Day" shall mean any day
on which the NYSE is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.4 The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the net
asset value next computed after receipt by the Trust (or its agent) of the
request for redemption, as established in accordance with the provisions of the
then current prospectus of the Trust describing Portfolio redemption procedures.
The Trust shall make payment for such shares in the manner established from time
to time by the Trust. Redemption with respect to a Portfolio will normally be
paid to the Company for an Account in federal funds transmitted by wire to the
Company before the close of business on the next Business Day after the receipt
of the request for redemption. Such payment may be delayed if, for example, the
Portfolio's cash position so requires or if extraordinary market conditions
exist, but in no event shall payment be delayed for a greater period than is
permitted by the 1940 Act.
1.5 Payments for the purchase of shares of the Trust's Portfolios by
the Company under Section 1.3 and payments for the redemption of shares of the
Trust's Portfolios under Section 1.4 may be netted against one another on any
Business Day for the purpose of determining the amount of any wire transfer on
that Business Day.
1.6 Issuance and transfer of the Trust's Portfolio shares will be by
book entry only. Stock certificates will not be issued to the Company or the
Account. Portfolio Shares purchased from the Trust will be recorded in the
appropriate title for each Account or the appropriate subaccount of each
Account.
1.7 The Trust shall furnish, on or before the ex-dividend date, notice
to the Company of any income dividends or capital gain distributions payable on
the shares of any Portfolio of the Trust. The Company hereby elects to receive
all such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. The Trust shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.8 The Trust shall calculate the net asset value of each Portfolio on
each Business Day, as defined in Section 1.3. The Trust shall make the net asset
value per share for each Portfolio available to the Company or its designated
agent on a daily basis as soon as reasonably practical after the net asset value
per share is calculated (normally by 6:30 p.m.
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<PAGE> 4
Eastern time) and shall use reasonable efforts to make such net asset value per
share available by 7:00 p.m. Eastern time each Business Day.
1.9 The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their separate accounts and to certain
qualified pension and retirement plans to the extent permitted by the Shared
Funding Exemptive Order. No shares of any Portfolio will be sold directly to the
general public. The Company agrees that it will use Trust shares only for the
purposes of funding the Contracts through the Accounts listed in Schedule A, as
amended from time to time.
1.10 The Company agrees that all net amounts available under the
Contracts shall be invested in the Trust, in such other Funds advised by an
Adviser or its affiliates as may be mutually agreed to in writing by the parties
hereto, or in the Company's general account, provided that such amounts may also
be invested in an investment company other than the Trust if: (a) such other
investment company, or series thereof, has investment objectives or policies
that are substantially different from the investment objectives and policies of
the Portfolios; or (b) the Company gives the Trust and the Underwriter 45 days
written notice of its intention to make such other investment company available
as a funding vehicle for the Contracts; or (c) such other investment company is
available as a funding vehicle for the Contracts at the date of this Agreement
and the Company so informs the Trust and the Underwriter prior to their signing
this Agreement (a list of such investment companies appearing on Schedule D to
this Agreement); or (d) the Trust or Underwriter consents to the use of such
other investment company.
1.11 The Trust agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article IV of this Agreement.
1.12 Each party to this Agreement shall have the right to rely on
information or confirmations provided by any other party (or by any affiliate of
any other party), and shall not be liable in the event that an error results
from any incorrect information or confirmations supplied by any other party. If
an error is made in reliance upon incorrect information or confirmations, any
amount required to make a Contract owner's account whole shall be borne by the
party who provided the incorrect information or confirmation.
ARTICLE II.
OBLIGATIONS OF THE PARTIES; FEES AND EXPENSES
2.1 The Trust shall prepare and be responsible for filing with the SEC
and any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of the Trust.
The Trust shall bear the costs of registration and qualification of its shares
of the Portfolios, preparation and filing of the documents listed in this
Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its shares.
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<PAGE> 5
2.2 At the option of the Company, the Trust or the Underwriter shall
either (a) provide the Company with as many copies of portions of the Trust's
current prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
pertaining specifically to the Portfolios as the Company shall reasonably
request; or (b) provide the Company with a camera ready copy of such documents
in a form suitable for printing and from which information relating to series of
the Trust other than the Portfolios has been deleted to the extent practicable.
The Trust or the Underwriter shall provide the Company with a copy of its
current statement of additional information, including any amendments or
supplements, in a form suitable for duplication by the Company. Expenses of
furnishing such documents for marketing purposes shall be borne by the Company
and expenses of furnishing such documents for current contract owners invested
in the Trust shall be borne by the Trust or the Underwriter.
2.3 The Trust (at its expense) shall provide the Company with copies of
any Trust-sponsored proxy materials in such quantity as the Company shall
reasonably require for distribution to Contract owners. The Company shall bear
the costs of distributing proxy materials (or similar materials such as voting
solicitation instructions), prospectuses and statements of additional
information to Contract owners. The Company assumes sole responsibility for
ensuring that such materials are delivered to Contract owners in accordance with
applicable federal and state securities laws.
2.4 If and to the extent required by law, the Company shall: (i)
solicit voting instructions from Contract owners; (ii) vote the Trust shares in
accordance with the instructions received from Contract owners; and (iii) vote
Trust shares for which no instructions have been received in the same proportion
as Trust shares of such Portfolio for which instructions have been received; so
long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The Company
reserves the right to vote Trust shares held in any segregated asset account in
its own right, to the extent permitted by law.
2.5 Except as provided in section 2.6, the Company shall not use any
designation comprised in whole or part of the names or marks "Franklin" or
"Templeton" or any other Trademark relating to the Trust or Underwriter without
prior written consent, and upon termination of this Agreement for any reason,
the Company shall cease all use of any such name or mark as soon as reasonably
practicable.
2.6 The Company shall furnish, or cause to be furnished to the Trust or
its designee, at least one complete copy of each registration statement,
prospectus, statement of additional information, retirement plan disclosure
information or other disclosure documents or similar information, as applicable
(collectively "disclosure documents"), as well as any report, solicitation for
voting instructions, sales literature and other promotional materials, and all
amendments to any of the above that relate to the Contracts or the Accounts
prior to its first use. The Company shall furnish, or shall cause to be
furnished, to the Trust or its designee each piece of sales literature or other
promotional material in which the Trust or an Adviser is named, at least 15
Business Days prior to its use. No such material shall be used if the Trust or
its designee reasonably objects to such use within five Business Days after
receipt of such
5
<PAGE> 6
material. For purposes of this paragraph, "sales literature or other promotional
material" includes, but is not limited to, portions of the following that use
any Trademark related to the Trust or Underwriter or refer to the Trust or
affiliates of the Trust: advertisements (such as material published or designed
for use in a newspaper, magazine or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards, motion
pictures or electronic communication or other public media), sales literature
(i.e., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, research reports,
market letters, form letters, seminar texts, reprints or excerpts or any other
advertisement, sales literature or published article or electronic
communication), educational or training materials or other communications
distributed or made generally available to some or all agents or employees, and
disclosure documents, shareholder reports and proxy materials.
2.7 The Company and its agents shall not give any information or make
any representations or statements on behalf of the Trust or concerning the
Trust, the Underwriter or an Adviser in connection with the sale of the
Contracts other than information or representations contained in and accurately
derived from the registration statement or prospectus for the Trust shares (as
such registration statement and prospectus may be amended or supplemented from
time to time), annual and semi-annual reports of the Trust, Trust-sponsored
proxy statements, or in sales literature or other promotional material approved
by the Trust or its designee, except as required by legal process or regulatory
authorities or with the written permission of the Trust or its designee.
2.8 The Trust shall use its best efforts to provide the Company, on a
timely basis, with such information about the Trust, the Portfolios and each
Adviser, in such form as the Company may reasonably require, as the Company
shall reasonably request in connection with the preparation of disclosure
documents and annual and semi-annual reports pertaining to the Contracts.
2.9 The Trust shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or representations
contained in and accurately derived from disclosure documents for the Contracts
(as such disclosure documents may be amended or supplemented from time to time),
or in materials approved by the Company for distribution including sales
literature or other promotional materials, except as required by legal process
or regulatory authorities or with the written permission of the Company.
2.10 So long as, and to the extent that, the SEC interprets the 1940
Act to require pass-through voting privileges for Contract owners, the Company
will provide pass-through voting privileges to Contract owners whose Contract
values are invested, through the registered Accounts, in shares of one or more
Portfolios of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each registered Account,
the Company will vote shares of each Portfolio of the Trust held by a registered
Account and for which no timely voting instructions from Contract owners are
received in the same proportion as those shares
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<PAGE> 7
held by that registered Account for which voting instructions are received. The
Company and its agents will in no way recommend or oppose or interfere with the
solicitation of proxies for Portfolio shares held to fund the Contracts without
the prior written consent of the Trust, which consent may be withheld in the
Trust's sole discretion.
2.11 The Trust and Underwriter shall pay no fee or other compensation
to the Company under this Agreement except as provided on Schedule E, if
attached. Nevertheless, the Trust or the Underwriter or an affiliate may make
payments (other than pursuant to a Rule 12b-1 Plan) to the Company or its
affiliates or to the Contracts' underwriter in amounts agreed to by the
Underwriter in writing and such payments may be made out of fees otherwise
payable to the Underwriter or its affiliates, profits of the Underwriter or its
affiliates, or other resources available to the Underwriter or its affiliates.
2.12 Notwithstanding any other provision of this Agreement, the Trust
and the Underwriter agree to reimburse the Company for costs for printing,
mailing, and tabulation of any Trust or Underwriter initiated proxies.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of its state of incorporation
and that it has legally and validly established each Account as a segregated
asset account under such law as of the date set forth in Schedule A.
3.2 The Company represents and warrants that, with respect to each
Account, (1) the Company has registered or, prior to any issuance or sale of the
Contracts, will register the Account as a unit investment trust in accordance
with the provisions of the 1940 Act to serve as a segregated asset account for
the Contracts, or (2) if the Account is exempt from registration as an
investment company under Section 3(c) of the 1940 Act, the Company will make
every effort to maintain such exemption and will notify the Trust and the
Adviser immediately upon having a reasonable basis for believing that such
exemption no longer applies or might not apply in the future.
3.3 The Company represents and warrants that, with respect to each
Contract, (1) the Contract will be registered under the 1933 Act, or (2) if the
Contract is exempt from registration under Section 3(a)(2) of the 1933 Act or
under Section 4(2) and Regulation D of the 1933 Act, the Company will make every
effort to maintain such exemption and will notify the Trust and the Adviser
immediately upon having a reasonable basis for believing that such exemption no
longer applies or might not apply in the future. The Company further represents
and warrants that the Contracts will be sold by broker-dealers, or their
registered representatives, who are registered with the SEC under the 1934 Act
and who are members in good standing of the NASD; the Contracts will be issued
and sold in compliance in all material respects with all applicable federal and
state laws; and the sale of the Contracts shall comply in all material respects
with state insurance suitability requirements.
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<PAGE> 8
For any unregistered Accounts which are exempt from registration under
the `40 Act in reliance upon Sections 3(c)(1) or 3(c)(7) thereof, the Company
represents and warrants that:
(a) each Account and sub-account thereof has a principal underwriter
which is registered as a broker-dealer under the Securities Exchange Act of
1934, as amended;
(b) Trust shares are and will continue to be the only investment
securities held by the corresponding Account sub-accounts; and
(c) with regard to each Portfolio, the Company, on behalf of the
corresponding sub-account, will:
(1) seek instructions from all Contract owners with regard to
the voting of all proxies with respect to Trust shares
and vote such proxies only in accordance with such
instructions or vote such shares held by it in the same
proportion as the vote of all other holders of such
shares; and
(2) refrain from substituting shares of another security for
such shares unless the SEC has approved such substitution
in the manner provided in Section 26 of the `40 Act.
3.4 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Massachusetts and that it does
and will comply in all material respects with the 1940 Act and the rules and
regulations thereunder.
3.5 The Trust represents and warrants that the Portfolio shares offered
and sold pursuant to this Agreement will be registered under the 1933 Act and
the Trust shall be registered under the 1940 Act prior to and at the time of any
issuance or sale of such shares. The Trust shall amend its registration
statement under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Trust shall register
and qualify its shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by the Trust or the
Underwriter.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements for variable
annuity, endowment or life insurance contracts set forth in Section 817(h) of
the Internal Revenue Code of 1986, as amended ("Code"), and the rules and
regulations thereunder, including without limitation Treasury Regulation
1.817-5, and will notify the Company immediately upon having a reasonable basis
for believing any Portfolio has ceased to comply or might not so comply and will
in that event immediately take all reasonable steps to adequately diversify the
Portfolio to achieve compliance within the grace period afforded by Regulation
1.817-5.
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3.7 The Trust represents and warrants that it is currently qualified as
a "regulated investment company" under Subchapter M of the Code, that it will
make every effort to maintain such qualification and will notify the Company
immediately upon having a reasonable basis for believing it has ceased to so
qualify or might not so qualify in the future.
3.8 The Trust represents and warrants that should it ever desire to
make any payments to finance distribution expenses pursuant to Rule 12b-1 under
the 1940 Act, the Trustees, including a majority who are not "interested
persons" of the Trust under the 1940 Act ("disinterested Trustees"), will
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
3.9 The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or similar
coverage for the benefit of the Trust in an amount not less that the minimum
coverage required by Rule 17g-1 or other regulations under the 1940 Act. Such
bond shall include coverage for larceny and embezzlement and be issued by a
reputable bonding company.
3.10 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals or entities
dealing with the money and/or securities of the Trust are and shall be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Trust, in an amount not less than $5 million. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Trust and the Underwriter in the event that such coverage
no longer applies.
3.11 The Underwriter represents that each Adviser is duly organized and
validly existing under applicable corporate law and that it is registered and
will during the term of this Agreement remain registered as an investment
adviser under the Advisers Act.
3.12 The Trust currently intends for one or more Classes to make
payments to finance its distribution expenses, including service fees, pursuant
to a Plan adopted under Rule 12b-1 under the 1940 Act ("Rule 12b-1"), although
it may determine to discontinue such practice in the future. To the extent that
any Class of the Trust finances its distribution expenses pursuant to a Plan
adopted under Rule 12b-1, the Trust undertakes to comply with any then current
SEC and SEC staff interpretations concerning Rule 12b-1 or any successor
provisions.
ARTICLE IV.
POTENTIAL CONFLICTS
4.1 The parties acknowledge that a Portfolio's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests
9
<PAGE> 10
of the contract owners of all Participating Insurance Companies. An
irreconcilable material conflict may arise for a variety of reasons, including:
(a) an action by any state insurance regulatory authority; (b) a change in
applicable federal or state insurance, tax, or securities laws or regulations,
or a public ruling, private letter ruling, no-action or interpretative letter,
or any similar action by insurance, tax, or securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of any Portfolio are being managed; (e) a
difference in voting instructions given by variable annuity contract and
variable life insurance contract owners; or (f) a decision by an insurer to
disregard the voting instructions of contract owners. The Trust shall promptly
inform the Company of any determination by the Trustees that an irreconcilable
material conflict exists and of the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for the Trustees to consider any issues raised including, but not
limited to, information as to a decision by the Company to disregard Contract
owner voting instructions. All communications from the Company to the Trustees
may be made in care of the Trust.
4.3 If it is determined by a majority of the Trustees, or a majority of
the disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its own expense and to the extent reasonably practicable (as determined by
the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such withdrawal should be implemented to a vote of all affected
Contract owners and, as appropriate, withdrawal of the assets of any appropriate
group (i.e. , annuity contract owners, life insurance policy owners, or variable
contract owners of one or more Participating Insurance Companies) that votes in
favor of such withdrawal, or offering to the affected Contract owners the option
of making such a change; and (b) establishing a new registered management
investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Trust's election, to withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
10
<PAGE> 11
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with a
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Trust be required to establish a new funding medium for the Contracts.
In the event that the Trustees determine that any proposed action does not
adequately remedy any irreconcilable material conflict, then the Company will
withdraw the Account's investment in the Trust and terminate this Agreement
within six (6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and termination
shall be limited to the extent required by any such material irreconcilable
conflict as determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared Funding
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if reasonably deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then the Trust and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.
ARTICLE V.
INDEMNIFICATION
5.1 Indemnification By the Company
(a) The Company agrees to indemnify and hold harmless
the Underwriter, the Trust and each of its Trustees, officers,
employees and agents and each person, if any, who controls the
Trust within the meaning of Section 15 of the
11
<PAGE> 12
1933 Act (collectively, the "Indemnified Parties" and
individually the "Indemnified Party" for purposes of this
Article V) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the
written consent of the Company, which consent shall not be
unreasonably withheld) or expenses (including the reasonable
costs of investigating or defending any alleged loss, claim,
damage, liability or expense and reasonable legal counsel fees
incurred in connection therewith) (collectively, "Losses"), to
which the Indemnified Parties may become subject under any
statute or regulation, or at common law or otherwise, insofar
as such Losses are related to the sale or acquisition of Trust
Shares or the Contracts and
(i) arise out of or are based upon any
untrue statements or alleged untrue statements of any
material fact contained in a disclosure document for
the Contracts or in the Contracts themselves or in
sales literature generated or approved by the Company
on behalf of the Contracts or Accounts (or any
amendment or supplement to any of the foregoing)
(collectively, "Company Documents" for the purposes
of this Article V), or arise out of or are based upon
the omission or the alleged omission to state therein
a material fact required to be stated therein or
necessary to make the statements therein not
misleading, provided that this indemnity shall not
apply as to any Indemnified Party if such statement
or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from
written information furnished to the Company by or on
behalf of the Trust for use in Company Documents or
otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(ii) arise out of or result from statements
or representations (other than statements or
representations contained in and accurately derived
from Trust Documents as defined in Section 5.2
(a)(i)) or wrongful conduct of the Company or persons
under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(iii) arise out of or result from any untrue
statement or alleged untrue statement of a material
fact contained in Trust Documents as defined in
Section 5.2(a)(i) or the omission or alleged omission
to state therein a material fact required to be
stated therein or necessary to make the statements
therein not misleading if such statement or omission
was made in reliance upon and accurately derived from
written information furnished to the Trust by or on
behalf of the Company; or
(iv) arise out of or result from any failure
by the Company to provide the services or furnish the
materials required under the terms of this Agreement;
or
(v) arise out of or result from any material
breach of any representation and/or warranty made by
the Company in this Agreement
12
<PAGE> 13
or arise out of or result from any other material
breach of this Agreement by the Company.
(b) The Company shall not be liable under this
indemnification provision with respect to any Losses to which
an Indemnified Party would otherwise be subject by reason of
such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified
Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this
Agreement or to the Trust or Underwriter, whichever is
applicable. The Company shall also not be liable under this
indemnification provision with respect to any claim made
against an Indemnified Party unless such Indemnified Party
shall have notified the Company in writing within a reasonable
time after the summons or other first legal process giving
information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated
agent), but failure to notify the Company of any such claim
shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification
provision. In case any such action is brought against the
Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such
action. The Company also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named
in the action. After notice from the Company to such party of
the Company's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Company will not be
liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party
independently in connection with the defense thereof other
than reasonable costs of investigation.
(c) The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings
against them in connection with the issuance or sale of the
Trust shares or the Contracts or the operation of the Trust.
5.2 Indemnification By The Underwriter
(a) The Underwriter agrees to indemnify and hold harmless the
Company, the underwriter of the Contracts and each of its directors and
officers and each person, if any, who controls the Company within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually an "Indemnified Party" for purposes of this
Section 5.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Underwriter, which consent shall not be unreasonably withheld) or
expenses (including the reasonable costs of investigating or defending
any alleged loss, claim, damage, liability or expense and reasonable
legal counsel fees incurred in connection therewith) (collectively,
13
<PAGE> 14
"Losses") to which the Indemnified Parties may become subject under any
statute, at common law or otherwise, insofar as such Losses are related
to the sale or acquisition of the Trust's Shares or the Contracts and:
(i) arise out of or are based upon any untrue
statements or alleged untrue statements of any material fact
contained in the Registration Statement, prospectus or sales
literature of the Trust (or any amendment or supplement to any
of the foregoing) (collectively, the "Trust Documents") or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or
omission of such alleged statement or omission was made in
reliance upon and in conformity with information furnished to
the Underwriter or Trust by or on behalf of the Company for
use in the Registration Statement or prospectus for the Trust
or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts
or Trust shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the disclosure documents or sales literature for
the Contracts not supplied by the Underwriter or persons under
its control) or wrongful conduct of the Trust, Adviser or
Underwriter or persons under their control, with respect to
the sale or distribution of the Contracts or Trust shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a disclosure
document or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of the Trust; or
(iv) arise as a result of any failure by the Trust to
provide the services and furnish the materials under the terms
of this Agreement (including a failure, whether unintentional
or in good faith or otherwise, to comply with the
qualification representation specified in Section 3.7 of this
Agreement and the diversification requirements specified in
Section 3.6 of this Agreement); or
(v) arise out of or result from any material breach
of any representation and/or warranty made by the Underwriter
in this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of Sections
5.2(b) and 5.2(c) hereof.
14
<PAGE> 15
(b) The Underwriter shall not be liable under this
indemnification provision with respect to any Losses to which an
Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence
in the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to each Company or the Account, whichever is
applicable.
(c) The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Underwriter in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim
shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Underwriter of any such
claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the
Underwriter will be entitled to participate, at its own expense, in the
defense thereof. The Underwriter also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Underwriter to such party of the
Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof other than
reasonable costs of investigation.
(d) The Company agrees to notify the Underwriter, in a
commercially reasonable period of time, of the commencement of any
litigation or proceedings against it or any of the Company's officers
or directors in connection with the issuance or sale of the Contracts
or the operation of each Account.
5.3 Indemnification By The Trust
(a) The Trust agrees to indemnify and hold harmless the
Company, and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 5.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Trust, which consent shall not be unreasonably withheld) or litigation
(including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Trust, and arise out of
or result from any material breach of any representation and/or
warranty made by the Trust in this Agreement or arise out of or result
from any other material breach of this Agreement by the Trust; as
limited by and in accordance with the provisions of Section 5.3(b) and
5.3(c) hereof. It
15
<PAGE> 16
is understood and expressly stipulated that neither the holders of
shares of the Trust nor any Trustee, officer, agent or employee of the
Trust shall be personally liable hereunder, nor shall any resort to be
had to other private property for the satisfaction of any claim or
obligation hereunder, but the Trust only shall be liable.
(b) The Trust shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against any Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations and duties under this Agreement or to the Company, the
Trust, the Underwriter or each Account, whichever is applicable.
(c) The Trust shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Trust in writing
within a reasonable time after the summons or other first legal process
giving information of the nature of the claims shall have been served
upon such Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but failure
to notify the Trust of any such claim shall not relieve the Trust from
any liability which it may have to the Indemnified Party against whom
such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against
the Indemnified Parties, the Trust will be entitled to participate, at
its own expense, in the defense thereof. The Trust also shall be
entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Trust to such
party of the Trust's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional
counsel retained by it, and the Trust will not be liable to such party
under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
(d) The Company and the Underwriter agree promptly to notify
the Trust of the commencement of any litigation or proceedings against
it or any of its respective officers or directors in connection with
this Agreement, the issuance or sale of the Contracts, with respect to
the operation of either the Account, or the sale or acquisition of
share of the Trust.
ARTICLE VI.
TERMINATION
6.1 This Agreement may be terminated by any party in its entirety or
with respect to one, some or all Portfolios or any reason by sixty (60) days
advance written notice delivered to the other parties, and shall terminate
immediately in the event of its assignment, as that term is used in the 1940
Act.
16
<PAGE> 17
6.2 This Agreement may be terminated immediately by either the Trust or
the Underwriter following consultation with the Trustees upon written notice to
the Company if:
(a) the Company notifies the Trust or the Underwriter that
the exemption from registration under Section 3(c) of the 1940 Act no
longer applies, or might not apply in the future, to the unregistered
Accounts, or that the exemption from registration under Section 4(2) or
Regulation D promulgated under the 1933 Act no longer applies or might
not apply in the future, to interests under the unregistered Contracts;
or
(b) either one or both of the Trust or the Underwriter
respectively, shall determine, in their sole judgment exercised in good
faith, that the Company has suffered a material adverse change in its
business, operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse publicity; or
(c) the Company gives the Trust and the Underwriter the
written notice specified in Section 1.10 hereof and at the same time
such notice was given there was no notice of termination outstanding
under any other provision of this Agreement; provided, however, that
any termination under this Section 6.2(c) shall be effective forty-five
(45) days after the notice specified in Section 1.10 was given; or
6.3 If this Agreement is terminated for any reason, except under
Article IV (Potential Conflicts) above, the Trust shall, at the option of the
Company, continue to make available additional shares of any Portfolio and
redeem shares of any Portfolio pursuant to all of the terms and conditions of
this Agreement for all Contracts in effect on the effective date of termination
of this Agreement. If this Agreement is terminated pursuant to Article IV, the
provisions of Article IV shall govern.
6.4 The provisions of Articles II (Representations and Warranties) and
V (Indemnification) shall survive the termination of this Agreement. All other
applicable provisions of this Agreement shall survive the termination of this
Agreement, as long as shares of the Trust are held on behalf of Contract owners
in accordance with Section 6.3, except that the Trust and the Underwriter shall
have no further obligation to sell Trust shares with respect to Contracts issued
after termination.
6.5 The Company shall not redeem Trust shares attributable to the
Contracts (as opposed to Trust shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Trust and the Underwriter the
opinion of counsel for the Company (which counsel shall be reasonably
17
<PAGE> 18
satisfactory to the Trust and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Trust or
the Underwriter 90 days notice of its intention to do so.
ARTICLE VII.
NOTICES.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust or the Underwriter:
Templeton Variable Products Series Fund or
Franklin Templeton Distributors, Inc.
500 E. Broward Boulevard
Fort Lauderdale, FL 33394-3091
Attention: Barbara J. Green, Trust Secretary
WITH A COPY TO
Franklin Resources, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94404
Attention: Karen L. Skidmore,
Senior Corporate Counsel
If to the Company:
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049-0001
Attention: Allen R. Reed,
Esq., Assistant General Counsel
ARTICLE VIII.
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
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<PAGE> 19
8.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Florida. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting exemptive
relief therefrom and the conditions of such orders. Copies of any such orders
shall be promptly forwarded by the Trust to the Company.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
8.7 Each party hereto shall treat as confidential the names and
addresses of the Contract owners and all information reasonably identified as
confidential in writing by any other party hereto, and, except as permitted by
this Agreement or as required by legal process or regulatory authorities, shall
not disclose, disseminate, or utilize such names and addresses and other
confidential information until such time as they may come into the public
domain, without the express written consent of the affected party. Without
limiting the foregoing, no party hereto shall disclose any information that such
party has been advised is proprietary, except such information that such party
is required to disclose by any appropriate governmental authority (including,
without limitation, the SEC, the NASD, and state securities and insurance
regulators).
8.8 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
8.9 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect, except as provided in Section
1.10.
8.10 Neither this Agreement nor any rights or obligations hereunder may
be assigned by either party without the prior written approval of the other
party.
8.11 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
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<PAGE> 20
IN WITNESS WHEREOF, the parties have caused their duly
authorized officers to execute this Participation Agreement as of the date and
year first above written.
The Company:
Kemper Investors Life Insurance Company
-----------------------------------------
By its authorized officer
By: /s/ OTIS R. HELDMAN, JR.
--------------------------------------
Name: Otis R. Heldman, JR.
Title: Vice President
The Trust:
Templeton Variable Products Series Fund
-----------------------------------------
By its authorized officer
By: /s/ KAREN L. SKIDMORE
--------------------------------------
Name: Karen L. Skidmore
Title: Assistant Vice President,
Assistant Secretary
The Underwriter:
Franklin Templeton Distributors, Inc.
-------------------------------------
By its authorized officer
By: /s/ DEBORAH R. GATZEK
--------------------------------------
Name: Deborah R. Gatzek
Title: Senior Vice President,
Assistant Secretary
20
<PAGE> 21
SCHEDULE A
SEPARATE ACCOUNTS OF
KEMPER INVESTORS LIFE INSURANCE COMPANY
1. KILICO Variable Separate Account
Date Established: January 22, 1987
SEC Registration Number: 33-65399
2. KILICO Variable Annuity Separate Account
Date Established: January 22, 1987
SEC Registration Number: 811-3199
21
<PAGE> 22
SCHEDULE B
TRUST PORTFOLIOS AND CLASSES AVAILABLE
<TABLE>
<CAPTION>
Templeton Variable Products Series Adviser
- ---------------------------------- -------
<S> <C>
Templeton Developing Markets Fund Templeton Asset Management Ltd.
-Class 2
</TABLE>
22
<PAGE> 23
SCHEDULE C
VARIABLE ANNUITY CONTRACTS
ISSUED BY KEMPER INVESTORS LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CONTRACT 1 CONTRACT 2 CONTRACT 3
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONTRACT/PRODUCT NAME Farmers Variable Annuity I Farmers Variable Universal
Life I
- ---------------------------------------------------------------------------------------------------------------------
REGISTERED (Y/N) Yes Yes
- ---------------------------------------------------------------------------------------------------------------------
REPRESENTATIVE FORM L-1550 (Individual) S-6003
NUMBERS L-8165 (Group)
L-8166 (Cert)
- ---------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT NAME KILICO Variable Annuity KILICO Variable Separate
Separate Account Account
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY NAME Templeton Variable Products Templeton Variable Products
Series Fund Series Fund
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY Templeton Developing Markets Templeton Developing Markets
PORTFOLIOS AND CLASSES Fund Fund
- Class 2 - Class 2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
SCHEDULE D
OTHER PORTFOLIOS AVAILABLE UNDER THE CONTRACTS
Kemper - Dreman High Return Equity
Scudder VLIF International (A Shares)
Scudder VLIF Money Market
Scudder VLIF Growth and Income (A Shares)
Kemper Government Securities
Scudder VLIF Bond (A Shares)
Janus Aspen Capital Appreciation Portfolio
Small Cap Growth
PIMCO Low Deviation Bond and PIMCO Foreign Bond
24
<PAGE> 25
SCHEDULE E
RULE 12B-1 PLANS
COMPENSATION SCHEDULE
Each Portfolio named below shall pay the following amounts pursuant to the terms
and conditions referenced below under its Class 2 Rule 12b-1 Distribution Plan,
stated as a percentage per year of Class 2's average daily net assets
represented by shares of Class 2.
<TABLE>
<CAPTION>
Portfolio Name Maximum Annual Payment Rate
- --------------------------------------------------------------------------------
<S> <C>
TEMPLETON DEVELOPING MARKETS FUND 0.25%
</TABLE>
Agreement Provisions
If the Company, on behalf of any Account, purchases Trust Portfolio
shares ("Eligible Shares") which are subject to a Rule 12b-1 Plan adopted under
the 1940 Act (the "Plan"), the Company may participate in the Plan.
To the extent the Company or its affiliates, agents or designees
(collectively "you") you provide administrative and other services which assist
in the promotion and distribution of Eligible Shares or Variable Contracts
offering Eligible Shares, the Underwriter, the Trust or their affiliates
(collectively, "we") may pay you a Rule 12b-1 fee. "Administrative and other
services" may include, but are not limited to, furnishing personal services to
owners of Contracts which may invest in Eligible Shares ("Contract Owners"),
answering routine inquiries regarding a Portfolio, coordinating responses to
Contract Owner inquiries regarding the Portfolios, maintaining such accounts or
providing such other enhanced services as a Trust Portfolio or Contract may
require, maintaining customer accounts and records, or providing other services
eligible for service fees as defined under NASD rules. Your acceptance of such
compensation is your acknowledgment that eligible services have been rendered.
All Rule 12b-1 fees, shall be based on the value of Eligible Shares owned by the
Company on behalf of its Accounts, and shall be calculated on the basis and at
the rates set forth in the Compensation Schedule stated above. The aggregate
annual fees paid pursuant to each Plan shall not exceed the amounts stated as
the "annual maximums" in the Portfolio's prospectus, unless an increase is
approved by shareholders as provided in the Plan. These maximums shall be a
specified percent of the value of a Portfolio's net assets attributable to
Eligible Shares owned by the Company on behalf of its Accounts (determined in
the same manner as the Portfolio uses to compute its net assets as set forth in
its effective Prospectus).
25
<PAGE> 26
You shall furnish us with such information as shall reasonably be
requested by the Trust's Boards of Trustees ("Trustees") with respect to the
Rule 12b-1 fees paid to you pursuant to the Plans. We shall furnish to the
Trustees, for their review on a quarterly basis, a written report of the amounts
expended under the Plans and the purposes for which such expenditures were made.
The Plans and provisions of any agreement relating to such Plans must
be approved annually by a vote of the Trustees, including the Trustees who are
not interested persons of the Trust and who have no financial interest in the
Plans or any related agreement ("Disinterested Trustees"). Each Plan may be
terminated at any time by the vote of a majority of the Disinterested Trustees,
or by a vote of a majority of the outstanding shares as provided in the Plan, on
sixty (60) days' written notice, without payment of any penalty. The Plans may
also be terminated by any act that terminates the Underwriting Agreement between
the Underwriter and the Trust, and/or the management or administration agreement
between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and the Trust. Continuation of the Plans is also conditioned on
Disinterested Trustees being ultimately responsible for selecting and nominating
any new Disinterested Trustees. Under Rule 12b-1, the Trustees have a duty to
request and evaluate, and persons who are party to any agreement related to a
Plan have a duty to furnish, such information as may reasonably be necessary to
an informed determination of whether the Plan or any agreement should be
implemented or continued. Under Rule 12b-1, the Trust is permitted to implement
or continue Plans or the provisions of any agreement relating to such Plans from
year-to-year only if, based on certain legal considerations, the Trustees are
able to conclude that the Plans will benefit each affected Trust Portfolio and
class. Absent such yearly determination, the Plans must be terminated as set
forth above. In the event of the termination of the Plans for any reason, the
provisions of this Schedule E relating to the Plans will also terminate.
Any obligation assumed by the Trust pursuant to this Agreement shall be limited
in all cases to the assets of the Trust and no person shall seek satisfaction
thereof from shareholders of the Trust. You agree to waive payment of any
amounts payable to you by Underwriter under a Plan until such time as the
Underwriter has received such fee from the Fund.
The provisions of the Plans shall control over the provisions of the
Participation Agreement, including this Schedule E, in the event of any
inconsistency.
You agree to provide complete disclosure as required by all applicable statutes,
rules and regulations of all rule 12b-1 fees received from us in the prospectus
of the contracts.
26
<PAGE> 1
EXHIBIT 1(i)
PARTICIPATION AGREEMENT
PARTICIPATION AGREEMENT (the "Agreement") made by and between SCUDDER
VARIABLE LIFE INVESTMENT FUND (the "Fund"), a Massachusetts business trust
created under a Declaration of Trust dated March 15, 1985, as amended, with a
principal place of business in Boston, Massachusetts and KEMPER INVESTORS LIFE
INSURANCE COMPANY, an Illinois corporation (the "Company"), with a principal
place of business One Kemper Drive, Long Grove, Illinois, on behalf of one or
more separate accounts of the Company, as set forth on Schedule A hereto, as it
may be amended from time to time upon written notice to the Fund in accordance
with Paragraph 10 herein (each, an "Account").
WHEREAS, the Fund acts as the investment vehicle for the separate
accounts established for variable life insurance policies and variable annuity
contracts (collectively referred to herein as "Variable Insurance Products") to
be offered by insurance companies which have entered into participation
agreements substantially identical to this Agreement ("Participating Insurance
Companies") and their affiliated insurance companies; and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares of beneficial interest without par value ("Shares"), and
additional series of Shares may be established, each designated a "Portfolio"
and representing the interest in a particular managed portfolio of securities;
and
WHEREAS, each Portfolio of the Fund, except the Money Market Portfolio,
is divided into two classes of Shares, and additional classes of Shares may be
established; and
WHEREAS, the Parties desire to evidence their agreement as to certain
other matters,
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
1. Duty of Fund to Sell.
The Fund shall make its Shares available for purchase at the applicable
net asset value per Share by Participating Insurance Companies and their
affiliates and separate accounts on those days on which the Fund calculates its
net asset value pursuant to rules of the Securities and Exchange Commission (the
"SEC"); provided, however, that the Trustees of the Fund may refuse to sell
Shares of any Portfolio to any person, or suspend or terminate the offering of
Shares of any Portfolio, if such action is required by law or by regulatory
authorities having
<PAGE> 2
jurisdiction or is, in the sole discretion of the Trustees, acting in good faith
and in light of their duties under federal and any applicable state laws,
necessary in the best interest of the shareholders of any Portfolio.
The Company's orders for such Shares of the Portfolios and one or more
classes thereof which are available for purchase under this Agreement, as set
forth on Schedule B hereto, as it may be amended from time to time, shall be
executed on a daily basis at the net asset value per Share next computed after
receipt by the Fund of the order for the Shares. The Company's order may net the
purchase orders and redemption requests for each Portfolio or class thereof. For
purposes of this Paragraph 1, the Company shall be the designee of the Fund for
receipt of such orders from the Account(s), and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
order by 10:00 a.m., New York time on the next following Business Day. "Business
Day" shall mean any day on which the New York Stock Exchange is open for trading
and on which the Fund calculates its net asset value per Share pursuant to the
rules of the SEC.
The Company shall pay for Shares on the next Business Day after an
order to purchase Shares is made in accordance with the provisions hereof.
Payment shall be made by wiring federal funds to the Fund or to its designated
custodial account by 2:00 p.m., New York time. For purposes of Paragraph 1, upon
receipt by the Fund of the federal funds so wired, such funds shall cease to be
the responsibility of the Company and shall become the responsibility of the
Fund. If payment in federal funds for any purchase is not received by the Fund
or its designated custodian or is received after 2:00 p.m., New York time, the
Company shall promptly upon the Fund's written request, reimburse the Fund for
any charges, costs, fees, interest, or other expenses incurred by the Fund in
connection with any advances to, or borrowings or overdrafts by, the Fund, or
any similar expenses incurred by the Fund as a result of transactions effected
by the Fund based upon such purchase order.
The Fund agrees to redeem for cash, at the Company's request, any full
or fractional Shares held by the Company, executing such requests on a daily
basis at the net asset value per Share next computed after receipt by the Fund
of the request for redemption. The Company's request may net any purchase orders
and redemption requests for each Portfolio or class thereof. For purposes of
this Paragraph 1, the Company shall be the designee of the Fund for
2
<PAGE> 3
receipt of requests for redemption from the Account(s), and receipt by such
designee shall constitute receipt by the Fund; provided that the Fund receives
notice of such request for redemption by 10:00 a.m., New York time on the next
following Business Day.
Payment for Shares redeemed shall be made by wiring federal funds to
the Company by 2:00 p.m., New York time, on the next Business Day after the Fund
receives the request for redemption. If payment in federal funds for any
redemption request is received by the Company after 2:00 p.m., New York time,
the Fund shall promptly upon the Company's written request, reimburse the
Company for any charges, costs, fees, interest, or other expenses incurred by
the Company as a result of such failure to provide redemption proceeds within
the specified time. Notwithstanding the foregoing, the Trustees of the Fund may
suspend the right of redemption or postpone the date of payment or satisfaction
upon redemption: (a) for any period during which the New York Stock Exchange is
closed, other than customary week-end and holiday closings, and during which
trading on the New York Stock Exchange is restricted; (b) for any period during
which an emergency, as determined by the SEC, exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets; and (c) for such other periods as the SEC may by order permit
for the protection of holders of the Shares. The Fund shall not bear any
responsibility whatsoever for the proper disbursement or crediting of redemption
proceeds by the Company; the Company alone shall be responsible for such action.
Issuance and transfer of the Shares will be by book entry only. Stock
certificates will not be issued to the Company or any Account. Shares ordered
from the Fund will be recorded in an appropriate title for each Account or the
appropriate subaccount thereof.
The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income dividends or capital gain
distributions payable on the Shares. The Company hereby elects to receive all
such income dividends and capital gain distributions as are payable on the
Shares of the Portfolios and classes thereof in additional Shares of that
Portfolio or class thereof. The Company reserves the right to revoke this
election and to receive all such income dividends and capital gain distributions
in cash. The Fund shall notify the Company of the number of Shares so issued as
payment of such
3
<PAGE> 4
dividends and distributions. The Fund shall to the extent practicable provide
advance notice to Company of any date on which the Fund reasonably expects to
make a dividend distribution.
2. Fund Materials.
The Fund, at its expense, shall provide the Company or its designee
with camera-ready copy or, at the Company's request, computer diskette versions
of all prospectuses, statements of additional information, annual and
semi-annual reports and proxy materials (collectively, "Fund Materials") to be
printed and distributed by the Company or its broker/dealer to the Company's
existing or prospective contract owners, as appropriate. The Company agrees to
bear the cost of printing and distributing such Fund Materials.
The Fund shall provide such other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
and/or statement of additional information ("SAI") for the Fund is amended
during the year) to have the prospectus for the Account(s), with respect to the
Variable Insurance Products, and the Fund's prospectus printed together in one
document, and to have the SAI for the Fund and the SAI for the Account(s), with
respect to the Variable Insurance Products, printed together in one document.
Alternatively, the Company may print the Fund's prospectus and/or its SAI in
combination with other investment companies' prospectuses and statements of
additional information. The Fund will cooperate with the Company in preparing
and filing with the SEC, pursuant to Rule 497 under the 1933 Act, appropriate
versions of the Fund's prospectus and/or SAI.
3. Requirement to Execute Participation Agreement; Requests.
Each Participating Insurance Company shall, prior to purchasing Shares
in the Fund, execute and deliver a participation agreement in a form
substantially identical to this Agreement.
The Fund shall make available, upon written request from the
Participating Insurance Company given in accordance with Paragraph 9, to each
Participating Insurance Company which has executed an Agreement and which
Agreement has not been terminated pursuant to Paragraph 8 (i) a list of all
other Participating Insurance Companies, and (ii) a copy of the Agreement as
executed by any other Participating Insurance Company.
The Fund shall also make available upon request to each Participating
Insurance Company which has executed an Agreement and Agreement has not been
terminated pursuant
4
<PAGE> 5
to Paragraph 8, the net asset value of any Portfolio of the Fund as of any date
upon which the Fund calculates the net asset value of its Portfolios for the
purpose of purchase and redemption of Shares.
The Fund shall make the net asset value per Share for each Portfolio
and class thereof available to the Company on a daily basis as soon as
reasonably practical after the net asset value per Share is calculated (normally
by 6:00 p.m., New York time) and shall use its best efforts to make such net
asset value per Share available by 7:00 p.m., New York time.
Each party to this Agreement shall have the right to rely on
information or confirmations provided by any other party (or by any affiliate of
any other party), and shall not be liable in the event that an error results
from any incorrect information or confirmations supplied by any other party. If
an error is made in reliance upon incorrect information or confirmations, any
amount required to make an account of a Variable Insurance Product owner whole
shall be borne by the party who provided the incorrect information or
confirmation.
4. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Fund and each
of its Trustees and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the Securities Act of 1933 (the "Act")
against any and all losses, claims, damages, liabilities or litigation
(including legal and other expenses), arising out of the acquisition of any
Shares by any person, to which the Fund or such Trustees, officers or
controlling person may become subject under the Act, under any other statute, at
common law or otherwise, which (i) may be based upon any wrongful act by the
Company, any of its employees or representatives, any affiliate of or any person
acting on behalf of the Company or a principal underwriter of its insurance
products, or (ii) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or prospectus
covering Shares or any amendment thereof or supplement thereto or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such a
statement or omission was made in reliance upon information furnished to the
Fund by the Company, or (iii) may be based on any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering insurance products sold by the Company or any insurance
5
<PAGE> 6
company which is an affiliate thereof, or any amendments or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or statements therein not
misleading, unless such statement or omission was made in reliance upon
information furnished to the Company or such affiliate by or on behalf of the
Fund; provided, however, that in no case (i) is the Company's indemnity in favor
of a Trustee or officer or any other person deemed to protect such Trustee or
officer or other person against any liability to which any such person would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of his duties or by reason of his reckless
disregard of obligations and duties under this Agreement or (ii) is the Company
to be liable under its indemnity agreement contained in this Paragraph 4 with
respect to any claim made against the Fund or any person indemnified unless the
Fund or such person, as the case may be, shall have notified the Company in
writing pursuant to Paragraph 10 within a reasonable time after the summons or
other first legal process giving information of the nature of the claims shall
have been served upon the Fund or upon such person (or after the Fund or such
person shall have received notice of such service on any designated agent), but
failure to notify the Company of any such claim shall not relieve the Company
from any liability which it may have to the Fund or any person against whom such
action is brought otherwise than on account of its indemnity agreement contained
in this Paragraph 4. The Company shall be entitled to participate, at its own
expense, in the defense, or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, but, if it elects to assume the defense,
such defense shall be conducted by counsel chosen by it and satisfactory to the
Fund, to its officers and Trustees, or to any controlling person or persons,
defendant or defendants in the suit. In the event that the Company elects to
assume the defense of any such suit and retain such counsel, the Fund, such
officers and Trustees or controlling person or persons, defendant or defendants
in the suit, shall bear the fees and expenses of any additional counsel retained
by them, but, in case the Company does not elect to assume the defense of any
such suit, the Company will reimburse the Fund, such officers and Trustees or
controlling person or persons, defendant or defendants in such suit, for the
reasonable fees and expenses of any counsel retained by them. The Company agrees
promptly to notify the Fund pursuant
6
<PAGE> 7
to Paragraph 10 of the commencement of any litigation or proceedings against it
or any of its directors or officers in connection with the issue and sale of any
Shares.
(b) The Fund agrees to indemnify and hold harmless the Company and each
of its directors and officers and each person, if any, who controls the Company
within the meaning of Section 15 of the Act against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses), to
which it or such directors, officers or controlling person may become subject
under the Act, under any other statute, at common law or otherwise, arising out
of the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by the Fund, any of its employees or representatives, any affiliate
of or any person acting on behalf of the Fund or a principal underwriter of the
Fund, or (ii) may be based upon any untrue statement or alleged untrue statement
of a material fact contained in a registration statement or prospectus covering
Shares or any amendment thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading unless such statement or
omission was made in reliance upon information furnished to the Fund by the
Company or (iii) may be based on any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or prospectus
covering insurance products sold by the Company or any insurance company which
is an affiliate thereof, or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statement or statements therein not misleading,
if such statement or omission was made in reliance upon information furnished to
the Company or such affiliate by or on behalf of the Fund; provided, however,
that in no case (i) is the Fund's indemnity in favor of a director or officer or
any other person deemed to protect such director or officer or other person
against any liability to which any such person would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of his duties or by reason of his reckless disregard of obligations and duties
under this Agreement or (ii) is the Fund to be liable under its indemnity
agreement contained in this Paragraph 4 with respect to any claims made against
the Company or any such director, officer or controlling person unless it or
such director, officer or controlling person, as the case may be, shall have
notified the Fund in writing pursuant to Paragraph 10 within a reasonable time
after the summons or
7
<PAGE> 8
other first legal process giving information of the nature of the claim shall
have been served upon it or upon such director, officer or controlling person
(or after the Company or such director, officer or controlling person shall have
received notice of such service on any designated agent), but failure to notify
the Fund of any claim shall not relieve it from any liability which it may have
to the Company or any person against whom such action is brought otherwise than
on account of its indemnity agreement contained in this Paragraph. The Fund will
be entitled to participate at its own expense, in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any such liability,
but if the Fund elects to assume the defense, such defense shall be conducted by
counsel chosen by it and satisfactory to the Company, its directors, officers or
controlling person or persons, defendant or defendants, in the suit. In the
event the Fund elects to assume the defense of any such suit and retain such
counsel, the Company, its directors, officers or controlling person or persons,
defendant or defendants in the suit, shall bear the fees and expenses of any
additional counsel retained by them, but, in case the Fund does not elect to
assume the defense of any such suit, it will reimburse the Company or such
directors, officers or controlling person or persons, defendant or defendants in
the suit, for the reasonable fees and expenses of any counsel retained by them.
The Fund agrees promptly to notify the Company pursuant to Paragraph 10 of the
commencement of any litigation or proceedings against it or any of its officers
or Trustees in connection with the issuance or sale of any Shares.
The provisions of this Section 4 shall survive the termination of the
Agreement.
5. Procedure for Resolving Irreconcilable Conflicts.
(a) The Trustees of the Fund will monitor the operations of the
Fund for the existence of any material irreconcilable conflict among the
interests of all the contract holders and policy owners of variable Insurance
Products (the "Participants") of all separate accounts investing in the Fund. An
irreconcilable material conflict may arise, among other things, from: (a) an
action by any state insurance regulatory authority; (b) a change in applicable
insurance laws or regulations; (c) a tax ruling or provision of the Internal
Revenue Code or the regulations thereunder; (d) any other development relating
to the tax treatment of insurers, contract holders or policy owners or
beneficiaries of Variable Insurance Products; (e) the manner in which the
investments of any Portfolio are being managed; (f) a difference in voting
8
<PAGE> 9
instructions given by variable annuity contract holders, on the one hand, and
variable life insurance policy owners, on the other hand, or by the contract
holders or policy owners of different participating insurance companies; or (g)
a decision by an insurer to override the voting instructions of Participants.
(b) The Company will be responsible for reporting any potential or
existing conflicts to the Trustees of the Fund. The Company will be responsible
for assisting the Trustees in carrying out their responsibilities under this
Paragraph 5(b) and Paragraph 5(a), by providing the Trustees with all
information reasonably necessary for the Trustees to consider the issues raised.
The Fund will also request its investment adviser to report to the Trustees any
such conflict which comes to the attention of the adviser.
(c) If it is determined by a majority of the Trustees of the Fund,
or a majority of its disinterested Trustees, that a material irreconcilable
conflict exists involving the Company, the Company shall, at its expense, and to
the extent reasonably practicable (as determined by a majority of the
disinterested Trustees), take whatever steps are necessary to eliminate the
irreconcilable material conflict, including withdrawing the assets allocable to
some or all of the separate accounts from the Fund or any Portfolio or class
thereof and reinvesting such assets in a different investment medium, including
another Portfolio of the Fund or class thereof, offering to the affected
Participants the option of making such a change or establishing a new funding
medium including a registered investment company.
For purposes of this Paragraph 5(c), the Trustees, or the disinterested
Trustees, shall determine whether or not any proposed action adequately remedies
any irreconcilable material conflict. In the event of a determination of the
existence of an irreconcilable material conflict, the Trustees shall cause the
Fund to take such action, such as the establishment of one or more additional
Portfolios or classes, as they in their sole discretion determine to be in the
interest of all shareholders and Participants in view of all applicable factors,
such as cost, feasibility, tax, regulatory and other considerations. In no event
will the Fund be required by this Paragraph 5(c) to establish a new funding
medium for any variable contract or policy.
The Company shall not be required by this Paragraph 5(c) to establish a
new funding medium for any variable contract or policy if an offer to do so has
been declined by a vote of a majority of the Participants materially adversely
affected by the material irreconcilable
9
<PAGE> 10
conflict. The Company will recommend to its Participants that they decline an
offer to establish a new funding medium only if the Company believes it is in
the best interest of the Participants.
(d) The Trustees' determination of the existence of an
irreconcilable material conflict and its implications promptly shall be
communicated to all Participating Insurance Companies by written notice thereof
delivered or mailed, first class postage prepaid.
6. Voting Privileges.
The Company shall be responsible for assuring that its separate account
or accounts participating in the Fund shall use a calculation method of voting
procedures substantially the same as the following: those Participants permitted
to give instructions and the number of Shares for which instructions may be
given will be determined as of the record date for the Fund shareholders'
meeting, which shall not be more than 60 days before the date of the meeting.
Whether or not voting instructions are actually given by a particular
Participant, all Fund shares held in any separate account or sub-account thereof
and attributable to policies or contracts will be voted for, against, or
withheld from voting on any proposition in the same proportion as (i) the
aggregate record date cash value held in such sub-account for policies or
contracts giving instructions, respectively, to vote for, against, or withhold
votes on such proposition, bears to (ii) the aggregate record date cash value
held in the sub-account for all policies or contracts for which voting
instructions are received. Owners of policies or contracts continued in effect
under lapse options will not be permitted to give voting instructions. Shares
held in any other insurance company general or separate account or sub-account
thereof will be voted in the proportion specified in the second preceding
sentence for shares attributable to policies or contracts.
The Company will provide pass-through voting privileges as required by
Paragraph 6 of this Agreement and to all owners of Variable Insurance Products
which are registered under the Act and/or the 1940 Act so long as the SEC
continues to interpret the 1940 Act as requiring pass-through voting privileges.
The owners of Variable Insurance Products to whom the Company will provide
pass-through voting privileges pursuant to this Agreement are hereinafter
referred to as "Pass-through Voters". Accordingly, the Company, when applicable,
will distribute to Pass-through Voters all proxy material furnished and will
vote
10
<PAGE> 11
Shares of the Portfolios held in its Account(s) in a manner consistent with
voting instructions timely received from Pass-through Voters. The Company will
vote Shares for which it has not received timely voting instructions, as well as
Shares it owns, in the same proportion as it votes those Shares for which it has
received voting instructions. The Company reserves the right to disregard the
voting instructions of Pass-through Voters to the extent such action is
permitted by Rules 6e-2 or 6e-3(T) under the 1940 Act and is permitted under
applicable state insurance laws affecting Fund.
7. Duration and Termination.
This Agreement shall continue in force until terminated in
accordance with the provisions herein.
This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of the Company or the Fund at any time
upon 180 days' notice, unless a shorter time is
agreed to by the parties;
(b) At the option of the Company, if Shares are not
reasonably available to meet the requirements of the
Variable Insurance Products as determined by the
Company. Prompt notice of election to terminate shall
be furnished by the Company, said termination to be
effective ten (10) days after receipt of notice
unless the Fund makes available a sufficient number
of Shares to reasonably meet the requirements of the
Variable Insurance Products within said ten-day
period;
(c) At the option of the Company, upon the institution of
formal proceedings against the Fund or the principal
underwriter for the Shares by the SEC, the National
Association of Securities Dealers, Inc. (the "NASD"),
or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which
would, in the Company's reasonable judgment,
materially impair Fund's ability to meet and perform
Fund's obligations and duties hereunder. Prompt
notice of election to terminate shall be furnished by
the Company with said termination to be effective
upon receipt of notice;
11
<PAGE> 12
(d) At the option of the Fund, upon the institution of
formal proceedings against the Company or the
principal underwriter for the Variable Insurance
Products by the SEC, the NASD, or any other
regulatory body, the expected or anticipated ruling,
judgment or outcome of which would, in the Fund's
reasonable judgment, materially impair the Company's
ability to meet and perform its obligations and
duties hereunder. Prompt notice of election to
terminate shall be furnished by the Fund with said
termination to be effective upon receipt of notice;
(e) In the event Shares are not registered, issued or
sold in accordance with applicable federal and/or
state law and any applicable rules and regulations
thereunder, or such law precludes the use of such
Shares as the underlying investment media for
Variable Insurance Products issued or to be issued by
the Company. Termination shall be effective upon such
occurrence without notice;
(f) Upon the receipt of any necessary regulatory
approvals, or requisite vote of Pass-through Voters
having an interest in the Portfolios, to substitute
for Shares of the Portfolios the shares of another
investment company in accordance with the terms of
the applicable Variable Insurance Products. The
Company shall give sixty (60) days' written notice to
the Fund of any proposed request for regulatory
approvals or vote to replace the Portfolios' Shares;
(g) At the option of the Company, upon the Fund's breach
of any material provision of this Agreement, which
breach has not been cured to the Company's
satisfaction within thirty (30) days after written
notice of such breach is delivered to the Fund;
(h) At the option of the Fund, upon the Company's breach
of any material provision of this Agreement, which
breach has not been cured to the Fund's satisfaction
within thirty (30) days after written notice of such
breach is delivered to the Company;
12
<PAGE> 13
(i) In the event this Agreement is assigned without the
prior written consent of the Company and the Fund.
Termination shall be effective immediately upon such
occurrence without notice.
In addition, this Agreement may be terminated at any time, at the
option of either of the Company or the Fund, when neither the Company, any
insurance company nor the separate account or accounts of such insurance company
which is an affiliate thereof which is not a Participating Insurance Company own
any Shares of the Fund or may be terminated by either party to the Agreement
upon a determination by a majority of the Trustees of the Fund, or a majority of
its disinterested Trustees, following certification thereof by a Participating
Insurance Company given in accordance with Paragraph 10 that an irreconcilable
conflict exists among the interests of (i) all contract holders and policy
holders of Variable Insurance Products of all separate accounts or (ii) the
interests of the Participating Insurance Companies investing in the Fund.
Notwithstanding any termination of this Agreement and unless the
further sale of Shares of the Portfolios is proscribed by applicable law or the
SEC or other regulatory body, the Fund shall, at the Company's option, continue
to make available additional Shares, as provided below, pursuant to the terms
and conditions of this Agreement, for all Variable Insurance Products in effect
on the effective date of termination of this Agreement (hereinafter referred to
as "Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts shall be permitted to reallocate investments in the Fund,
redeem investments in the Fund and/or invest in the Fund upon the payment of
additional premiums under the Existing Contracts.
8. Compliance.
The Fund will comply with the provisions of Section 4240(a) of the New
York Insurance Law.
Each Portfolio of the Fund will comply with the provisions of Section
817(h) of the Internal Revenue Code of 1986, as amended (the "Code"), relating
to diversification requirements for variable annuity, endowment and life
insurance contracts. Specifically, each Portfolio will comply with either (i)
the requirement of Section 817(h)(1) of the Code that its assets be adequately
diversified, or (ii) the "Safe Harbor for Diversification" specified in
13
<PAGE> 14
Section 817(h)(2) of the Code, or (iii) in the case of variable life insurance
contracts only, the diversification requirement of Section 817(h)(1) of the Code
by having all or part of its assets invested in U. S. Treasury securities which
qualify for the "Special Rule for Investments in United States Obligations"
specified in Section 817(h)(3) of the Code. The Fund will notify the Company
immediately upon having a reasonable basis for believing that a Portfolio has
ceased to comply with the requirements of Section 817(h) of the Code or that the
Portfolio might not so comply in the future and will immediately take all steps
necessary to adequately diversify the Portfolio to achieve compliance.
The provisions of Paragraphs 5 and 7 of this Agreement shall be
interpreted in a manner consistent with any Rule or order of the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended,
applicable to the parties hereto.
No Shares of any Portfolio of the Fund may be sold to the general
public.
9. Notices.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: William M. Thomas
If to the Company:
Kemper Investors Life Insurance Company
One Kemper Drive
Long Grove, Illinois 60049
Attn: General Counsel
14
<PAGE> 15
10. Massachusetts Law to Apply.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
11. Miscellaneous.
The name "Scudder Variable Life Investment Fund" is the designation of
the Trustees for the time being under a Declaration of Trust dated March 15,
1985, as amended, and all persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund. No Portfolio shall
be liable for any obligations properly attributable to any other Portfolio.
The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
12. Entire Agreement.
This Agreement incorporates the entire understanding and agreement
among the parties hereto, and supersedes any and all prior understandings and
agreements between the parties hereto with respect to the subject matter hereof.
15
<PAGE> 16
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the 26th day of
June, 1998.
SEAL SCUDDER VARIABLE LIFE
INVESTMENT FUND
By: /s/ William Thomas
William Thomas
President
SEAL KEMPER INVESTORS LIFE
INSURANCE COMPANY
By: /s/ Otis R. Heldman, Jr.
Its: Marketing Officer
<PAGE> 17
SCHEDULE A
TO PARTICIPATION AGREEMENT
Separate Account(s) of the Company
KILICO Variable Separate Account - 2
KILICO Variable Separate Account
KILICO Variable Annuity Separate Account
<PAGE> 18
SCHEDULE B
TO PARTICIPATION AGREEMENT
Portfolios and Classes Available for Purchase
Growth and Income Class A
Growth and Income Class B
International Class A
International Class B
Capital Growth Class A
Global Discovery Class A
<PAGE> 1
EXHIBIT 1(j)
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
PARTICIPATING CONTRACT AND POLICY AGREEMENT
Ladies and Gentlemen:
We (sometimes hereinafter referred to as "Investor Services") are the
Principal Underwriter of shares of Scudder Variable Life Investment Fund (the
"Fund"), a no-load, open-end, diversified registered management investment
company established in 1985 as a Massachusetts business trust. The Fund is a
series fund consisting of the Balanced Portfolio, Bond Portfolio, Capital Growth
Portfolio, Global Discovery Portfolio, International Portfolio, Money Market
Portfolio, and Growth and Income Portfolio (individually or collectively
hereinafter referred to as the "Portfolio" or the "Portfolios"). In addition,
each Portfolio, except the Money Market Portfolio, is divided into two classes
of shares of beneficial interest("Shares"). Additional Portfolios and classes
may be created from time to time. The Fund is the funding vehicle for variable
annuity contracts and variable life insurance policies ("Participating Contracts
and Policies") to be offered to the separate accounts (the "Accounts") of
certain life insurance companies ("Participating Insurance Companies"). Owners
of Participating Contracts and Policies will designate a portion of their
premium to be invested in insurance company separate accounts or sub-accounts
which invest in, or represent an investment in, directly or indirectly, Shares
of the Portfolios of the Fund. All Shares of the Portfolios will be sold only to
Participating Insurance Companies which have agreed to participate in the Fund
to fund their separate accounts and/or to qualified plans, all in accordance
with the requirements of Section 817(h) of the Internal Revenue Code of 1986, as
amended ("Code") and Treasury Regulation 1.817-5. Shares of the Portfolios will
not be sold directly to the general public.
You are a registered broker-dealer which intends to offer and sell
Participating Contracts and Policies. In connection with such offer and sale you
will be obligated to deliver the prospectuses of such Participating Contracts
and Policies and, contemporaneously therewith, the prospectus of the Fund. Sales
of Shares to Participating Insurance Companies or their affiliates or the
separate accounts of either shall be effected solely by us as principal
<PAGE> 2
underwriter of the Fund, and not by you. The relationship between us shall be
further governed by the following terms and conditions:
1. To the extent, if any, that your activities or the activities of
the Participating Insurance Companies in connection with the sale
of Participating Contracts and Policies may constitute the sale of
Shares, you and we agree that (i) we are the sole "principal
underwriter" of the Fund and the sole "underwriter" of the Shares
as those terms are defined in the Investment Company Act of 1940
(the "1940 Act") and the Securities Act of 1933 (the "1933 Act"),
respectively, and (ii) neither you nor the Participating Insurance
Companies or the Accounts shall be deemed to be "principal
underwriters" of the Fund or "underwriters" of the Fund within the
meaning of the 1940 Act and the 1933 Act, respectively.
2. You hereby represent and warrant to us as follows:
(a) You are a corporation duly organized and validly existing in
good standing under the laws of the State of Delaware and
have full power and authority to enter into this Agreement.
(b) This Agreement has been duly authorized, executed and
delivered by you and is a valid and binding obligation
enforceable against you in accordance with its terms.
(c) Your compliance with the provisions of this Agreement will
not conflict with or result in a violation of the provisions
of your charter or by-laws, or any statute or any judgment,
decree, order, rule or regulation of any court or
governmental agency or body having jurisdiction.
3. We hereby represent and warrant to you as follows:
(a) A registration statement (File No. 2-96461) on Form N-IA
with respect to the Shares (w) has been prepared by the Fund
in conformity with the requirements of the 1940 Act and the
1933 Act and all applicable published instructions, rules and
regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the
2
<PAGE> 3
"Commission"), (x) has been filed with the Commission, (y) is
currently effective, and (z) will be amended under the 1933
Act and the 1940 Act from time to time as required in order
to effect the continuous offering of the Shares. The
registration statement, including financial statements and
exhibits, and the final prospectus, including the statement
of additional information, as subsequently amended and
supplemented, are herein respectively referred to as the
"Registration Statement" and the "Prospectus".
(b) The Registration Statement and the Prospectus and any
amendment or supplement thereto will contain all statements
required to be stated therein and will comply in all material
respects with the requirements of the 1940 Act, the 1933 Act
and the Rules and Regulations, and the Registration Statement
and any post-effective amendment thereto will not contain or
incorporate by reference any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading, and the Prospectus and any amendment or
supplement thereto will not contain or incorporate by
reference any untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary in order to make the statements therein, in light
of the circumstances under which they were made, not
misleading.
(c) We are a corporation duly organized and validly existing in
good standing under the laws of The Commonwealth of
Massachusetts and have full power and authority to enter into
this Agreement.
(d) This Agreement has been duly authorized, executed and
delivered by us and is a valid and binding obligation
enforceable against us in accordance with its terms.
3
<PAGE> 4
(e) Our compliance with all of the provisions of this Agreement
will not conflict with or result in a violation of the
provisions of our charter or by-laws, or any statute or any
judgment, decree, order, rule or regulation of any court or
governmental agency or body having jurisdiction over us.
4. You hereby covenant and agree with us as follows:
(a) You shall be an independent contractor and neither you nor
any of your directors, partners, officers or employees as
such, is or shall be an employee of us or of the Fund. You
are responsible for your own conduct and the employment,
control and conduct of your agents and employees and for
injury to such agents or employees or to others through your
agents or employees.
(b) You or one or more Participating Insurance Companies will be
responsible for insuring compliance with all applicable laws
and regulations of any regulatory body having jurisdiction
over you or Participating Contracts and Policies.
(c) No person is authorized to make any representations
concerning Shares except those contained in the Registration
Statement or Prospectus relating thereto and in such printed
information as issued by us for use as information
supplemental to the Prospectus. In offering Participating
Contracts and Policies you shall, with respect to the Fund
and the Shares, rely solely on the representations contained
in the Registration Statement, Prospectus and in the
above-mentioned supplemental information.
(d) You are not entitled to any compensation whatsoever from us
or the Fund with respect to offers of Participating Contracts
and Policies.
(e) With respect to payments to be made to us pursuant to a Rule
12b-1 Plan for the Fund, you will not seek reimbursement for
administrative and recordkeeping services under the Fund's
Rule 12b-1 Plan that have been
4
<PAGE> 5
or will be paid for by any fees or charges imposed on owners
of Participating Contracts and Policies by a Participating
Insurance Company for such services. This provision does not
restrict you from receiving sales charges on purchases and
redemptions, consistent with applicable law, made under or
redemption proceeds from a Participating Contract or Policy
at the same time that you are seeking reimbursement for
expenses under the Fund's Rule 12b-1 Plan.
5. We hereby covenant and agree with you as follows:
(a) If, at any time when a Prospectus relating to the Shares is
required to be delivered under the 1940 Act, the 1933 Act or
the Rules and Regulations, we become aware of the occurrence
of any event as a result of which the Prospectus as then
amended or supplemented would include any untrue statement of
a material fact, or omit to state a material fact necessary
to make the statements therein, in light of the circumstances
under which made, not misleading, or if we become aware that
it has become necessary at any time to amend or supplement
the Prospectus to comply with the 1940 Act, the 1933 Act or
the Rules and Regulations, we will promptly notify you and
promptly request the Fund to prepare and to file with the
Commission an amendment to the Registration Statement or
supplement to the Prospectus which will correct such
statement or omission or an amendment or supplement which
will effect such compliance, and deliver to you copies of any
such amendment or supplement.
(b) We will cooperate with you in taking such action as may be
necessary to qualify the Shares for offering and sale under
the securities or Blue Sky laws of any state or jurisdiction
as you may request and will continue such qualification in
effect so long as is required by applicable law in connection
with the distribution of Shares.
(c) We shall reimburse you, subject to the minimum amounts set
forth in the attached schedule, for those distribution and
shareholder servicing-
5
<PAGE> 6
related expenses that are permitted to be paid for by the
Fund under the Fund's Rule 12b-1 Plan and for which (i) you
submit documentation, as may be requested by us or by the
Fund's Board of Trustees, and (ii) we receive payment for
such expenses from the Fund under the Fund's Rule 12b-1 Plan.
We shall remit to you as promptly as reasonably practicable
all payments received by us from the Fund for remittance to
you pursuant to the Fund's Rule 12b-1 Plan.
6. Sales of Shares may be suspended or the offering of Shares
withdrawn without notice (i) if the continued offering or sale of
Shares would violate any applicable statute or regulation, order
or decree of any court, governmental agency or self-regulatory
organization having jurisdiction, or (ii) if in the sole
discretion of the Trustees of the Fund, including a majority of
those Trustees who are not "interested persons" (as defined in the
1940 Act) of the Fund acting in good faith and in light of their
duties under federal and any applicable state laws, such action is
determined to be necessary in the best interests of the
Shareholders of any Portfolio.
7. If we elect to provide to you for the purpose of your offering
Participating Contracts and Policies copies of any Prospectus
relating to the Shares and printed information supplemental
thereto, we shall furnish you with such copies as you reasonably
request upon the payment of reasonable charges therefor by you or
one or more Participating Insurance Companies. If we elect not to
provide such copies of such documents, you or one or more
Participating Insurance Companies shall bear the entire cost of
printing copies for your use. You shall not use such copies of
such documents printed by you or one or more Participating
Insurance Companies until you shall have furnished us with a copy
thereof and we either have given you written approval for use or
twenty days shall have elapsed following our receipt thereof and
we have not objected thereto in writing.
6
<PAGE> 7
8. (a) You will indemnify and hold harmless Investor Services and
each of its directors and officers and each person, if any, who
controls Investor Services within the meaning of Section 15 of the
1933 Act, against any loss, liability, damages, claim or expense
(including the reasonable cost of investigating or defending any
alleged loss, liability, damages, claim or expense and reasonable
counsel fees incurred in connection therewith), arising by reason
of any person's acquiring any Shares, which may be based upon the
1933 Act or any other statute or common law, and which (i) may be
based upon any wrongful act by you, any of your employees or
representatives, any affiliate of or any person acting on behalf
of you, or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a Registration
Statement or Prospectus covering Shares or any amendment thereof
or supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading if such a statement
or omission was made in reliance upon information furnished to us
or the Fund by you, or (iii) may be based on any untrue statement
or alleged untrue statement of a material fact contained in a
registration statement or prospectus covering insurance products
sold by you, or any amendments or supplement thereto, or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement
or statements therein not misleading, unless such statement or
omission was made in reliance upon information furnished to you or
a Participating Insurance Company by or on behalf of Investor
Services or the Fund; provided, however, that in no case (i) is
the indemnity by you in favor of any person indemnified to be
deemed to protect Investor Services or any such person against any
liability to which Investor Services or any such person would
otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of its or his duties or by
reason of its or his reckless
7
<PAGE> 8
disregard of its obligations and duties under this Agreement, or
(ii) are you to be liable under your indemnity agreement contained
in this paragraph with respect to any claim made against Investor
Services or any person indemnified unless Investor Services or
such person, as the case may be, shall have notified you in
writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall
have been served upon Investor Services or upon such person (or
after Investor Services or such person shall have received notice
of such service on any designated agent), but failure to notify
you of any such claim shall not relieve you from any liability
which you may have to Investor Services or any person against whom
such action is brought otherwise than on account of your indemnity
agreement contained in this paragraph. You shall be entitled to
participate, at your own expense, in the defense, or, if you so
elect, to assume the defense of any suit brought to enforce any
such liability, but, if you elect to assume the defense, such
defense shall be conducted by counsel chosen by you and
satisfactory to Investor Services, or to its officers or
directors, or to any controlling person or persons, defendant or
defendants in the suit. In the event that you assume the defense
of any such suit and retain such counsel, Investor Services or
such officers or directors or controlling person or persons,
defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case
you do not elect to assume the defense of any such suit, you shall
reimburse Investor Services and such officers, directors or
controlling person or persons, defendant or defendants in such
suit, for the reasonable fees and expenses of any counsel retained
by them. You agree promptly to notify Investor Services of the
commencement of any litigation or proceedings against it in
connection with the offer, issue and sale of any Shares.
(b) Investor Services will indemnify and hold harmless you and
each of your directors and officers and each person, if any, who
controls you
8
<PAGE> 9
within the meaning of Section 15 of the 1933 Act, against any
loss, liability, damages, claim or expense (including the
reasonable cost of investigating or defending any alleged loss,
liability, damages, claim or expense and reasonable counsel fees
incurred in connection therewith), arising by reason of any
person's acquiring any Shares, which may be based upon the 1933
Act or any other statute or common law, and which (i) may be based
upon any wrongful act by Investor Services, any of its employees
or representatives, any affiliate of or any person acting on its
behalf, or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a Registration
Statement or Prospectus covering Shares or any amendment thereof
or supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading unless such
statement or omission was made in reliance upon information
furnished to Investor Services or the Fund by you or (iii) may be
based on any untrue statement or alleged untrue statement of a
material fact contained in a registration statement or prospectus
covering insurance products sold by you, or any amendment or
supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon information
furnished to you by or on behalf of Investor Services or the Fund;
provided, however, that in no case (i) is the indemnity by
Investor Services in favor of any person indemnified to be deemed
to protect you or any such person against any liability to which
you or any such person would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the
performance of your or his duties or by reason of your or his
reckless disregard of your or his obligations and duties under
this Agreement, or (ii) is Investor Services to be liable under
its indemnity agreement contained in this paragraph with respect
to any claim made against you
9
<PAGE> 10
or any person indemnified unless you or such person, as the case
may be, shall have notified Investor Services in writing within a
reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been
served upon you or upon such person (or after you or such person
shall have received notice of such service on any designated
agent), but failure to notify Investor Services of any such claim
shall not relieve Investor Services from any liability which
Investor Services may have to you or any person against whom such
action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. Investor Services shall be
entitled to participate, at its own expense, in the defense, or,
if it so elects, to assume the defense of any suit brought to
enforce any such liability, but, if it elects to assume the
defense, such defense shall be conducted by counsel chosen by
Investor Services and satisfactory to you, or to your officers or
directors, or to any controlling person or persons, defendant or
defendants in the suit. In the event that Investor Services
assumes the defense of any such suit and retains such counsel, you
or such officers or directors or controlling person or persons,
defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by you, but, in case
Investor Services does not elect to assume the defense of any such
suit, Investor Services shall reimburse you and such officers,
directors or controlling person or persons, defendant or
defendants in such suit, for the reasonable fees and expenses of
any counsel retained by you. Investor Services agrees promptly to
notify you of the commencement of any litigation or proceedings
against it in connection with the offer, issue and sale of any
Shares.
9. The indemnities, representations, warranties, covenants and
agreements of each party to this Agreement as set forth in this
Agreement will remain in full force and effect regardless of any
investigation made by or on behalf of either of such
10
<PAGE> 11
parties or any of their respective officers, directors, partners
or any controlling person, and will survive delivery of and
payment for the Shares.
10. Any provision of this Agreement which may be determined by
competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, each
party hereto waives any provision of law which renders any
provision hereof prohibited or unenforceable in any respect.
11. This Agreement constitutes the entire agreement among the parties
concerning the subject matter hereof, and supersedes any and all
prior understandings.
12. This Agreement shall automatically terminate in the event of its
assignment. This Agreement may be terminated at any time by either
party by 30 days' written notice given to the other party, except
that the Agreement may be terminated by Investor Services without
notice (i) if the continued offering or sale of Shares would
violate any applicable statute or regulation, order or decree of
any court, governmental agency or self-regulatory organization
having jurisdiction, or (ii) if in the sole discretion of the
Trustees of the Fund, including a majority of those Trustees who
are not "interested persons" (as defined in the 1940 Act) of the
Fund, acting in good faith and in light of their duties under
federal and any applicable state laws, such action is determined
to be necessary in the best interests of the Shareholders of any
Portfolio. The obligation of each party to indemnify the other
party pursuant to paragraph 8 hereof shall apply with respect to
any Shares sold before or after such termination. To the extent we
receive payments under any provision of this Agreement pursuant to
a Rule 12b-1 Plan for the Fund, both you and we
11
<PAGE> 12
understand and agree that this Agreement will be subject to the
applicable approval, reporting and termination requirements as set
forth in Rule 12b-1.
13. Any notice hereunder shall be duly given if mailed or telegraphed
to the other party hereto at the address specified below or at
such other address as such party may from time to time specify in
writing to the other party. This Agreement shall be governed by
and construed in accordance with the laws of The Commonwealth of
Massachusetts.
14. This Agreement may be executed in any number of counterparts
which, taken together shall constitute one and the same
instrument. This Agreement shall become effective upon receipt by
us of your acceptance hereof.
15. This Agreement may not be modified or amended except by a written
instrument duly executed by the parties hereto.
SCUDDER INVESTOR SERVICES, INC.
By: /s/ William M. Thomas
William M. Thomas
President
Two International Place
Boston, Massachusetts 02110
The undersigned hereby
accepts the offer set forth
in the above letter.
INVESTORS BROKERAGE SERVICES, INC.
Dated: 6/26/98 By: /s/ Otis R. Heldman, Jr.
Otis R. Heldman, Jr.
President
One Kemper Drive
Long Grove, Illinois 60049
12
<PAGE> 1
EXHIBIT 1(k)
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement") made by and between SCUDDER
KEMPER INVESTMENTS, INC., a Delaware corporation ("SKI"), with a principal place
of business in Boston, Massachusetts and KEMPER INVESTORS LIFE INSURANCE
COMPANY, an Illinois corporation (the "Company"), with a principal place of
business in One Kemper Drive, Long Grove, Illinois, on behalf of one or more
separate accounts of the Company, as set forth on Schedule A hereto, as it may
be amended from time to time upon written notice to the Fund in accordance with
Paragraph 9 herein (the "Account").
WHEREAS, SKI has caused to be organized Scudder Variable Life
Investment Fund (the "Fund"), a Massachusetts business trust created under a
Declaration of Trust dated March 15, 1985, as amended, the beneficial interest
in which is divided into several series, each designated a "Portfolio" and
representing the interest in a particular managed portfolio of securities, each
of which series (except Money Market Portfolio) is divided into two classes of
shares of beneficial interest; and
WHEREAS, the purpose of the Fund is to act as the investment vehicle
for the separate accounts established for variable life insurance policies and
variable annuity contracts to be offered by insurance companies which have
entered into indemnification agreements substantially identical to this
Agreement; and
WHEREAS, the parties desire to express their agreement as to certain
other matters;
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
1. Additional Definitions.
For purposes of this Agreement, the following definitions shall apply:
(a) "Shares" means shares of beneficial interest, without par
value, of any class of any Portfolio, now or hereafter created, of
the Fund.
2. Access to Other Products.
SKI shall permit an Account to participate in any registered investment
company other than the Fund which is intended as the funding vehicle for
insurance products and for which SKI or an affiliate of SKI acts as investment
adviser, on the same basis as other insurance companies are permitted to
participate in such a registered investment company. This
<PAGE> 2
provision shall not require SKI to make available to the Company shares of any
investment company which is organized solely as the funding vehicle for
insurance products offered by a single insurance company or a group of
affiliated insurance companies.
3. Right to Review and Approve Sales Materials.
The Company shall furnish, or shall cause to be furnished, to SKI or
its designee, at least 10 business days prior to its intended use, each piece of
promotional material in which SKI or the Fund is named. No such material shall
be used unless SKI or its designee shall have approved such use in writing, or
10 business days shall have elapsed without approval, rejection or objection
since receipt by SKI or its designee of such material.
SKI shall furnish, or shall cause to be furnished, to the Company or
its designee, at least 10 business days prior to its intended use, each piece of
promotional material in which the Company or its separate account(s) is named.
No such material shall be used unless the Company or its designee shall have
approved such use in writing, or 10 business days shall have elapsed without
approval, rejection or objection since receipt by the Company or its designee of
such material.
4. Sales Organization Meetings.
Representatives of SKI or its designee shall meet with the sales
organizations of the Company at such reasonable times and places as may be
agreed upon by the Company and SKI or its designee for the purpose of educating
sales personnel about the Fund.
5. Administration of Separate Accounts
(a) Administrative services to owners of variable life insurance
policies and/or variable annuity contracts issued by the Company shall be the
responsibility of the Company and shall not be the responsibility of SKI. SKI
recognizes the Company as the sole shareholder of Fund Shares issued under the
Participation Agreement, dated as of the 26th day of June, 1998, by and between
the Company on behalf of its separate accounts and the Fund (the "Participation
Agreement"). From time to time, SKI may pay amounts from its past profits to the
Company for providing certain administrative services for the Fund or its
Portfolios, or for providing owners of variable life insurance policies and/or
variable annuity contracts with other services that relate to the Fund. These
services may include, among other things, aggregating allocation, transfer, and
liquidation orders of the Accounts, printing and
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<PAGE> 3
mailing to owners of variable life insurance policies and/or variable annuity
contracts copies of the Portfolios' prospectuses and other materials that the
Fund is required by law or otherwise to provide to its shareholders, but that
the Company is not otherwise required to provide to owners of variable life
insurance policies and/or variable annuity contracts, providing financial
consultants with advice with respect to inquiries related to the Portfolios (not
including information about performance or related to sales), and such other
related services as the Fund and the Company may from time to time agree. In
consideration of the savings resulting from such arrangement, and to compensate
the Company for its costs, SKI agrees to pay the Company an amount equal to 15
basis points (.15%) per annum of the average aggregate amount invested by the
Company in the Portfolios under the Participation Agreement. Payment of such
amounts by SKI will not increase the fees paid by the Fund, the Portfolios or
their shareholders.
(b) The parties agree that SKI's payments to the Company are for
administrative services only and do not constitute payment in any manner for
investment advisory services or for costs of distribution.
(c) For the purposes of computing the administrative fee reimbursement
contemplated hereby, the average aggregate amount invested by the Company over a
one-month period shall be computed by totaling the Company's aggregate
investment (Share net asset value multiplied by total number of Shares held by
the Company) on each business day during the month and dividing by the total
number of business days during each month.
(d) The Company will calculate the reimbursement of administrative
expenses at the end of each calendar quarter and the Company shall send a
detailed statement of each such fee computation to SKI. SKI will make such
reimbursement to the Company within thirty (30) days thereafter.
6. Duration.
This Agreement shall continue in force until terminated in
accordance with the following provisions:
(a) At the option of the Company or SKI at any time upon 180 days'
notice, unless a shorter time is agreed to by the parties;
(b) Contemporaneously with the termination of the Participation
Agreement;
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<PAGE> 4
(c) In the event this Agreement is assigned without the prior written
consent of the Company and SKI. Termination shall be effective
immediately upon such occurrence without notice. Provided,
however, the obligation of each party hereto to indemnify the
other party hereto
shall continue with respect to all losses, claims, damages, liabilities or
litigation based upon the acquisition of Shares purchased as the funding vehicle
for any variable life insurance policy or variable annuity contract issued by
the Company or any affiliated insurance company.
7. Indemnification.
(a) The Company agrees to indemnity and hold harmless SKI and each of
its directors and officers and each person, if any, who control SKI within the
meaning of Section 15 of the Securities Act of 1933 (the "Act") or any person
controlled by or under common control with SKI ("affiliate") against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which SKI or such directors, officers or affiliate may become
subject under the Act, under any other statute, at common law or otherwise,
arising out of the acquisition of any Shares by any person which (i) may be
based upon any wrongful act by the Company, any of its employees or
representatives, any affiliate of or any person acting on behalf of the Company
or a principal underwriter of its insurance products, or (ii) may be based upon
any untrue statement or alleged untrue statement of a material fact contained in
a registration statement or prospectus covering Shares or any amendment thereof
or supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in reliance upon
information furnished to SKI or the Fund by the Company; provided, however, that
in no case (i) is the Company's indemnity in favor of a director or officer or
any other person deemed to protect such director or officer or other person
against any liability to which any such person would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of his duties or by reason of his reckless disregard of obligations and duties
under this Agreement or (ii) is the Company to be liable under its indemnity
agreement contained in this Paragraph 7 with respect to any claim made against
SKI or any person indemnified unless SKI or such
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<PAGE> 5
person, as the case may be, shall have notified the Company in writing pursuant
to Paragraph 9 within a reasonable time after the summons or other first legal
process giving information of the nature of the claims shall have been served
upon SKI or upon such person (or after SKI or such person shall have received
notice of such service on any designated agent), but failure to notify the
Company of any such claim shall not relieve the Company from any liability which
it may have to SKI or any person against whom such action is brought otherwise
than on account of the indemnity agreement contained in this Paragraph 7. The
Company shall be entitled to participate, at its own expense, in the defense,
or, if it so elects, to assume the defense of any suit brought to enforce any
such liability, but, if it elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to SKI, its officers and
directors, or to any affiliates, defendant or defendants in the suit. In the
event that the Company elects to assume the defense of any such suit and retain
such counsel, SKI, such officers and directors or affiliates, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case the Company does not elect to assume the
defense of any such suit, the Company will reimburse SKI, such officers and
directors or affiliates, defendant or defendants in such suit, for the
reasonable fees and expenses of any counsel retained by them. The Company agrees
promptly to notify SKI pursuant to Paragraph 9 of the commencement of any
litigation or proceedings against it or any of its directors or officers in
connection with the issue and sale of any Shares.
(b) SKI agrees to indemnify and hold harmless the Company and each of
its directors and officers and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or any person controlled by or under
common control with the Company ("affiliate") against any and all losses,
claims, damages, liabilities or litigation (including legal and other expenses)
to which it or such directors, officers or affiliate may become subject under
the Act, under any other statute, at common law or otherwise, arising out of the
acquisition of any Shares by any person which (i) may be based upon any wrongful
act by SKI, any of its employees or representatives, any affiliate of or any
person acting on behalf of SKI or a principal underwriter of the Fund, or (ii)
may be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement or prospectus covering Shares or any
amendment thereof or supplement thereto or the omission or
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<PAGE> 6
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading if such statement or
omission was made in reliance upon information furnished to the Fund or the
Company by SKI; provided, however, that in no case (i) is SKI's indemnity in
favor of a director or officer or any other person deemed to protect such
director or officer or other person against any liability to which any such
person would otherwise be subject by reason of willful misfeasance, bad faith,
or gross negligence in the performance of his duties or by reason of his
reckless disregard of obligations and duties under this Agreement or (ii) is SKI
to be liable under its indemnity agreement contained in this Paragraph 7 with
respect to any claims made against the Company or any person indemnified unless
the Company or such person, as the case may be, shall have notified SKI in
writing pursuant to Paragraph 9 within a reasonable time after the summons or
other first legal process giving information of the nature of the claim shall
have been served upon it or upon such director, officer, or controlling person
(or after the Company or such director, officer or controlling person shall have
received notice of such service on any designated agent), but failure to notify
SKI of any claim shall not relieve it from any liability which it may have to
the Company or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this Paragraph 7. SKI will be
entitled to participate, at its own expense, in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any such liability,
but if SKI elects to assume the defense, such defense shall be conducted by
counsel chosen by it and satisfactory to the Company, its directors, officers or
affiliates, defendant or defendants, in the suit. In the event SKI elects to
assume the defense of any such suit and retain such counsel, the Company, its
directors, officers or affiliates, defendant or defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them, but, in
case SKI does not elect to assume the defense of any such suit, it will
reimburse the Company or such directors, officers or affiliates, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. SKI agrees promptly to notify the Company pursuant to
Paragraph 8 of the commencement of any litigation or proceedings against it or
any of its officers or directors in connection with the issuance or sale of any
Shares.
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<PAGE> 7
(c) SKI agrees to indemnify and hold harmless the Company and each of
its directors and officers against any and all losses, claims, damages,
liabilities or litigation arising from the imposition of additional federal
income taxes on the Company or any policyholder and/or contract holder solely as
a result of a Final Determination that any Portfolio has failed (x) to comply
with the diversification requirements of section 817(h) of the Internal Revenue
Code of 1986, as amended (the "Code"), relating to the diversification
requirements for variable annuity, endowment and life insurance contracts, or
(y) to qualify as a regulated investment company within the meaning of section
851 of the Code; provided, however, that (i) SKI shall have no liability under
this Paragraph 7(c) if such failure is caused by a third party who is not an
employee or agent of SKI (e.g., the Fund's custodian or another service
provider), and (ii) in no case is SKI's indemnity under this Paragraph 7(c)
deemed to protect any person against any liability to which that person would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of that person's duties or by reason of reckless
disregard by that person of obligations under this Agreement.
The Company agrees that if the Internal Revenue Service asserts in
writing in connection with any governmental audit or review of the Company or,
to the Company's knowledge, of any policyholder and/or contract holder, that any
Portfolio has failed to comply with the diversification requirements of section
817(h) of the Code or the Company otherwise becomes aware of any facts that
could give rise to any claim against SKI as a result of such a failure or
alleged failure, (i) the Company shall promptly notify SKI pursuant to Paragraph
9 of such assertion or potential claim; (ii) the Company shall consult with SKI
as to how to minimize any liability that may arise as a result of such failure
or alleged failure; (iii) the Company shall use its best efforts to minimize any
liability of SKI for indemnification resulting from such failure, including,
without limitation, demonstrating, pursuant to Treasury Regulations Section
1.817-5(a)(2), to the Commissioner of the Internal Revenue Service that such
failure was inadvertent; provided, however, this Paragraph 7(c) shall not be
construed to require the Company to jeopardize its or any policyholder's and/or
contract holder's standing or position with respect any such failure or alleged
failure; (iv) the Company shall permit SKI and its legal and accounting advisors
to participate in any conferences, settlement discussions or other
administrative or judicial proceedings or contests (including judicial appeals
thereof)
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<PAGE> 8
with the Internal Revenue Service, any policyholder and/or contract
holder or any other claimant regarding any claims that could give rise to
indemnification by SKI as a result of such a failure or alleged failure; (v) any
written materials to be submitted by the Company to the Internal Revenue
Service, any policyholder and/or contract holder or any other claimant in
connection with any of the foregoing proceedings or contests (including, without
limitation, any such materials to be submitted to the Internal Revenue Service
pursuant to Treasury Regulations Section 1.817-5(a)(2)), shall be provided by
the Company to SKI (together with any supporting information or analysis, but
excluding any privileged materials) at least 10 business days prior to the day
on which such proposed materials are to be submitted; (vi) the Company shall
provide SKI and its advisors with such cooperation as SKI shall reasonably
request (including, without limitation, by permitting SKI and its accounting and
legal advisors to review the relevant books and records of the Company) in order
to facilitate SKI's review of any written submissions provided to it pursuant to
the preceding clause or its assessment of the validity or amount of any claim
against it arising from such a failure or alleged failure; (vii) the Company
shall not with respect to any claim of the IRS or any policyholder and/or
contract holder that would give rise to a claim for indemnification against SKI
(a) compromise or settle any claim, (b) accept any adjustment on audit, or (c)
forego any allowable judicial appeals, without the express written consent of
SKI, which shall not be unreasonably withheld, provided that the Company shall
not be required to appeal any adverse judicial decision unless SKI shall have
provided an opinion of independent counsel to the effect that a reasonable basis
(consistent with Formal Opinion 85-352 of the American Bar Association) exists
for taking such appeal; and (viii) SKI shall have no liability as a result of
such failure or alleged failure if the Company fails to comply with any of the
foregoing clauses (i) through (vii). Should SKI refuse to give its written
consent to any compromise or settlement of any claim or liability hereunder, the
Company may, in its discretion, authorize SKI to act in the name of the Company
in, and to control the conduct of, such conferences, discussions, proceedings,
contests or appeals and all administrative or judicial appeals thereof, and in
that event SKI shall bear the fees and expenses associated with the conduct of
the proceedings that it is so authorized to control.
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<PAGE> 9
For purposes of this Paragraph 7(c), "Final Determination" shall mean,
with respect to any claim, a settlement of such claim (including the acceptance
of an adjustment proposed by the Internal Revenue Service) or a decision of a
court of competent jurisdiction with respect to such claim that has become final
after either the (i) exhaustion of allowable appeals or (2) expiration of the
time to take any such appeal with respect to the claim.
8. Massachusetts Law to Apply.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
9. Notices.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to SKI:
Scudder Kemper Investments, Inc.
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: William M. Thomas
If to the Company:
Kemper Investors Life Insurance Company
One Kemper Drive
Long Grove, Illinois 60049
Attn: General Counsel
10. Miscellaneous.
The captions in the Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
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<PAGE> 10
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the 26th day of
June, 1998.
SEAL SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ William M. Thomas
William M. Thomas
Authorized Officer
SEAL KEMPER INVESTORS LIFE
INSURANCE COMPANY
By: /s/ Otis R. Heldman, Jr.
Name: Otis R. Heldman, Jr.
Title: Marketing Officer
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SCHEDULE A
TO INDEMNIFICATION AGREEMENT
Separate Account(s) of the Company
KILICO Variable Separate Account - 2
KILICO Variable Separate Account
KILICO Variable Annuity Separate Account
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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, Fixed and Market Value
Adjusted Deferred Annuity Contracts
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-22389) of our report dated February 19, 1999, on our audit of the financial
statements of KILICO Variable Annuity Separate Account and to the reference to
our firm under the caption "Experts."
PricewaterhouseCoopers LLP
Chicago, Illinois
April 16, 1999
<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, Fixed and Market Value
Adjusted Deferred Annuity Contracts
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-22389) of our report dated March 12, 1999, 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."
Pricewaterhousecoopers LLP
Chicago, Illinois
April 16, 1999
<PAGE> 1
EXHIBIT 23(b)
The Board of Directors
Kemper Investors Life Insurance Company
We consent to the use of our report included herein on the consolidated
financial statements of Kemper Investors Life Insurance Company and to the
references to our firm under the headings "Experts" in the prospectuses.
KPMG LLP
Chicago, Illinois
April 16, 1999
