<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2000
REGISTRATION NO. 333-02491
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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 (Primary Standard Industrial
number, Classification Code Number)
including area code, of registrant's principal
executive offices)
Debra P. Rezabek, Esq.
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
(847) 969-3506
- - --------------------------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
Frank J. 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 Amendment becomes effective.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
------------------
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus contained
herein also relates to Registration Statements No. 33-33547, No. 33-43462 and
No. 33-46881.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE> 2
KEMPER INVESTORS LIFE INSURANCE COMPANY
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(b)
<TABLE>
<CAPTION>
FORM S-1
ITEM NO. FORM S-1 CAPTION CAPTION IN PROSPECTUS
- - -------- ---------------- ---------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Facing Page and Outside Front Cover Page of
Prospectus.
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Table of Contents.
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Summary; Not Applicable as to Ratio of
Earnings to Fixed Charges.
4. Use of Proceeds............................ KILICO, The MVA Option, The Separate
Account and The Fund--The MVA Option;
Business--Investments.
5. Determination of Offering Price............ Not Applicable.
6. Dilution................................... Not Applicable.
7. Selling of Security Holders................ Not Applicable.
8. Plan of Distribution....................... Distribution of Contracts
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 Tax Matters; Business; Management's
Discussion and Analysis of Financial
Condition and Results of Operations; Legal
Proceedings; Financial Statements of Kemper
Investors Life Insurance Company and
Subsidiaries.
12. Disclosure of Commission Position of
Indemnification For Securities Act
Liabilities................................ Part II, Item 17.
</TABLE>
<PAGE> 3
PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
- - --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- - --------------------------------------------------------------------------------
KEMPER PASSPORT
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
This Prospectus describes Variable and Market Value Adjusted Deferred Annuity
Contracts (the "Contract") offered by Kemper Investors Life Insurance Company
("we" or "KILICO"). The Contract is designed to provide annuity benefits for
retirement which may or may not qualify for certain federal tax advantages.
Depending on particular state requirements, the Contract may be issued on a
group or individual basis. Contracts issued on a group basis are represented by
a certificate. Contracts issued on an individual basis are represented by an
individual annuity contract. For purposes of this Prospectus, the term
"Contract" refers both to certificates and to individual annuity contracts.
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 sixteen investment options, each of which is a
Subaccount of KILICO Variable Annuity Separate Account. Currently, you may
choose among the following Portfolios of the Kemper Variable Series:
- - - Kemper Money Market
- - - Kemper Total Return
- - - Kemper High Yield
- - - Kemper Growth
- - - Kemper Government Securities
- - - Kemper International
- - - Kemper Small Cap Growth
- - - Kemper Investment Grade Bond
- - - Kemper Contrarian Value
- - - Kemper Small Cap Value
- - - Kemper Value+Growth
- - - Kemper Horizon 20+
- - - Kemper Horizon 10+
- - - Kemper Horizon 5
- - - Kemper Blue Chip
- - - Kemper Strategic Income
(formerly Kemper Global Income)
The Contracts are not insured 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 52. 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, 2000.
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> 4
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 3
SUMMARY OF EXPENSES......................................... 5
CONDENSED FINANCIAL INFORMATION............................. 7
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUND... 8
THE CONTRACTS............................................... 11
THE ACCUMULATION PERIOD..................................... 12
CONTRACT CHARGES AND EXPENSES............................... 17
THE ANNUITY PERIOD.......................................... 19
FEDERAL INCOME TAXES........................................ 22
DISTRIBUTION OF CONTRACTS................................... 27
VOTING RIGHTS............................................... 27
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 28
DOLLAR COST AVERAGING....................................... 28
SYSTEMATIC WITHDRAWAL PLAN.................................. 29
EXPERTS..................................................... 29
LEGAL MATTERS............................................... 29
SPECIAL CONSIDERATIONS...................................... 29
AVAILABLE INFORMATION....................................... 29
BUSINESS.................................................... 30
PROPERTIES.................................................. 35
LEGAL PROCEEDINGS........................................... 35
SELECTED FINANCIAL DATA..................................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 37
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS................... 49
EXECUTIVE COMPENSATION...................................... 51
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 52
FINANCIAL STATEMENTS........................................ 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... 53
FINANCIAL STATEMENTS OF KEMPER INVESTORS LIFE INSURANCE
COMPANY AND SUBSIDIARIES.................................. 54
APPENDIX A ILLUSTRATION OF A MARKET VALUE ADJUSTMENT........ 78
APPENDIX B KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED
FIXED AND VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA
DISCLOSURE STATEMENT...................................... 80
</TABLE>
<PAGE> 5
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATED GUARANTEE PERIOD VALUE--The sum of your 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.
ALLOCATION OPTION--The seventeen Subaccounts and the MVA Option available
under the Contract for allocation of Purchase Payments, or transfers of
Contract Value during the Accumulation Period.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments and upon the continuation of whose life annuity payments
involving life contingencies depend.
ANNUITY DATE--The date on which annuity payments are to commence.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person designated to receive any benefits under a Contract
upon your death or upon the Annuitant's death 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 Deferred Annuity
Contract offered on an individual or group basis. Contracts issued on a
group basis are represented by a certificate. Contracts issued on an
individual basis are represented by an individual annuity contract.
CONTRACT VALUE--The sum of the values of your Accumulated Guarantee Period
Value and Separate Account Value during the Accumulation Period.
CONTRACT YEAR--Period between anniversaries of the Date of Issue of a
Contract.
DATE OF ISSUE--The date on which the first Contract Year commences.
FIXED ANNUITY--An annuity under which we guarantee the amount of each
annuity payment; it does not vary with the investment experience of a
Subaccount.
FUND--Kemper Variable Series, an open-end management investment company.
The Separate Account invests in sixteen portfolios of the Fund.
GENERAL ACCOUNT--All our assets other than those allocated to any legally
segregated separate account.
GUARANTEED INTEREST RATE--The rate of interest established by us for a
given Guarantee Period.
GUARANTEE PERIOD--A period of time during which an amount is to be credited
with a Guaranteed Interest Rate. You may elect Guarantee Period options
having durations of from one (1) to ten (10) years.
GUARANTEE PERIOD VALUE--The Guarantee Period Value is the sum of your: (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 CONTRACT--A Contract issued in connection with a retirement
plan which does not receive favorable tax treatment under Section 401, 403,
408, 408A or 457 of the Internal Revenue Code.
OWNER ("YOU, YOUR, YOURS")--The person designated in the Contract as having
the privileges of ownership defined in the Contract.
PURCHASE PAYMENTS--Amounts paid to us by you or on your behalf.
1
<PAGE> 6
QUALIFIED CONTRACT--A Contract issued in connection with a retirement plan
which receives favorable tax treatment under Section 401, 403, 408, 408A or
457 of the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT VALUE--The sum of your Subaccount Values.
SKI--Scudder Kemper Investments, Inc., whose Corporate Headquarters is at
345 Park Avenue, New York, New York 10154-0010.
SUBACCOUNTS--The seventeen subdivisions of the Separate Account, the assets
of which consist solely of shares of the corresponding portfolio of the
Fund.
SUBACCOUNT VALUE--The value of your interest in each Subaccount.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required.
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which you have an
interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Contract Value in the first six Contract Years after
a Purchase Payment is made or against certain annuitizations of Contract
Value in the first six Contract Years after a Purchase Payment is made.
2
<PAGE> 7
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 and Qualified Contracts are described in this
Prospectus.
The minimum initial Purchase Payment is $2,000. 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.
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts that you select. Each Subaccount invests in one of
the following corresponding Portfolios:
- - - Kemper Money Market
- - - Kemper Total Return
- - - Kemper High Yield
- - - Kemper Growth
- - - Kemper Government Securities
- - - Kemper International
- - - Kemper Small Cap Growth
- - - Kemper Investment Grade Bond
- - - Kemper Contrarian Value
- - - Kemper Small Cap Value
- - - Kemper Value+Growth
- - - Kemper Horizon 20+
- - - Kemper Horizon 10+
- - - Kemper Horizon 5
- - - Kemper Blue Chip
- - - Kemper Strategic Income (formerly Kemper Global Income)
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccounts.
The MVA Option also provides fixed accumulations. The MVA Option is only
available during the Accumulation Period. You 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 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 you select. 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 you timely elect 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 8.)
Transfers between Subaccounts are permitted before and after annuitization,
subject to limitations. A transfer from a Guarantee Period is subject to a
Market Value Adjustment unless effected within 15 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 14 and 21, respectively.)
You may withdraw up to 15% of the Contract Value in any Contract Year without a
Withdrawal Charge. If you withdraw more than 15% of the Contract Value in any
Contract Year, the amount in excess of 15% is subject to a Withdrawal Charge.
The Withdrawal Charge is:
- 6% in the first and second Contract Years,
- 5% in the third and fourth Contract Years, and
- 4% in the fifth and sixth Contract Years.
However, in no event shall the aggregate Withdrawal Charges assessed against a
Contract exceed 9% of the aggregate Purchase Payments made under the Contract.
Withdrawals will have tax consequences, including income tax and in some
circumstances an additional 10% penalty tax. Withdrawals are permitted from
Contracts issued with Section 403(b) Qualified Plans only under limited
circumstances. (See "Federal Income Taxes," page 22.)
A Market Value Adjustment also applies to any withdrawal (except during the
"free look" period), transfer, purchase of an annuity option and to death
benefit payments made more than 15 days before or 15 days after the
3
<PAGE> 8
end of a Guarantee Period in the MVA Option. The Market Value Adjustment is
applied to the amount being withdrawn before deduction of any applicable
Withdrawal Charges. (See "The Contracts," page 11.)
Contract charges include:
- mortality and expense risk charges,
- administrative expenses,
- records maintenance, and
- applicable premium taxes.
(See "Charges Against the Separate Account," page 17.) In addition, the
investment adviser to the Fund deducts varying charges against the assets of the
Fund for which it provides investment advisory services. (See the Fund's
prospectus for such information.)
The Contract may be purchased as an Individual Retirement Annuity, Simplified
Employee Pension--IRA, Roth Individual Retirement Annuity, tax sheltered
annuity, deferred compensation plan, and as a nonqualified annuity. (See
"Taxation of Annuities in General," page 22 and "Qualified Plans," page 25.)
You 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 you
receive the Contract. (See "The Contracts," page 11.) 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.
4
<PAGE> 9
SUMMARY OF EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments)..................................... None
Contingent Deferred Sales Load (as a percentage of amount surrendered)(1)
Contract Year of Withdrawal
First year....................................... 6%
Second year...................................... 6%
Third year....................................... 5%
Fourth year...................................... 5%
Fifth year....................................... 4%
Sixth year....................................... 4%
Seventh year and following....................... 0%
Surrender Fees (in addition to Withdrawal Charge)(2)....................................................... None
Exchange Fee............................................................................................... None
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.... 1.10%
Administration................ .15%
Account Fees and Expenses..... 0%
Total Separate Account
Annual Expenses............. 1.25%
</TABLE>
<TABLE>
<CAPTION>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets for the period ended December 31, 1999) KEMPER
KEMPER KEMPER KEMPER KEMPER INVESTMENT
MONEY TOTAL KEMPER KEMPER GOVERNMENT KEMPER SMALL CAP GRADE
MARKET(4) RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH BOND(5)
--------- ------ ---------- ------ ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees... .50% .55% .60% .60% .55% .75% .65% .60%
Other
Expenses... .04 .06 .07 .06 .08 .19 .06 .05
--- --- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses... .54% .61% .67% .66% .63% .94% .71% .65%
=== === === === === === === ===
</TABLE>
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER
CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER BLUE STRATEGIC
VALUE(5) VALUE(5) GROWTH(5) HORIZON 20+(5) HORIZON 10+(5) HORIZON 5(5) CHIP(5) INCOME(6)
---------- --------- --------- -------------- -------------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees.. .75% .75% .75% .60% .60% .60% .65% .65%
Other
Expenses... .05 .09 .08 .18 .12 .16 .06 .28
--- --- --- --- --- --- --- ----
Total
Portfolio
Annual
Expenses.. .80% .84% .83% .78% .72% .76% .71% .93%
=== === === === === === === ====
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your Contract at the
end of the applicable time period, you
would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets:
Kemper Money Market #1(4) $81 $112 $146 $215
Kemper Total Return 81 115 149 222
Kemper High Yield 82 116 152 229
Kemper Growth 82 116 152 228
Kemper Government Securities 81 115 150 225
Kemper International 84 124 166 257
Kemper Small Cap Growth 82 117 154 233
Kemper Investment Grade Bond 82 116 151 227
Kemper Contrarian Value 83 120 159 243
Kemper Small Cap Value 83 121 161 247
Kemper Value+Growth 83 121 160 246
Kemper Horizon 20+ 83 120 158 240
Kemper Horizon 10+ 82 118 155 234
Kemper Horizon 5 83 119 157 238
Kemper Blue Chip 82 117 154 233
Kemper Strategic Income 84 124 165 256
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(4) $19 $ 58 $ 99 $215
Kemper Total Return 19 60 103 222
Kemper High Yield 20 62 106 229
Kemper Growth 20 61 105 228
Kemper Government Securities 20 60 104 225
Kemper International 23 70 120 257
Kemper Small Cap Growth 20 63 108 233
Kemper Investment Grade Bond 20 61 105 227
Kemper Contrarian Value 21 66 113 243
Kemper Small Cap Value 22 67 115 247
Kemper Value+Growth 22 67 114 246
Kemper Horizon 20+ 21 65 112 240
Kemper Horizon 10+ 20 63 109 234
Kemper Horizon 5 21 64 111 238
Kemper Blue Chip 20 63 108 233
Kemper Strategic Income 23 70 119 256
</TABLE>
5
<PAGE> 10
The purpose of the preceding table is to assist you in understanding the various
costs and expenses that an Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund but not the MVA Option. See "Contract Charges and Expenses" and "The MVA
Option" for more information regarding the various costs and expenses. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH MAY BE
ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN. The example assumes a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This hypothetical rate
of return is not intended to be representative of past or future performance of
any Subaccount. The Records Maintenance Charge is a single charge, it is not a
separate charge for each Subaccount. In addition, the effect of the Records
Maintenance Charge has been reflected by applying the percentage derived by
dividing the total amounts of annual Records Maintenance Charge collected by the
total net assets of all the Subaccounts in the Separate Account.
(1) You may withdraw up to 15% of the Separate Account Value plus Market
Adjusted Value in any Contract Year without assessment of any charge. Under
certain circumstances the contingent deferred sales load may be reduced or
waived, including when certain annuity options are selected.
(2) Surrenders and other withdrawals from the MVA Option are subject to a Market
Value Adjustment unless made within 15 days before or 15 days after the end
of a Guarantee Period. The Market Value Adjustment may increase or reduce
the Guarantee Period Value.
(3) Under certain circumstances the annual Records Maintenance Charge may be
reduced or waived. The annual Records Maintenance Charge will be waived for
Contracts with a Contract Value exceeding $50,000 on the date of assessment.
(4) Kemper Money Market Subaccount #2 is not shown because it is available only
for dollar cost averaging that will deplete your Subaccount Value entirely
at least by the end of the third Contract Year.
(5) 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 May 1, 2000, to limit their respective fees and to
reimburse other expenses to the extent necessary to limit total operating
expenses of the following described Portfolios to the amounts set forth
after the Portfolio names: 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 at
or lower than these expense limits, except for Kemper Contrarian Value
Portfolio, which reflects the benefit of custodial credits. Without these
credits, Management Fees, Other Expenses and Total Portfolio Annual Expenses
for Kemper Contrarian Value Portfolio would have been .75%, .06% and .81%,
respectively.
(6) 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 May 1, 2000, to limit their respective fees and to
reimburse other expenses to the extent necessary to limit total operating
expenses of the Kemper Strategic Income Portfolio to 1.05%. The "Management
Fee", reflected in the above table, has been restated to reflect a fee
reduction effective May 1, 2000 and the "Other Expenses" reflect actual
expenses for the past fiscal year.
6
<PAGE> 11
- - --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
- - --------------------------------------------------------------------------------
The following condensed financial information is derived from the financial
statements of the Separate Account. The data should be read in conjunction
with the financial statements, related notes and other financial information
included in the Statement of Additional Information.
Selected data for accumulation units outstanding as of the year ended December
31st for each period:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995 1994 1993 1992
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD* ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kemper Money Market Subaccount #1 $1.245 $1.199 $1.153 $1.112 $1.065 $1.037 $1.021 $1.000
Kemper Money Market Subaccount #2 1.358 1.292 1.227 1.168 1.105 1.063 1.034 1.000
Kemper Total Return Subaccount 1.917 1.685 1.423 1.234 .991 1.109 1.002 1.000
Kemper High Yield Subaccount 1.887 1.883 1.708 1.515 1.308 1.354 1.143 1.000
Kemper Growth Subaccount 2.349 2.066 1.724 1.436 1.093 1.153 1.018 1.000
Kemper Government Securities Subaccount 1.437 1.359 1.263 1.247 1.061 1.104 1.050 1.000
Kemper International Subaccount 1.845 1.698 1.571 1.365 1.225 1.287 .981 1.000
Kemper Small Cap Growth Subaccount** 2.595 2.220 1.675 1.324 1.031
Kemper Investment Grade Bond Subaccount*** 1.179 1.106 1.027
Kemper Contrarian Value Subaccount*** 1.765 1.499 1.164
Kemper Small Cap Value Subaccount*** 1.065 1.215 1.010
Kemper Value+Growth Subaccount*** 1.672 1.408 1.137
Kemper Horizon 20+ Subaccount*** 1.520 1.361 1.144
Kemper Horizon 10+ Subaccount*** 1.401 1.274 1.105
Kemper Horizon 5 Subaccount*** 1.311 1.210 1.087
Kemper Blue Chip Subaccount**** 1.244 1.106
Kemper Strategic Income Subaccount**** 1.118 1.020
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995 1994 1993 1992
ACCUMULATION UNIT VALUE AT END OF PERIOD ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kemper Money Market Subaccount #1 $1.290 $1.245 $1.199 $1.153 $1.112 $1.065 $1.037 $1.021
Kemper Money Market Subaccount #2 1.424 1.358 1.292 1.227 1.168 1.105 1.063 1.034
Kemper Total Return Subaccount 2.173 1.917 1.685 1.423 1.234 .991 1.109 1.002
Kemper High Yield Subaccount 1.903 1.887 1.883 1.708 1.515 1.308 1.354 1.143
Kemper Growth Subaccount 3.181 2.349 2.066 1.724 1.436 1.093 1.153 1.018
Kemper Government Securities Subaccount 1.429 1.437 1.359 1.263 1.247 1.061 1.104 1.050
Kemper International Subaccount 2.655 1.845 1.698 1.571 1.365 1.225 1.287 .981
Kemper Small Cap Growth Subaccount** 3.449 2.595 2.220 1.675 1.324 1.031
Kemper Investment Grade Bond Subaccount*** 1.141 1.179 1.106 1.027
Kemper Contrarian Value Subaccount*** 1.566 1.765 1.499 1.164
Kemper Small Cap Value Subaccount*** 1.081 1.065 1.215 1.010
Kemper Value+Growth Subaccount*** 1.924 1.672 1.408 1.137
Kemper Horizon 20+ Subaccount*** 1.640 1.520 1.361 1.144
Kemper Horizon 10+ Subaccount*** 1.499 1.401 1.274 1.105
Kemper Horizon 5 Subaccount*** 1.358 1.311 1.210 1.087
Kemper Blue Chip Subaccount**** 1.539 1.244 1.106
Kemper Strategic Income Subaccount**** 1.040 1.118 1.020
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF 1999 1998 1997 1996 1995 1994 1993 1992
PERIOD (000'S OMITTED) ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kemper Money Market Subaccount #1 22,203 28,318 20,687 12,271 8,710 14,423 5,757 3,037
Kemper Money Market Subaccount #2 994 3,312 4,951 6,923 1,981 3,333 3,033 6,561
Kemper Total Return Subaccount 47,741 61,104 72,701 73,747 65,648 68,207 51,444 27,355
Kemper High Yield Subaccount 35,919 47,782 53,550 49,626 37,502 28,545 22,109 6,519
Kemper Growth Subaccount 36,866 47,066 53,984 59,737 55,059 55,308 37,678 19,693
Kemper Government Securities Subaccount 14,590 18,658 19,445 21,355 21,288 24,760 28,414 16,647
Kemper International Subaccount 20,094 25,265 28,090 27,660 20,930 21,035 12,503 4,699
Kemper Small Cap Growth Subaccount** 9,080 11,182 11,754 10,280 5,316 2,637
Kemper Investment Grade Bond Subaccount*** 4,655 4,945 3,586 1,381
Kemper Contrarian Value Subaccount*** 22,790 26,480 23,349 11,193
Kemper Small Cap Value Subaccount*** 11,299 15,683 15,213 8,113
Kemper Value+Growth Subaccount*** 13,294 17,452 13,973 7,220
Kemper Horizon 20+ Subaccount*** 3,708 3,772 3,498 2,586
Kemper Horizon 10+ Subaccount*** 5,266 6,742 5,297 4,162
Kemper Horizon 5 Subaccount*** 3,321 3,386 2,899 1,818
Kemper Blue Chip Subaccount**** 9,100 6,025 1,879
Kemper Strategic Income Subaccount**** 264 1,206 319
</TABLE>
- - --------------------------------------------------------------------------------
* Commencement of Offering on January 6, 1992.
** Commencement of Offering on May 2, 1994 at initial accumulation unit value
of $1.000.
*** Commencement of Offering on May 1, 1996 at initial accumulation unit value
of $1.000.
**** Commencement of Offering on May 1, 1997 at initial accumulation unit value
of $1.000.
7
<PAGE> 12
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUND
KEMPER INVESTORS LIFE INSURANCE COMPANY
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.
KILICO and Kemper Corporation are wholly-owned subsidiaries of Zurich Financial
Services ("ZFS"). 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
You 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 you do 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 Rates. (See
"The Accumulation Period-- 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, 1999 included approximately 83.8
percent in U.S. Treasuries, investment grade corporate, foreign and municipal
bonds, and commercial paper, 3.1 percent in below investment grade (high risk)
bonds, 3.9 percent in mortgage loans and other real estate-related investments
and 9.1 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.")
8
<PAGE> 13
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
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.
Sixteen 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 Fund as necessary to provide benefits, to deduct
Contract charges and to transfer assets from one Subaccount to another as you
request. 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 FUND
The Separate Account invests in shares of the Kemper Variable Series.
The Fund provides investment vehicles for variable life insurance and variable
annuity contracts. Shares of the Fund are sold only to insurance company
separate accounts and qualified retirement plans. Shares of the Fund 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 Fund. Currently, we do not foresee disadvantages to
variable life insurance owners, variable annuity owners or qualified retirement
plans. The Fund monitors events for material conflicts between owners and
determine what action, if any, should be taken. In addition, if we believe that
the Fund's response to any of those events or conflicts insufficiently protects
Owners, we will take appropriate action.
The Fund consists 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.
The sixteen Portfolios of the Fund are summarized below:
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments. 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 TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, consistent with reasonable risk.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital.
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
9
<PAGE> 14
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income.
KEMPER CONTRARIAN VALUE PORTFOLIO seeks to achieve a high rate of total return.
KEMPER SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation.
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 HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
KEMPER HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
KEMPER BLUE CHIP PORTFOLIO seeks growth of capital and of income.
KEMPER STRATEGIC INCOME (FORMERLY KEMPER GLOBAL INCOME) PORTFOLIO seeks high
current return.
The Portfolios of the Fund may not achieve their stated objective. More detailed
information, including a description of risks involved in investing in the
Portfolios, is found in the Fund's prospectus accompanying this Prospectus, and
Statement of Additional Information available from us upon request.
Responsibility for overall management of the Fund rests with the Board of
Trustees and officers of the Fund. Scudder Kemper Investments, Inc. ("SKI"), our
affiliate, is the investment manager for each of the Portfolios. Scudder
Investments (U.K.) Limited ("Scudder U.K."), an affiliate of SKI, is the
sub-adviser for the Kemper International Portfolio.
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 reserve the right to 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 your 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 Fund, 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 these 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 Investment Company Act of 1940 ("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 Subaccount's future
performance.
10
<PAGE> 15
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 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. You may redeem
Subaccount units at Accumulation Unit value, which may be more or less than
original cost. The performance figures reflect the deduction of all expenses and
fees, including a prorated portion of the Records Maintenance Charge.
Redemptions within the first six years may be subject to a Withdrawal Charge
that ranges from 6% 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, and thus may
be higher than if such charges were deducted. Standardized average annual total
return figures include the effect of the applicable Withdrawal Charge that may
be imposed at the end of the period.
The Subaccounts may be compared to relevant indices and performance data from
independent sources, including, but not limited to, 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. 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 the
comparative information with regard to the index will not reflect he deduction
of any Contract charges or fees. Similarly, the indexes are unmanaged and do not
reflect the fees and expenses of management and acquisition costs. In addition,
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.
Additional information concerning a Subaccount's performance and independent
sources is provided in the Statement of Additional Information.
THE CONTRACTS
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $2,000, and the minimum subsequent
payment is $500. Cumulative Purchase Payments in excess of $1,000,000 require
our prior approval.
11
<PAGE> 16
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.
You 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 you
receive 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, you 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 you
to immediate tax liability and may subject you 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.
You designate the Beneficiary. If you or the Annuitant dies, and no designated
Beneficiary or contingent beneficiary is alive at that time, you or we will pay
your or the Annuitant's estate.
Under a Qualified Contract, the provisions of the applicable plan may prohibit a
change of Beneficiary. Generally, an interest in a Qualified Contract may not be
assigned.
THE ACCUMULATION PERIOD
A. APPLICATION OF PURCHASE PAYMENTS.
You select 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.
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. The number of Accumulation Units and Guarantee
Period Value is reduced when the Records Maintenance Charge is 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 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 you, unless you consent to our retaining the
Purchase Payment until the application is completed.
B. 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.
12
<PAGE> 17
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
- 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; and
(3) is the factor representing the mortality and expense risk and
administration charges.
C. GUARANTEE PERIODS OF THE MVA OPTION.
You 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 YOU MAKE 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
you elect another Guarantee Period within thirty days after the end of the
terminating Guarantee Period. You may choose a different Guarantee Period by
preauthorized telephone instructions or by giving us written notice. You should
not select a new Guarantee Period extending
13
<PAGE> 18
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.
You may call us at 1-800-621-5001 or write to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049 for the
new Guaranteed Interest Rates.
D. 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 you 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.
E. 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
- Accumulated Guarantee Period Value.
F. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, you may transfer the Contract Value among the
Subaccounts and the Guarantee Periods, subject to the following provisions:
- the Contract Value transferred must be at least $1,000, unless the entire
Subaccount or Guarantee Period Value is transferred;
- you are is limited to allocating Contract Value to a maximum of 16
allocation options (all Guarantee Periods are considered one allocation
option) including 40 Guarantee Periods under the MVA Option;
- only one transfer is allowed every 15 days; and
- the Contract Value remaining in a Subaccount or Guarantee Period must be
at least $1,000, unless the total value is transferred.
In addition, transfers of Guarantee Period Value are subject to Market Value
Adjustment unless the transfer is made within 15 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 good faith instructions given in accordance
with our procedures, including requests for personal
14
<PAGE> 19
identifying information, that are designed to limit unauthorized use of the
privilege. Therefore, you bear the risk of loss in the event of a fraudulent
telephone transfer.
G. WITHDRAWAL DURING ACCUMULATION PERIOD.
You 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.
In any Contract Year, you may withdraw up to 15% of the Contract Value without
Withdrawal Charge. If you withdraw a larger amount, the excess amount withdrawn
is subject to withdrawal charge.
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, you must
specify the source of the partial withdrawal. If you do not specify the source,
we redeem Accumulation Units on a pro rata basis from all investment options in
which you have an interest. Accumulation Units attributable to the earliest
Contribution Years are redeemed first.
Partial withdrawals are subject to the following:
- A Purchase Payment must be made 30 days before a partial withdrawal of
such Purchase Payment is made.
- The minimum withdrawal is $1,000 (before any Market Value Adjustment), or
your entire interest in the investment option(s) from which withdrawal is
requested.
- You must leave at least $1,000 in each investment option from which the
withdrawal is requested, unless the total value is withdrawn and the
minimum Contract Value must be at least $2,500.
Election to withdraw shall be made in writing to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049 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 on
the Accumulation Unit values, as calculated after we receive the request. The
Withdrawal Value attributable to the Subaccounts is paid within 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, or
- as the SEC by order may permit.
For withdrawal requests from the MVA Option, 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.
H. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected during the "free look" period or within 15 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 also applies to death benefits payable upon your or the
Annuitant's death.
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.
15
<PAGE> 20
The Market Value Adjustment (MVA) uses this formula:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1 + I)
MVA = GPV X [ [ ------- ] (t/365) -1 ]
(1 + J)
</TABLE>
Where:
I is the Guaranteed Interest Rate being credited to the Guarantee Period
Value (GPV) subject to the Market Value Adjustment,
J is the Current Interest Rate 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.
The .005 Market Value Adjustment factor can be changed in the future, at our
discretion on newly issued Contracts.
For an illustration showing an upward and a downward adjustment, see Appendix A.
I. DEATH BENEFIT.
We pay a death benefit to the Beneficiary if any of the following occurs during
the Accumulation Period:
- the Owner, who is also the Annuitant, dies,
- the Annuitant or the Owner dies when the Annuitant is not the Owner,
- a joint owner dies, or
- the surviving joint Annuitant, when joint Annuitants are named and are
not the Owners, dies.
For Non-Qualified 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 requirements to begin Death Benefit distribution.
If a death benefit becomes payable because of the death of an Owner, it must be
fully paid out within 5 years of the Owner's death, unless it is payable to the
named beneficiary over the beneficiary's life expectancy, beginning no more than
1 year after the Owner's death. The death benefit proceeds applied to the
annuity must be $4,000 or more.
If the death benefit becomes payable because of the death of the Annuitant or
joint Annuitant, it will be paid as selected by the named beneficiary, including
a lump sum withdrawal or Annuity Option, provided, in the case of an annuity
option, that the death benefit proceeds are $4,000 or more.
The death benefit payable under the Contract depends upon issue age of the Owner
except in the case of a Contract issued where the Owner differs from the
Annuitant, the death benefit issue age will be based on the age of the Owner or
Annuitant, whichever is older.
For a Contract issued to an Owner prior to age 66, the death benefit payable
during the first six Contract Years will be Market Adjusted Value plus Separate
Account Value as of the date we receive proof of death and return of the
Contract, or the sum of all Purchase Payments (minus withdrawals and withdrawal
charges) accumulated at 5% annually per Contract Year, whichever is greater. The
death benefit payable at the end of the sixth Contract Year is the greater of
Market Adjusted Value plus Separate Account Value as of the date we receive
proof of death and return of the Contract, or the sum of all Purchase Payments
(minus withdrawals and withdrawal charges) accumulated at 5% annually per
Contract Year ("Minimum Death Benefit Value"). From the seventh Contract Year to
the twelfth Contract Year, the death benefit payable during the Accumulation
Period is the Market Adjusted Value plus Separate Account Value as of the date
we receive proof of death and return of the Contract, or Minimum Death Benefit
Value at the end of year six plus subsequent Purchase Payments minus withdrawals
and withdrawal charges, whichever is greater. Every six years after the end of
the twelfth Contract Year the Minimum Death Benefit Value plus later Purchase
Payments minus withdrawals and withdrawal charges is compared to Market Adjusted
Value plus Separate Account Value and whichever is greater determines the new
Current Minimum Death Benefit Value for the next six Contract Years.
16
<PAGE> 21
For a Contract issued to an Owner age 66 and over, the death benefit payable
during the Accumulation Period for the first six Contract Years is Market
Adjusted Value plus Separate Account Value, or the sum of all Purchase Payments
(minus withdrawals and withdrawal charges), whichever is greater. At the end of
the sixth Contract Year, the Minimum Death Benefit Payable will be set for the
remainder of the Accumulation Period at the greater of Market Adjusted Value
plus Separate Account Value, or the sum of all Purchase Payments (minus
withdrawals and withdrawal charges). For the remainder of the Accumulation
Period, the beneficiary will receive the greater of Market Adjusted Value plus
Separate Account Value or the Minimum Death Benefit Value plus subsequent
Purchase Payments minus withdrawals and withdrawal charges.
The death benefit is payable upon our receipt at our Home Office of proof of
death and return of the Contract, election of the method of payment, and
sufficient information about the beneficiary to make payment. The beneficiary
may receive a lump sum benefit, defer receipt of the benefit for up to 5 years
or select an available Annuity Option if the proceeds are $4,000 or more.
CONTRACT CHARGES AND EXPENSES
We deduct the following charges and expenses:
- - - mortality and expense risk charge,
- - - administrative expenses,
- - - Records Maintenance Charge,
- - - Withdrawal Charge, and
- - - applicable premium taxes.
Subject to certain expense limitations, you indirectly bear investment
management fees and other Fund expenses.
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 1.10% 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 we incur.
The mortality risk we assume arises from two contractual obligations. First, if
you or the Annuitant die before the Annuity Date, we may, in some cases, pay
more than Contract Value. (See "Death Benefit", above) 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 the particular Contract.
B. 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.
17
<PAGE> 22
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 you have an interest.
C. 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, you may withdraw up to 15% of the Contract Value without
Withdrawal Charge. If you withdraw a larger amount, the excess amount withdrawn
is subject to a Withdrawal Charge.
The Withdrawal Charge applies in the first six Contribution Years following each
Purchase Payment as follows:
<TABLE>
<CAPTION>
CONTRIBUTION WITHDRAWAL
YEAR CHARGES
------------ ----------
<S> <C>
First....................................................... 6%
Second...................................................... 6%
Third....................................................... 5%
Fourth...................................................... 5%
Fifth....................................................... 4%
Sixth....................................................... 4%
Seventh and following....................................... 0%
</TABLE>
Purchase Payments are deemed surrendered in the order in which they were
received.
When a withdrawal is requested, you receive 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 you.
Because Contribution Years are based on the date each Purchase Payment is made,
you 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 you have been confined in a hospital or skilled health care
facility for at least thirty days and you remain confined at the time of
the request; or
- within thirty days following your discharge from a hospital or skilled
health care facility after a confinement of at least thirty days.
Restrictions and provisions related to the nursing care or hospitalization
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 sixth Contribution Year or earlier. No Withdrawal
Charge applies upon annuitization if you select 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 ("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.
18
<PAGE> 23
D. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deduction of investment management
fees and general operating expenses. Subject to limitations, you indirectly bear
these fees and expenses. Investment management fees appear on page 5. Further
detail is provided in the attached prospectuses for the Portfolios and the
Fund's Statement of Additional Information.
E. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If we pay state premium taxes, we may charge the amount
paid against Contract Value upon annuitization, unless the tax was previously
assessed. See "Appendix B--State Premium Tax Chart" in the Statement of
Additional Information.
F. 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. Reductions in these
fees and charges will not unfairly discriminate against any Owner.
THE ANNUITY PERIOD
Contracts may be annuitized under one of several Annuity Options, which are
available either on a fixed or variable basis. Annuity payments begin on the
Annuity Date under the Annuity Option you select.
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.
You may elect one of the Contract's Annuity Options. You may decide at any time
(subject to the provisions of any applicable retirement plan and state
variations) to begin annuity payments. You 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 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 $4,000. In addition, if the first monthly payment
is less than $50 we may change the frequency of payments to quarterly,
semiannual or annual intervals so that the initial payment is at least $50.
The amount of periodic annuity payments may depend upon:
- the Annuity Option selected;
- the age of the payee; and
- the investment experience of the selected Subaccount(s).
19
<PAGE> 24
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. Finally, if you participate in a Subaccount with higher
investment performance, it is likely you will receive a higher periodic payment.
If the Beneficiary is not an individual, the entire interest must be distributed
within 5 years of your death. The Death Benefit distribution must begin no later
than one year from your death, unless a later date is prescribed by federal
regulation.
For Non-Qualified Contracts, if you die before the Annuity Date, available
Annuity Options are limited. 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 your death).
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.
20
<PAGE> 25
3. ALLOCATION OF ANNUITY.
You may elect payments on a fixed or variable basis, or a combination. Any
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. You 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 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 7 days before
an annuity payment date, the transfer is effective during the Valuation
Period after the annuity payment date.
- Transfers to the General Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least 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 4% 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 your 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 4% per annum rate of investment earnings is assumed by the Contract's annuity
tables. If the actual net investment earnings rate exceeds 4% per annum,
payments increase accordingly. Conversely, if the actual rate is less than 4%
per annum, annuity payments decrease.
21
<PAGE> 26
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 benefit, if any, depends 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 the
courts.
This discussion does not address state or local tax consequences, nor federal
estate or gift tax, 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 Contract are generally not taxable to you or the 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 you, 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 each year 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
22
<PAGE> 27
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:
- certain contracts acquired by a decedent's estate,
- certain Qualified Contracts,
- certain contracts used with structured settlement agreements, and
- certain 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 the contract value
and the purchase payments.
Although we do not control Fund investments, we expect that each Portfolio of
the Fund will comply with these regulations so that each Subaccount of 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. In those circumstances, income and gains from separate account assets
are includible in the owner's gross income. The Internal Revenue Service
("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 comprehensive guidance has been issued by the IRS clarifying the
circumstances when such investment control by a variable contract owner would
exist. As a result, your right to allocate the Contract Value among the
Subaccounts may cause you to be considered the owner of the assets of the
Separate Account.
We do not know what limits may be set forth in any guidance that the IRS may
issue, or whether any such limits will apply to existing Contracts. We therefore
reserve the right to modify the Contract as necessary to attempt to prevent you
from being considered the owner of the Separate Account assets. However, there
is no assurance that such efforts would be successful.
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
your 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 Contract are includible in income to
the extent the Contract Value exceeds the "investment in the contract." This
amount is referred to as the "income on the contract". Full withdrawals are also
includible in income to the extent they exceed the "investment in the contract."
Investment in the contract equals the total of Purchase Payments minus any
amounts previously received from the Contract that were not includible in your
income.
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 you
transfer a contract interest, without adequate consideration, to someone other
than your spouse (or to a former spouse incident to divorce), you will be taxed
on the income on the contract. In this case, the transferee's investment in the
contract is increased to reflect the increase in your 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.
23
<PAGE> 28
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 the expected value of the fixed 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 your or the 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 Contract
unless:
- received on or after you reach age 59 1/2,
- attributable to your disability,
- made to a Beneficiary after your 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 your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and a designated beneficiary (within the
meaning of the tax law),
- 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 certain structured settlement agreements.
6. AGGREGATION OF CONTRACTS
The taxable amount of an annuity payment or withdrawal from a Non-Qualified
Contract may be determined by combining some or all of the Non-Qualified
Contracts you own. For example, if you purchase a Contract and also purchase an
immediate annuity at approximately the same time, the IRS may treat the two
contracts as one contract. Similarly, if a person transfers part of his interest
in one annuity contract to purchase another annuity contract, the IRS might
treat the two contracts as one contract. In addition, if you purchase 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 always 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.
24
<PAGE> 29
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, all or some
portion of otherwise deductible interest may not be deductible by the owner.
However, this interest deduction disallowance does not affect Contracts where
the Owner is taxable each year on the investment income under the Contract.
Entities considering purchasing the Contract, or entities that will be
beneficiaries under a Contract, should consult a tax adviser.
D. QUALIFIED PLANS
Qualified Contracts are used with retirement plans which receive favorable tax
treatment as Individual Retirement Annuities, Simplified Employee
Pensions--IRAs, Roth Individual Retirement Annuities, tax sheltered annuities,
and certain deferred compensation plans ("qualified plans"). Numerous special
tax rules apply to qualified plans and to Qualified Contracts. Therefore, we
make no attempt to provide more than general information about use of Qualified
Contracts.
The tax rules applicable to qualified plans vary according to the type, 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. Both the amount of the
permitted contribution, and the corresponding deduction or exclusion, are
limited under qualified plans. In Qualified Contracts, the Owner and Annuitant
generally are the same individual. If a joint Annuitant is named and the
Annuitant is alive, all distributions must be made to the Annuitant. Also, if
the joint Annuitant is not the Annuitant's spouse, the annuity options 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.
Qualified Contracts are subject to special rules specifying the time at which
distributions must begin and the amount that must be distributed each year. In
the case of Individual Retirement Annuities, distributions of minimum amounts
must generally begin by April 1 of the calendar year following the calendar year
in which the owner attains age 70 1/2. An excise tax is imposed for the 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.
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Contracts. For Individual Retirement Annuities, the penalty tax does not apply
to a payment:
- received after you reach age 55 and have separated from service,
- received after you reach age 59 1/2,
- received after your death or because of your disability, or
- made as a series of substantially equal periodic payments (at least
annually) for your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and your designated beneficiary.
In addition, the penalty tax does not apply to certain distributions used for
qualified first time home purchases or for higher education expenses. Special
conditions must be met to qualify for these exceptions. If you wish to take a
distribution for these purposes you should consult your tax adviser. Other
exceptions may apply.
Qualified Contracts are amended to conform to plan requirements. However, you
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 may 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."
25
<PAGE> 30
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 consult a tax adviser.
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 with such plans should consult a tax adviser.
ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth
IRAs differ from other IRAs in certain respects, including:
- Roth IRA contributions are never deductible,
- "qualified distributions" from a Roth IRA are excludable from income,
- mandatory distribution rules do not apply before death,
- a rollover to a Roth IRA must be a "qualified rollover contribution,"
under the Code,
- special eligibility requirements apply, and
- contributions to a Roth IRA can be made after the Owner has reached age
70 1/2.
All or part of an IRA may be converted into a Roth IRA without taking an actual
distribution. You may convert by notifying the IRA issuer or trustee. You must
be eligible for a qualified rollover contribution 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, except that the 10% penalty tax does not apply. 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," as defined in Section 408A, from a Roth IRA is
excludible from gross income. A qualified distribution includes a distribution
made after you reach age 59 1/2, after your death, because of your disability,
or made to a first-time homebuyer.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities". If you purchase a contract for such purposes, you should seek
competent advice as to eligibility, limitations on permissible amounts of
purchase payments and other tax consequences associated with the Contracts. In
particular, you 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 you. 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 you also purchase a life insurance contract as part of your
tax-sheltered annuity plan.
Tax-sheltered annuity contracts must contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after December 31, 1988 on amounts attributable to salary reduction
contributions held as of December 31, 1988. These amounts can be paid only if
you have reached age 59 1/2, separated from service, died, or becomes disabled
(within the meaning of the tax law), or in the case of hardship (within the
meaning of the tax law). Amounts permitted to be distributed in the event of
hardship are limited to actual contributions; earnings thereon cannot be
distributed on account of hardship. Amounts subject to the withdrawal
restrictions applicable to section 403(b)(7) custodial accounts may be subject
to more stringent restrictions. (These limitations on withdrawals generally do
not apply to the extent you direct us to transfer some or all of the Contract
Value to the issuer of another tax-sheltered annuity or into a section 403(b)(7)
custodial account.)
26
<PAGE> 31
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 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 (i) minimum distributions required under section 401(a)(9) of the Code,
and (ii) certain distributions for life, life expectancy, or for 10 years or
more which are part of a "series of substantially equal periodic payments."
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, you 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, you elect 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%.
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
27
<PAGE> 32
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 you a statement showing amounts
credited to each Subaccount and to the Guarantee Period Value. In addition, if
you transfer amounts among the investment options or make additional payments,
you receive written confirmation of these transactions. We will also send a
current statement upon your request. We also send you annual and semi-annual
reports for the Portfolios that correspond to the Subaccounts in which you
invest and a list of the securities held by that Portfolio. In addition, we
calculate for you 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.
You 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
We offer two different dollar cost averaging programs where you may predesignate
a portion of Subaccount Value under a Contract to be automatically transferred
on a monthly basis to one or more of the other Subaccounts during the
Accumulation Period. The first dollar cost averaging program is available only
for initial Purchase Payments and you must enroll in the program at the time the
Contract is issued. You may allocate all or a portion of the initial Purchase
Payment to Kemper Money Market Subaccount #2, which is the only Subaccount with
no deduction for the 1.25% daily asset-based charge for mortality and expense
risks and administrative costs. You must transfer all of the Subaccount Value
out of Kemper Money Market Subaccount #2 to one or more of the other Subaccounts
within three years from the initial Purchase Payment. If you terminate dollar
cost averaging or do not deplete all Contract Value in Kemper Money Market
Subaccount #2 within three years, we will automatically transfer any remaining
Subaccount Value in Kemper Money Market Subaccount #2 to Kemper Money Market
Subaccount #1.
The other dollar cost averaging program is available for Purchase Payments and
for Contract Value transferred into Kemper Money Market Subaccount #1 or Kemper
Government Securities Subaccount. You may predesignate a portion of Subaccount
Value to be automatically transferred on a monthly basis to one or more of the
other Subaccounts. You may enroll in this program at the time the Contract is
issued or anytime thereafter by properly completing the Dollar Cost Averaging
enrollment form and returning it to us at our home office at least 5 business
days prior to the second Tuesday of a month ("Transfer Date").
Under each program, transfers will be made in the amounts you designated and
must be at least $500 per Subaccount. The total Contract Value in the applicable
Subaccount at the time Dollar Cost Averaging is elected must be at least equal
to the amount designated on each Transfer Date multiplied by the duration
selected. Dollar Cost Averaging stops automatically if the Contract Value does
not equal or exceed the amount designated to be transferred on each Transfer
Date and the remaining amount will be transferred.
Dollar Cost Averaging 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 your written termination at least two business days before the
next transfer date, or
- the Contract is surrendered or annuitized.
You may initiate, reinstate or change Dollar Cost Averaging from Kemper Money
Market Subaccount #1 or Kemper Government Securities Subaccount or change
existing Dollar Cost Averaging terms for Kemper Money Market Subaccount #2 by
completing the new enrollment form and returning it to us at our home office at
least 5 business days prior to the next Transfer Date such transfer is to be
made.
28
<PAGE> 33
When utilizing Dollar Cost Averaging you must be invested in Kemper Money Market
Subaccount #1, Kemper Money Market Subaccount #2, or Kemper Government
Securities Subaccount and may be invested in any other Subaccounts. Election of
Dollar Cost Averaging is not available during the Annuity Period.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing you to pre-authorize
periodic withdrawals during the Accumulation Period. You instruct us to withdraw
selected amounts from the Subaccounts or Guarantee Periods on a monthly,
quarterly, semi-annual or annual basis. The SWP is available when you request a
minimum $100 periodic payment. A market value adjustment applies to any
withdrawals under the SWP from a Guarantee Period, unless effected within 15
days before or 15 days after the Guarantee Period ends. If the amounts
distributed under the SWP 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 MAY
BE SUBJECT TO 20% WITHHOLDING. If you are interested in SWP, you may obtain an
application and information concerning this program and its restrictions from us
or your agent. We give thirty days' notice if we amend the SWP. The SWP may be
terminated at any time by you or us.
EXPERTS
The consolidated balance sheets of KILICO as of December 31, 1999 and 1998 and
the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1999, 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.
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 Debra P.
Rezabek, our Senior Vice President, General Counsel and Corporate Secretary.
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 you in writing of these amendments.
Your 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.
You are solely responsible for the validity or effect of any assignment. You,
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 and the
Investment Company Act of 1940. 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.
29
<PAGE> 34
BUSINESS
CORPORATE STRUCTURE
KILICO was founded in 1947 and 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 non-operating holding company. KILICO and Kemper are wholly-owned
subsidiaries of Zurich Financial Services ("ZFS" or "Zurich"). ZFS is owned by
Zurich Allied AG and Allied Zurich p.l.c., fifty-seven percent and forty-three
percent, respectively. Zurich Allied AG is listed on the Swiss Market Index.
Allied Zurich p.l.c. is included in the FTSE-100 Share Index in London.
STRATEGIC INITIATIVES
Our management, operations and strategic directions are integrated with those of
several other Kemper subsidiaries:
- - - Federal Kemper Life Assurance Company ("FKLA"),
- - - Zurich Life Insurance Company of America ("ZLICA"), and
- - - Zurich Direct, Inc., ("ZD").
This integration streamlines management, controls costs, improves profitability,
increases operating efficiencies and productivity, and helps to expand the
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. ZLICA markets term life insurance products primarily through ZD.
ZD is an affiliated direct marketing life insurance agency currently marketing
basic, low-cost term life insurance through various marketing media.
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 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 37 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.
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, these 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 these 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.
30
<PAGE> 35
As a result of this strategy, our separate account assets and related sales of
our variable annuity and life products have increased over the last couple of
years. KILICO's separate account assets and sales were as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Separate account assets..................................... $9,778.1 $7,099.2 $5,122.0
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Variable annuity sales...................................... $ 468.9 $ 300.4 $ 259.8
Variable life sales......................................... 1,661.1 1,523.0 2,708.6
-------- -------- --------
Total separate account sales...................... $2,130.0 $1,823.4 $2,968.4
======== ======== ========
</TABLE>
During mid-1998, we introduced DESTINATIONS, a registered individual variable
annuity product. DESTINATIONS offers 37 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 mid-1997, we 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 budgets,
from 1998 through 2001.
Investors Brokerage Services, Inc., ("IBS"), our wholly-owned subsidiary, is the
principal underwriter and distributor of our registered variable annuity and
variable life products. IBS, Life Insurance Solutions, L.L.C., an affiliate, and
Benefit Finance Securities, L.L.C., a non-affiliate, are distributors of our
BOLI and high net worth products.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted our general account fixed annuity sales over the
last several years. Our general account fixed annuity sales were as follows (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
General account fixed annuity sales......................... $383.8 $179.9 $145.7
====== ====== ======
</TABLE>
Our general account fixed annuity sales increased $203.9 million in 1999,
compared with 1998. This increase is primarily due to strong sales of the new
variable annuity product introduced in mid-1998 that offers both a variable and
a fixed option, including dollar cost averaging. Dollar cost averaging allows
contractholders the option to deposit amounts in the general account and
authorize pro-rated amounts to be automatically transferred into the separate
account over a specified period of time in order to reduce the effects of
significant market fluctuations.
During 1999, 1998 and 1997, we assumed $21.3 million, $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 $677 thousand in 1999, compared
with $846 thousand in 1998 and $1.1 million in 1997.
FEDERAL INCOME TAX DEVELOPMENTS
In early 2000, the Clinton Administration's Fiscal Year 2001 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not these proposals will be accepted, amended or
omitted in the final 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
31
<PAGE> 36
customers who purchase them in recognition of their favorable tax attributes.
Additionally, sales of these products during 2000 may also be negatively
impacted until the likelihood of the current proposals being enacted into law
has been determined.
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, 1999, we had three ratios
outside the usual ranges; the change in capital and surplus ratios, gross and
net, and the change in reserving ratio. Our change in capital and surplus
ratios, both gross and net is due to the payment of dividends to Kemper in 1999
of $115.0 million. Our change in reserving ratio primarily reflected the level
of interest-sensitive life surrenders and withdrawals during 1999, as well as an
increase in individual variable life renewal premiums, as compared to 1998. The
increase in individual variable life renewal premiums in 1999 is mainly due to
an increase in sales of individual universal life insurance in 1998. 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 1999 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 substantially exceeding any that would mandate action under the
risk-based capital rules and are 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. 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
1999 1998
----------- -----------
<S> <C> <C>
General account annuities................................... $2,729 $2,864
Interest-sensitive life insurance and other................. 671 688
Term life reserves.......................................... 9 9
Ceded future policy benefits................................ 310 345
------ ------
Total............................................. $3,719 $3,906
====== ======
</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 an 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, 1999 and 1998, our reinsurance reserve credit from FLA related to these
coinsurance transactions totaled approximately $309.7 million and $344.8
million, respectively. Utilizing FKLA's employees, we are the servicing company
for this coinsured business and are reimbursed by FLA for the related servicing
expenses.
32
<PAGE> 37
During December 1997, we entered into a funds withheld reinsurance agreement
with a Zurich affiliated company, Zurich Insurance Company, Bermuda Branch
("ZICBB"), formerly ZC Life Reinsurance Limited. Under the terms of this
agreement, we ceded, on a yearly renewable term basis, 90 percent of the net
amount at risk (death benefit payable to the insured less the insured's separate
account cash surrender value) related to BOLI, which is held in our separate
accounts. As consideration for this reinsurance coverage, we cede separate
account fees (cost of insurance charges) to ZICBB and retain a portion in a
funds withheld account which is included as a component of benefits and funds
payable in the accompanying consolidated balance sheets. During 1998, we
modified the reinsurance agreement to increase the reinsurance from 90 percent
to 100 percent.
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement (in millions):
BANK OWNED LIFE INSURANCE (BOLI)
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Face amount in force....................................... $ 82,021 $ 66,186 $ 59,338
======== ======== ========
Net amount at risk ceded................................... $(75,979) $(62,160) $(51,066)
======== ======== ========
Cost of insurance charges ceded............................ $ 166.4 $ 175.5 $ 24.3
======== ======== ========
Funds withheld account..................................... $ 263.4 $ 170.9 $ 23.4
======== ======== ========
</TABLE>
We have a 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 was marked-to-market based predominantly upon the
total return of the Government 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 had also placed assets supporting the FWA in a segmented portion of
our General Account. This portfolio was classified as "trading" under Statement
of Financial Accounting Standards No. 115 ("FAS 115") at December 31, 1998 and
through November 30, 1999. 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, we 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, we recorded realized capital losses of $7.3 million and $0.2 million
related to the changes in fair value of this portfolio during 1999 and 1998,
respectively.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, we no longer marked-to-market a portion of the FWA
liability and therefore no longer designated the related portion of assets as
"trading". As a result, changes in fair value to the FWA and the assets
supporting the FWA no longer flow through our operating results.
In 1996, we assumed, on a yearly renewable term basis, term life insurance from
FKLA. As a result of this transaction, we recorded reserves in 1999 and 1998 of
approximately $8.0 million and $8.5 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.
33
<PAGE> 38
To address our competition, we have adopted certain business strategies. These
include:
- systematic review of investment risk and our capital position,
- customer segmentation and focus,
- 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, 1999, we used the services of approximately 940 employees of
FKLA, which are also shared with FLA and ZLICA.
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
systematically reduced our investment risk and strengthened our capital
position.
We carefully monitor our cash flow and regularly and systematically plan our
investment program to provide funds to meet all obligations and to optimize
investment return. An affiliated company, Scudder Kemper Investments, Inc.
("SKI") and its subsidiaries and affiliates, manages our securities portfolio. A
majority-owned Kemper real estate subsidiary handles our real estate related
investments. Our board of directors directs our investment policy. 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
34
<PAGE> 39
results to be materially different from those contemplated by the
forward-looking statements. These factors include, among other things:
- - - 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 our contracts,
- - - our ability to achieve anticipated levels of operational efficiencies through
certain cost-saving initiatives,
- - - customer response to new products, distribution channels and marketing
initiatives,
- - - mortality, morbidity, and other factors which may affect the profitability of
our insurance products,
- - - changes in the federal income tax laws and regulations which may affect the
relative tax advantages of some of our products,
- - - increasing competition which could affect the sale of our products,
- - - 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
- - - 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 93,666 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. There are
no material legal proceedings pending to which the Separate Account or IBS is a
party.
35
<PAGE> 40
SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1999, and for the opening balance sheet as of the
acquisition date, January 4, 1996. Such information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in this Prospectus. All amounts are shown in millions.
<TABLE>
<CAPTION>
PREACQUISITION
--------------
DECEMBER 31
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 JANUARY 4 --------------
1999 1998 1997 1996 1996(2) 1995
----------- ----------- ----------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE.............. $ 363.4 $ 419.7 $ 425.5 $ 356.2 $ -- $ 68.1(1)
========= ========= ========= ======== ======== ========
NET INCOME EXCLUDING
REALIZED INVESTMENT
RESULTS.................. $ 51.1 $ 31.4 $ 31.9 $ 25.6 $ -- $ 74.2
========= ========= ========= ======== ======== ========
NET INCOME (LOSS).......... $ 44.9 $ 65.1 $ 38.7 $ 34.4 $ -- $ (133.0)(1)
========= ========= ========= ======== ======== ========
FINANCIAL SUMMARY
Total separate account
assets................... $ 9,778.1 $ 7,099.2 $ 5,122.0 $2,127.2 $1,761.1 $1,761.1
========= ========= ========= ======== ======== ========
Total assets............... $14,655.7 $12,239.7 $10,589.7 $7,717.9 $7,682.7 $7,581.7
========= ========= ========= ======== ======== ========
Future policy benefits..... $ 3,409.1 $ 3,561.6 $ 3,856.9 $4,256.5 $4,585.1 $4,573.2
========= ========= ========= ======== ======== ========
Stockholder's equity....... $ 630.0 $ 853.9 $ 865.6 $ 751.0 $ 745.6 $ 605.9
========= ========= ========= ======== ======== ========
</TABLE>
- - ---------------
(1) Real estate-related investment losses adversely impacted total revenue and
net loss for 1995. These losses reflect a change in our strategy with
respect to our 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.
36
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
We recorded net income of $44.9 million in 1999, compared with net income of
$65.1 million in 1998 and $38.7 million in 1997. The decrease in net income in
1999, compared with 1998, was due to a significant decrease in net realized
investment results, offset by an increase 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
------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Operating earnings before
amortization of goodwill........ $ 63.8 $ 44.1 $ 47.2
Amortization of goodwill.......... (12.7) (12.7) (15.3)
Net realized investment gains
(losses)........................ (6.2) 33.7 6.8
------ ------ ------
Net income................... $ 44.9 $ 65.1 $ 38.7
====== ====== ======
</TABLE>
The following table reflects the major components of net realized investment
results included in net income above.
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Real estate-related gains......... $ 2.7 $ 26.9 $ 12.8
Fixed maturities and
write-downs..................... (6.3) 1.4 (6.7)
Trading account securities........ (4.7) 1.7 --
Other gains, net.................. 2.1 3.7 0.7
------ ------ ------
Total........................ $ (6.2) $ 33.7 $ 6.8
====== ====== ======
</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 real estate-related gains during the last three years. Net realized
investment losses on fixed maturities in 1999 were primarily the result of
rising interest rates throughout the year leading to lower market values in
fixed maturity investments. Net realized investment gains on fixed maturities in
1998 were offset by other-than-temporary declines in value of certain U.S.
dollar denominated fixed maturity investments which had 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. The net realized
investment losses on fixed maturities generated in 1997 arose primarily from the
sales of lower yielding U.S. Treasury bonds, collateralized mortgage obligations
and corporate bonds, related to ongoing repositionings of our fixed maturity
investment portfolio. We reinvested the proceeds from the repositionings,
together with cash and short-term investments, into higher yielding corporate
bonds and asset-backed securities in 1997.
We used trading account securities to manage our reinsurance strategy on the
BOLI product. Effective November 1, 1998, we changed the methodology used to
determine the increase to the FWA and a substantial portion of this liability
was marked-to-market based predominately upon the total return of the Government
Bond Division of KILICO's Variable Series I Separate Account. We also placed
assets supporting the FWA in a segmented portfolio and classified this asset
segment as "trading" under Statement of Financial Standards No. 115 ("FAS 115")
at December 31, 1998 and through November 30, 1999. During 1998, we recorded a
net realized capital gain of $2.8 million upon transfer of these assets to the
trading portfolio as required by FAS 115. we recorded realized capital losses of
$7.3 million and $0.2 million related to the changes in fair values of this
portfolio during 1999 and 1998, respectively. Due to a change in the reinsurance
strategy related to the BOLI product, effective December 1, 1999, we no longer
marked-to-market a portion of the FWA liability and
37
<PAGE> 42
therefore no longer designated the related portion of assets as "trading". As a
result, changes in fair value to the FWA and the assets supporting the FWA no
longer flow through our operating results.
Other realized investment gains, net, relate primarily to the sale of equity
securities as we took advantage of favorable market conditions.
Operating earnings before the amortization of goodwill increased to $63.8
million in 1999, compared with $44.1 million in 1998, primarily due to:
- an increase in spread revenue (investment income earned less interest
credited),
- an increase in separate account fees and charges,
- a decrease in claims incurred and other policyholder benefits,
- a decrease in the amortization of insurance acquisition costs and value
of business acquired, offset by
- an increase in commissions and operating expenses, net of the deferral of
insurance acquisition costs.
Operating earnings before the amortization of goodwill decreased to $44.1
million in 1998, compared with $47.2 million in 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.
The following table reflects our sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Annuities:
General account......................... $ 383.8 $ 179.9 $ 145.7
Separate account........................ 468.9 300.4 259.8
-------- -------- --------
Total annuities...................... 852.7 480.3 405.5
-------- -------- --------
Life Insurance:
Separate account bank-owned variable
universal life ("BOLI").............. 1,622.0 1,501.0 2,700.0
Separate account variable universal
life................................. 39.1 22.0 8.6
Term life............................... 21.9 22.4 22.2
Interest-sensitive life................. 0.7 .2 --
-------- -------- --------
Total life........................... 1,683.7 1,545.6 2,730.8
-------- -------- --------
Total sales................ $2,536.4 $2,025.9 $3,136.3
======== ======== ========
</TABLE>
Sales of annuity products consist of total deposits received, which are not
recorded as revenue within the consolidated statements of operations. Our
general account annuity sales increased $203.9 million in 1999 when compared
with 1998. This increase is primarily due to strong sales of the new variable
annuity product introduced in the second half of 1998 that offers both a
variable and a fixed option, including dollar cost averaging.
Total separate account annuity (variable) sales increased $168.5 million in
1999, compared with 1998, also due to strong sales of the new variable annuity
product mentioned earlier. The increase in variable annuity sales in 1998,
compared with 1997, was due, in part, 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 the new variable annuity product
introduced during 1998.
38
<PAGE> 43
Sales of variable annuities increase administrative fees earned. In addition,
they pose minimal investment risk for us, 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 1999, 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 BOLI increased $121.0 million to $1,622.0 million in 1999, compared
with $1,501.0 million in 1998. Sales of individual variable universal life
insurance increased $17.1 million to $39.1 in 1999, compared with $22.0 million
in 1998. Strong sales for these products continue due to favorable tax treatment
afforded these products as well as the opportunity for potentially higher
returns for contractholders. Sales of these separate account variable products,
like variable annuities, pose minimal investment risk for us 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 contractholders, as well as administrative
fees and cost of insurance charges. These fees and charges compensate us for
providing life insurance coverage to the contractholders potentially in excess
of their cash surrender values. Face amount of new variable universal life
insurance business issued amounted to $16.6 billion in 1999, compared with $7.7
billion in 1998 and $59.6 billion in 1997. The decrease in face amount issued in
1999 and 1998, compared with 1997 is due to a significant portion of renewal
premiums in 1999 and 1998 and higher funded policies issued in 1999 and 1998,
compared to those issued in 1997.
In 1999, 1998 and 1997 we assumed $21.3 million, $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, amounted to $677 thousand in 1999, compared with $846 thousand in 1998
and $1.1 million in 1997.
Spread revenue increased in 1999 compared with 1998 and 1997 due to a more
modest decrease in investment income than in interest credited. Investment
income decreased in 1999, compared with 1998 and 1997 due to several factors.
These factors include a decrease in cash and invested assets from the 1998 and
1997 levels, reflecting the surrender and withdrawal activity during the last
three years, dividends paid to Kemper during 1999 and 1998 and the reinvestment
of 1998 sales proceeds and collateralized mortgage obligation ("CMO")
prepayments at lower yields due to the lower interest rate environment in 1998.
Net investment income was also negatively impacted by the placement of a real
estate-related investment on non-accrual status effective January 1, 1999. With
overall interest rates increasing during 1999, sales proceeds, maturities and
prepayments were reinvested at higher yields during 1999.
The decrease in interest credited in 1999, compared with 1998 and 1997, was
primarily due to a decrease in policyholder liabilities resulting from surrender
and withdrawal activity over the last three years and a decrease in crediting
rates during 1999 and 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 our fixed maturity
investments as of January 4, 1996, the date Kemper was acquired by Zurich,
became our 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 our fixed
maturity investments was approximately $133.9 million greater than original par.
Premium amortization decreased investment income by approximately $7.8 million
in 1999, compared with $14.4 million in 1998 and $15.3 million in 1997.
Administrative fees received from our separate account products of $46.1 million
in 1999, compared with $38.3 million and $31.0 million in 1998 and 1997,
respectively, are included in separate account fees and charges. Administrative
fee revenue increased in each of the last three years due to growth in average
separate account assets.
Cost of insurance ("COI") charges related to variable universal life insurance,
primarily BOLI, of $167.9 million, $167.6 million and $27.6 million in 1999,
1998 and 1997, respectively, are also included in separate account fees and
charges. Of these COI charges, $166.4 million, $175.5 million and $24.3 million
were ceded, respectively, to a Zurich affiliated company, Zurich Insurance
Company, Bermuda Branch ("ZICBB"), formerly ZC Life Reinsurance Limited. In
1998, we ceded in excess of 100 percent of the COI charges received due to
changes to the reinsurance agreement. Separate account fees and charges in 1999,
1998 and 1997 also include BOLI-related premium tax expense loads of $26.8
million, $29.1 million and $51.1 million, respectively.
Other income includes surrender charge revenue of $5.0 million in 1999, compared
with $4.0 million and $5.2 million in 1998 and 1997, respectively. The increase
in surrender charge revenue in 1999, compared with
39
<PAGE> 44
1998, reflects the increased policyholder surrender and withdrawal activity in
the separate accounts during 1999, compared with 1998. Similarly, the decrease
in surrender charge revenue in 1998, compared with 1997, reflects the decrease
in total general account policyholder surrenders and withdrawals during 1998,
compared with 1997.
POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
(in millions)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
General account..................... $564.2 $645.5 $703.1
Separate account.................... 399.8 260.9 236.2
------ ------ ------
Total.......................... $964.0 $906.4 $939.3
====== ====== ======
</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.
General account surrenders, withdrawals and death benefits decreased $81.3
million in 1999, compared with 1998, reflecting a decrease in death benefits as
well as a decrease in overall surrenders and withdrawals.
Separate account surrenders, withdrawals and death benefits increased $138.9
million in 1999, compared with 1998. A partial withdrawal on a BOLI contract of
$39.8 million in 1999 contributed to this increase. The remaining increase is
primarily due to the growth of assets under management in the separate account
and a related increase in surrenders and withdrawals as contractholders seek
alternative investment options during a period of strong market performance.
The trend of decreasing policyholder surrenders, withdrawals and death benefits
in the general account and increasing in the separate account reflects a shift
in assets under management from the general account to the separate account over
the past three years. This shift, in turn, reflects our increased emphasis on
marketing our existing and new separate account products.
Taxes, licenses and fees primarily reflect 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
$3.4 million in 1999, compared with $1.5 million in 1998 and $1.5 million in
1997.
Commission expense was higher in 1999, compared with both 1998 and 1997, due to
an increase in total sales.
Operating expenses increased slightly in 1999, to $46.0 million, compared with
$44.6 million and $36.8 million in 1998 and 1997, respectively. Operating
expenses increased in 1998, compared with 1997, as a result of staffing 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 related to bringing our systems in compliance with the
year 2000 amounted to $0.6 million in 1999 and $1.3 million in 1998.
The deferral of insurance acquisition costs in 1999, 1998 and 1997 positively
impacted our data processing expenses. The deferral of insurance acquisition
costs increased in 1999, compared with both 1998 and 1997, reflecting an
increase in commissions expense and operating expenses related directly to the
increased production of new business over the last several years.
A decrease in the amortization of deferred insurance acquisition costs in 1999,
compared with 1998, positively impacted our operating earnings. This decrease
was primarily due to significant appreciation in our separate account assets due
to rising equity markets during 1999, as well as realized capital losses on
post-purchase investments during 1999, compared with realized capital gains on
post-purchase investments during 1998. Appreciation in separate account assets
increases estimated future gross profits, shifting amortization to later years.
Realized capital losses on post-purchase investments decreases current gross
profits and defers amortization into future periods. Realized capital gains on
post-purchase investments increases current gross profits and accelerates
amortization in the current period. The lower amortization in 1997 reflects a
smaller deferred insurance acquisition cost asset in 1997. The deferred
insurance acquisition cost asset was $159.7 million, $91.5 million and $59.5
million at December 31, 1999, 1998 and 1997, respectively.
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
40
<PAGE> 45
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 1999, compared
with 1998, as a result of:
- significant appreciation 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, and
- a significant decrease in realized investment results on pre-purchase
investments.
The significant realized capital gains in 1998 increased gross profits for that
period and accelerated the amortization of the value of business acquired during
1998.
The difference between the cost of acquiring KILICO and the net fair value of
our 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.
OPERATIONS BY BUSINESS SEGMENT
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"), DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. FAS 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.
KILICO, FKLA, ZLICA, and FLA operate under the trade name Zurich Kemper Life.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). Our SBU
concept 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. For purposes of operating segment
disclosure, Zurich Kemper Life includes 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 into the Life Brokerage, Financial, Retirement
Solutions Group ("RSG") and Direct SBUs. The SBUs are not managed at the legal
entity level, but rather at the Zurich Kemper Life level. Since Zurich Kemper
Life's SBUs cross legal entity lines, as certain similar products are sold by
more than one legal entity, this Prospectus discusses results of operations
related solely to KILICO. The vast majority of our business is derived from the
Financial and RSG SBUs. The contributions of Zurich Kemper Life's SBUs to
combined revenues, operating results and certain balance sheet data pertaining
thereto, are shown in the Notes to Consolidated Financial Statements.
The principal products and markets of the Financial and RSG SBUs are as follows:
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. Institutional business includes BOLI and funding agreements (included
in FKLA).
RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets
fixed and 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.
41
<PAGE> 46
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:
- our 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.
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Cash and short-term investments............................ $ 54 1.4% $ 72 1.7%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1....................................... 2,164 56.5 2,663 63.7
NAIC(1) Class 2....................................... 994 25.9 724 17.3
Below investment grade (NAIC classes 3 through 6):
Performing............................................ 118 3.1 96 2.3
Trading account securities................................. -- -- 102 2.4
Joint venture mortgage loans............................... 67 1.8 66 1.6
Third-party mortgage loans................................. 64 1.7 76 1.8
Other real estate-related investments...................... 21 0.5 22 0.5
Policy loans............................................... 262 6.8 271 6.5
Equity securities.......................................... 62 1.6 67 1.6
Other...................................................... 25 0.7 24 0.6
------ ----- ------ -----
Total(2)......................................... $3,831 100.0% $4,183 100.0%
====== ===== ====== =====
</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 depreciation on fixed maturities at December 31, 1999 was $121.2
million, compared with unrealized appreciation of $61.3 million at December 31,
1998. We do not record tax benefits related to aggregate unrealized depreciation
on investments. Fair values are sensitive to movements in interest rates and
other economic developments and can be expected to fluctuate, at times
significantly, from period to period.
At December 31, 1999, investment-grade fixed maturities, cash and short-term
investments accounted for 83.8 percent of our invested assets and cash, compared
with 82.7 percent at December 31, 1998. Approximately 45.9 percent of our NAIC
Class 1 bonds were rated AAA or equivalent at year-end 1999, compared with 53.4
percent at December 31, 1998.
Approximately 20.0 percent of our investment-grade fixed maturities at December
31, 1999 were mortgage-backed securities, down from 28.0 percent at December 31,
1998, due to sales and paydowns during 1999. 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
42
<PAGE> 47
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 such investments
over time.
Approximately 16.8 percent and 15.4 percent of our investment-grade fixed
maturities at December 31, 1999 and 1998, respectively, consisted of corporate
asset-backed securities. Home equity loans (24.0%), commercial mortgage-backed
securities (22.8%), manufactured housing loans (12.5%), other commercial assets
(11.3%), and collateralized loan and bond obligations (10.6%) backed the
majority of our investment in asset-backed securities.
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, we carry most of our
mortgage-backed securities 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 mortgage-backed
securities.
At December 31, 1999 and 1998, we had unamortized premiums and discounts related
to mortgage-backed and asset-backed securities as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1999 1998
----- -----
<S> <C> <C>
Unamortized premiums........................................ $11.6 $15.8
===== =====
Unamortized discounts....................................... $ 6.5 $ 4.6
===== =====
</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.
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) 1999 2000 2001 2002 2003 2004 THEREAFTER 1999
------------- ------------ ----- ----- ----- ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed
bonds.............. $ 630.4 $19.6 $21.6 $47.3 $149.5 $135.2 $257.2 $ 630.4
Average yield...... 6.61% 6.61% 6.63% 6.63% 6.67% 7.09% 7.14% 6.61%
Asset-backed bonds.... $ 409.8 $11.4 $27.0 $33.6 $ 48.8 $ 39.0 $250.0 $ 409.8
Average yield...... 7.11% 7.17% 7.25% 7.18% 7.16% 7.34% 7.60% 7.11%
CMBs.................. $ 120.7 $ -- $ -- $ -- $ -- $ -- $120.7 $ 120.7
Average yield...... 6.75% 6.75% 6.75% 6.75% 6.75% 6.75% 6.73% 6.75%
-------- --------
$1,160.9 $1,160.9
======== ========
</TABLE>
43
<PAGE> 48
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ---------------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1998 1999 2000 2001 2002 2003 THEREAFTER 1998
------------- ------------ ------ ----- ----- ----- ------ ---------- ------------
<S> <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
Average yield....... 6.45% 6.46% 6.42% 6.43% 6.42% 6.42% 6.42% 6.45%
Asset-backed bonds..... $ 407.4 $ 17.9 $36.1 $49.8 $36.1 $ 31.9 $235.6 $ 407.4
Average yield....... 6.67% 6.73% 6.75% 6.82% 6.90% 6.90% 6.95% 6.67%
CMBs................... $ 115.5 $ 1.3 $ 1.2 $ 1.4 $ 1.5 $ 12.3 $ 97.8 $ 115.5
Average yield....... 6.25% 6.28% 6.28% 6.28% 6.28% 6.28% 6.28% 6.25%
-------- --------
$1,469.6 $1,469.6
======== ========
</TABLE>
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1999, is 4.5 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately .26
of a year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately .93 of a year.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1998, was 4.0 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately .65 of
a year, while a 200 basis point decrease in interest rates would have decreased
the weighted average maturity by approximately 1.45 years.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 48 issuers at December 31, 1999, totaled 3.1 percent
of cash and invested assets at December 31, 1999 and 2.3 percent at December 31,
1998. 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
Our $151.6 million real estate-related portfolio 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, 1999, compared with $164.4 million, or 3.9 percent, at December 31,
1998. The decrease in real estate-related investments during 1999 was primarily
due to sales and loan paydowns.
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 $29.8 million at December 31, 1999. This amount represented a net decrease
of $34.6 million since December 31, 1998, primarily due to the cancellation of
several standby financing commitments in 1999. As of December 31, 1999, we
expect to fund approximately $0.1 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. We consider total
legal commitments, along with estimated working capital requirements, in our
evaluation of reserves and write-downs.
Excluding the $0.9 million of net equity investments in joint ventures, our real
estate loans totaled $150.7 million at December 31, 1999, after reserves and
write-downs. Of this amount, $74.4 million are on accrual status with a weighted
average interest rate of approximately 7.85 percent. Of these accrual loans:
- 15.6 percent have terms requiring current periodic payments of their full
contractual interest and
- 84.4 percent require only partial payments or payments to the extent of
borrowers' cash flow.
The equity investments in real estate at December 31, 1999 consisted of our
other equity investments in joint ventures. These equity investments include
KILICO's share of periodic operating results. As an equity owner or affiliate of
an equity owner, we have the ability to fund, and historically has elected to
fund, operating requirements of certain joint ventures.
44
<PAGE> 49
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
OTHER REAL ESTATE-
MORTGAGE LOANS RELATED INVESTMENTS
---------------- ----------------------
JOINT THIRD- OTHER EQUITY
VENTURE PARTY LOANS(2) INVESTMENTS TOTAL
------- ------ -------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998.................. $65.8 $76.5 $20.9 $ 1.2 $164.4(1)
Additions (deductions):
Fundings...................................... 0.3 -- -- -- 0.3
Interest added to principal................... 3.5 0.4 -- -- 3.9
Sales/paydowns/distributions.................. (2.4) (13.0) (4.2) (0.5) (20.1)
Operating gain................................ -- -- -- 0.1 0.1
Net realized investments gains................ 0.8 3.3 -- 0.1 4.2(3)
Other transactions, net....................... (0.8) (3.3) 2.9 -- (1.2)(3)
----- ------ ----- ----- ------
Balance at December 31, 1999.................. $67.2 $63.9 $19.6 $ 0.9 $151.6(4)
===== ====== ===== ===== ======
</TABLE>
- - ---------------
(1) Net of $25.3 million reserve and write-downs. Excludes $8.7 million of real
estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. We issued these loans generally to provide
financing for Kemper's or KILICO's joint ventures for various purposes.
(3) Included in this amount is $2.9 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.
(4) Net of $23.7 million reserve and write-downs. Excludes $0.6 million of real
estate-related accrued interest.
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, 1999, we had investments in three
projects that accounted for approximately 92.3 percent of our $151.6 million
real estate-related portfolio.
The largest of these investments at December 31, 1999 amounted to $63.9 million
and consisted of second mortgages on nine hotel properties, one office building,
and one retail property. Patrick M. Nesbitt or his affiliates, a third-party
real estate developer, have ownership interests in these properties. These
properties 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 $55.4 million at December 31,
1999. 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 impact the long-term economic viability of
the project. Loans to the MLP were placed on non-accrual status at the beginning
of 1999 to ensure that book value of the MLP did not increase over net
realizable value.
The remaining significant real estate-related investment amounted to $20.7
million at December 31, 1999 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. 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.
45
<PAGE> 50
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 and paydowns. Our net income could be 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.
Our only troubled real estate-related investments were loans on nonaccrual
status, before reserves and write-downs, totaling $98.3 million and $37.4
million at December 31, 1999 and 1998, respectively. 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 $76.3 million and $31.8 million at December 31, 1999 and
1998, respectively. The increase in nonaccrual loans in 1999, compared with
1998, is due to the previously discussed placement of loans to the MLP on
nonaccrual status at the beginning of 1999.
NET INVESTMENT INCOME
Our pre-tax net investment income totaled $264.6 million in 1999, compared with
$273.5 million in 1998 and $296.2 million in 1997. 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 that are on nonaccrual status. As previously
discussed, purchase accounting adjustments negatively impacted our net
investment income in 1999, 1998 and 1997.
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
------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed maturities........................... $-- $0.3 $0.5
Real estate-related investments............ 9.9 3.2 3.9
---- ---- ----
Total............................... $9.9 $3.5 $4.4
==== ==== ====
</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 losses of $6.2 million in
1999, and after-tax realized investment gains of $33.7 million and $6.8 million
in 1998 and 1997, respectively. Trading account security losses of $4.7 million
in 1999 are included in the after-tax realized investment losses. As previously
discussed, we segregated a portion of our General Account investment portfolio
in the first eleven months of 1999 into a "trading" account under FAS 115. FAS
115 requires that assets held in a trading account must be valued at fair value,
with changes in fair value flowing through the income statement as realized
capital gains and losses. Also, as previously discussed, effective December 1,
1999, we no longer segregated our General Account investment portfolio as
"trading". As a result, all investments previously designated as "trading" are
currently classified as available for sale and changes in fair value to the FWA
and the assets supporting the FWA no longer flow through our operating results.
Unrealized gains and losses on fixed maturity investments that are available for
sale are not reflected in our net income. These changes in unrealized value are
recorded as a component of accumulated other comprehensive income, net of any
applicable income taxes. However, and to the extent, a fixed maturity investment
suffers an
46
<PAGE> 51
other-than-temporary decline in value, 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.
We have established a valuation allowance to reduce the deferred tax asset for
investment losses to a net realizable amount. The valuation allowance is
evaluated as of each balance sheet date.
INTEREST RATES
Interest rates remained relatively stable during 1997, before declining in 1998.
During 1998, the Federal Open Market Committee lowered interest rates three
times. This trend was reversed in 1999 when the Federal Open Market Committee
raised rates three times over the course of the year, resulting in a flatter
yield curve due to higher 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. However, approximately 36 percent of our
fixed and variable annuity liabilities as of December 31, 1999, 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 us. 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.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating.
During 1999, we received rating upgrades from both A.M. Best and Standard &
Poor's, primarily due to the perceived long-term strategic benefit of the merger
and the increased financial strength of Zurich and Zurich Kemper Life.
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $630.0 million at December 31, 1999, compared with
$853.9 million at December 31, 1998 and $865.6 million at December 31, 1997. The
decrease in stockholder's equity in 1999 was primarily due to a decrease in
accumulated other comprehensive income (loss) of $153.8 million and dividends of
$115.0 million paid to Kemper, offset by net income of $44.9 million. The
decrease in accumulated other
47
<PAGE> 52
comprehensive income (loss) was primarily related to unrealized depreciation of
our fixed maturity investment portfolio due to rising interest rates during
1999. The decrease in stockholder's equity in 1998 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 increase in unrealized
appreciation of our fixed maturity investment portfolio due to falling interest
rates during 1998.
EMERGING ISSUE
In June 1998, the FASB issued Statement of Financial Accounting Standard 133,
("FAS 133") ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In
June 1999, the FASB issued Statement of Financial Accounting Standard 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133. This statement defers the effective
date of FAS 133 to fiscal quarters of fiscal years beginning after June 15,
2000. We have not determined the impact that implementation of FAS 133 would
have on our results of operations or financial position. However, we expect that
the impact of implementation will not be material.
48
<PAGE> 53
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Gale K. Caruso (42) President and Chief Executive Officer of Federal Kemper Life
President and Chief Executive Officer Assurance Company ("FKLA"), Fidelity Life Association
since June 1999. Director since July ("FLA"), Zurich Life Insurance Company of America ("ZLICA")
1999. and Zurich Direct, Incorporated ("ZD") since June 1999.
Director of FKLA, FLA and ZLICA since July 1999. Chairman,
President and Chief Executive Officer of Scudder Canada
Investor Services, Ltd. from 1995 to June 1999. Managing
Director of Scudder Kemper Investments, Inc. from July 1986
to June 1999.
Eliane C. Frye (52) Executive Vice President of FKLA and FLA since March 1995.
Executive Vice President since March Executive Vice President of ZLICA and ZD since March 1996.
1995. Director since May 1998. 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.
Frederick L. Blackmon (48) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and Chief
Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice
1995. President and Chief Financial Officer of ZLICA and 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.
Russell M. Bostick (43) Senior Vice President and Chief Information Officer of FKLA,
Senior Vice President and Chief FLA, ZLICA and ZD since March 1999. Vice President and Chief
Information Officer since March 1999. Information Officer of FKLA, FLA, KILICO, ZLICA and ZD from
April 1998 to March 1999. Chief Technology Officer of
Corporate Software & Technology from June 1997 to April
1998. Vice President, Information Technology Department of
CNA Insurance Companies from January 1995 to June 1997.
James C. Harkensee (41) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA and ZD since 1995. Director
1996. of ZD from April 1993 to March 1997 and since March 1998.
Vice President of ZLICA from 1992 to 1995. Vice President of
ZD from 1994 to 1995.
James E. Hohmann (44) Senior Vice President of FKLA since December 1995. Chief
Senior Vice President since December Actuary of FKLA and KILICO from December 1995 to January
1995. Director since May 1998. 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.
Edward K. Loughridge (45) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of
Zurich-American Insurance Group from February 1992 to March
1996.
</TABLE>
49
<PAGE> 54
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Debra P. Rezabek (44) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996.
General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO,
Secretary since January 1996. 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 and 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. General Counsel and Assistant Secretary of
KILICO, FKLA and FLA from 1992 to 1996. Assistant Secretary
of Kemper since January 1996.
Edward L. Robbins (60) Senior Vice President and Chief Actuary of FKLA, FLA, ZLICA
Senior Vice President and Chief and ZD since March 1999. Senior Actuary of FKLA, FLA,
Actuary since March 1999. KILICO, ZLICA and ZD from July 1998 to March 1999. Principal
of KPMG Peat Marwick LLP from May 1984 to July 1998.
Kenneth M. Sapp (54) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Senior Vice President of ZD since March 1998. Director
1998. 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 (57) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.
William H. Bolinder (56) Director of FKLA and FLA since January 1996. Director of
Chairman of the Board from ZLICA and ZD since March 1995. Chairman of the Board of FKLA
January 1996 to June 1999 and FLA from January 1996 to June 1999 and since April 2000.
and since April 2000. Chairman of the Board of ZLICA and ZD from March 1995 to
Director since January 1996. June 1999 and since April 2000. 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 ("ZHCA")
since 1995. Vice Chairman of ZHCA since 1996. Underwriter
for Zurich American Lloyds since 1986.
David A. Bowers (53) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich U.S. since August
1985. Vice President, General Counsel and Secretary of
Kemper since January 1996.
Gunther Gose (55) Director of FKLA, FLA and ZLICA since November 1998. Chief
Director since November 1998. 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>
50
<PAGE> 55
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------------------
OTHER LONG TERM
ANNUAL INCENTIVE PLAN ALL OTHER
NAME AND COMPENSATION PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) ($)(3) ($)(2) ($)(4)
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gale K. Caruso................. 1999 $ 91,636 $ 81,120 $23,088 $117,600 $--
Chief Executive Officer(1)
John B. Scott.................. 1999 225,960 145,200 -- 270,720 --
Chairman of the Board(1)(5) 1998 171,000 134,140 -- 213,750 38,326
1997 171,000 112,100 -- 239,400 64,089
Frederick L. Blackmon.......... 1999 113,420 62,805 20,545 90,630 --
Senior Vice President and Chief 1998 94,160 63,800 -- 78,540 8,977
Financial Officer(1) 1997 96,300 54,225 -- 112,500 19,543
George Vlaisavljevich.......... 1999 260,000 152,500 -- 208,000 --
Senior Vice President(1) 1998 260,000 146,000 -- 216,600 23,236
1997 252,500 146,000 39,922 243,000 9,165
James E. Hohmann............... 1999 237,650 141,620 -- 190,120 --
Senior Vice President(1) 1998 88,400 71,175 -- 79,560 7,823
1997 79,333 45,500 -- 80,150 1,063
</TABLE>
- - ---------------
(1) Also served in same positions for FKLA, ZLICA and FLA. An allocation of the
time devoted to duties as executive officer of KILICO has been made. All
compensation items reported in the Summary Compensation Table reflect this
allocation.
(2) Annual bonuses are paid pursuant to annual incentive plans.
(3) The amounts disclosed in this column include:
(a) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.
(b) Relocation expense reimbursements of $18,574 in 1999 for Ms. Caruso 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.
The amounts of the contributions for the 1999 plan year were not available
as of the date of this Prospectus.
(b) Distributions from the Kemper and FKLA supplemental plans.
(5) Served as Chief Executive Officer until June 15, 1999.
51
<PAGE> 56
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; Report of Independent Public Accountants;
Financial Statements of the Separate Account; Appendix A Table of Historical
Hypothetical Accumulation Unit Values and Performance Information; and Appendix
B State Premium Tax Chart. The Statement of Additional Information should be
read in conjunction with this Prospectus.
FINANCIAL STATEMENTS
The financial statements of KILICO that are included in this Prospectus should
be considered primarily as bearing on our ability to meet our obligations under
the Contracts. The Contracts are not entitled to participate in our earnings,
dividends or surplus.
52
<PAGE> 57
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 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States 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.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 17, 2000
53
<PAGE> 58
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1999, $3,397,188, December
31, 1998, $3,421,535)..................................... $3,276,017 $ 3,482,820
Trading account securities at fair value (amortized cost:
December 31, 1998, $99,095)............................... -- 101,781
Equity securities (cost: December 31, 1999, $65,235;
December 31, 1998, $66,776)............................... 61,592 66,854
Short-term investments...................................... 42,391 58,334
Joint venture mortgage loans................................ 67,242 65,806
Third-party mortgage loans.................................. 63,875 76,520
Other real estate-related investments....................... 20,506 22,049
Policy loans................................................ 261,788 271,540
Other invested assets....................................... 25,621 23,645
----------- -----------
Total investments.................................. 3,819,032 4,169,349
Cash........................................................ 12,015 13,486
Accrued investment income................................... 127,219 124,213
Goodwill.................................................... 203,907 216,651
Value of business acquired.................................. 119,160 118,850
Deferred insurance acquisition costs........................ 159,667 91,543
Deferred income taxes....................................... 93,502 35,059
Reinsurance recoverable..................................... 309,696 344,837
Receivable on sales of securities........................... 3,500 3,500
Other assets and receivables................................ 29,950 23,029
Assets held in separate accounts............................ 9,778,068 7,099,204
----------- -----------
Total assets....................................... $14,655,716 $12,239,721
=========== ===========
LIABILITIES
Future policy benefits...................................... $3,718,833 $ 3,906,391
Other policyholder benefits and funds payable............... 457,328 318,369
Other accounts payable and liabilities...................... 71,482 61,898
Liabilities related to separate accounts.................... 9,778,068 7,099,204
----------- -----------
Total liabilities.................................. 14,025,711 11,385,862
----------- -----------
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.................................. 804,347 804,347
Accumulated other comprehensive income (loss)............... (120,819) 32,975
Retained earnings (deficit)................................. (56,023) 14,037
----------- -----------
Total stockholder's equity......................... 630,005 853,859
----------- -----------
Total liabilities and stockholder's equity......... $14,655,716 $12,239,721
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE> 59
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $264,640 $273,512 $296,195
Realized investment gains (losses).......................... (9,549) 51,868 10,546
Premium income.............................................. 21,990 22,346 22,239
Separate account fees and charges........................... 74,715 61,982 85,413
Other income................................................ 11,623 10,031 11,087
-------- -------- --------
Total revenue..................................... 363,419 419,739 425,480
-------- -------- --------
BENEFIT AND EXPENSES
Interest credited to policyholders.......................... 162,243 176,906 199,782
Claims incurred and other policyholder benefits............. 18,185 28,029 28,372
Taxes, licenses and fees.................................... 30,234 30,292 52,608
Commissions................................................. 67,555 39,046 32,602
Operating expenses.......................................... 45,989 44,575 36,837
Deferral of insurance acquisition costs..................... (69,814) (46,565) (38,177)
Amortization of insurance acquisition costs................. 5,524 12,082 3,204
Amortization of value of business acquired.................. 12,955 17,677 24,948
Amortization of goodwill.................................... 12,744 12,744 15,295
-------- -------- --------
Total benefits and expenses....................... 285,615 314,786 355,471
-------- -------- --------
Income before income tax expense............................ 77,804 104,953 70,009
Income tax expense.......................................... 32,864 39,804 31,292
-------- -------- --------
Net income........................................ $ 44,940 $ 65,149 $ 38,717
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE> 60
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
NET INCOME.................................................. $ 44,940 $ 65,149 $ 38,717
--------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains (losses) on investments arising
during period:
Unrealized holding gains (losses) on investments.......... (180,267) 25,372 60,802
Adjustment to value of business acquired.................. 12,811 (9,332) (28,562)
Adjustment to deferred insurance acquisition costs........ 5,726 (2,862) (2,680)
--------- -------- --------
Total unrealized holding gains (losses) on
investments arising during period............... (161,730) 13,178 29,560
--------- -------- --------
Less reclassification adjustments for items included in
net income:
Adjustment for (gains) losses included in realized
investment gains (losses)............................ 16,651 6,794 (9,016)
Adjustment for amortization of premium on fixed
maturities included in net investment income......... (10,533) (17,064) (17,866)
Adjustment for (gains) losses included in amortization
of value of business acquired........................ (454) (7,378) (2,353)
Adjustment for (gains) losses included in amortization
of insurance acquisition costs....................... 1,892 (463) (355)
--------- -------- --------
Total reclassification adjustments for items
included in net income.......................... 7,556 (18,111) (29,590)
--------- -------- --------
Other comprehensive income (loss), before related income tax
expense (benefit)......................................... (169,286) 31,289 59,150
Related income tax expense (benefit)........................ (15,492) 10,952 (985)
--------- -------- --------
Other comprehensive income (loss), net of tax..... (153,794) 20,337 60,135
--------- -------- --------
Comprehensive income (loss)....................... $(108,854) $ 85,486 $ 98,852
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE> 61
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of period.................. $ 2,500 $ 2,500 $ 2,500
--------- -------- --------
ADDITIONAL PAID-IN CAPITAL, beginning of period............. 804,347 806,538 761,538
Capital contributions from parent........................... -- 4,261 45,000
Adjustment to prior period capital contribution from
parent.................................................... -- (6,452) --
--------- -------- --------
End of period..................................... 804,347 804,347 806,538
--------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of
period.................................................... 32,975 12,637 (47,498)
Other comprehensive income (loss), net of tax............... (153,794) 20,338 60,135
--------- -------- --------
End of period..................................... (120,819) 32,975 12,637
--------- -------- --------
RETAINED EARNINGS, beginning of period...................... 14,037 43,888 34,421
Net income.................................................. 44,940 65,149 38,717
Dividends to parent......................................... (115,000) (95,000) (29,250)
--------- -------- --------
End of period..................................... (56,023) 14,037 43,888
--------- -------- --------
Total stockholder's equity........................ $ 630,005 $853,859 $865,563
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE> 62
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 44,940 $ 65,149 $ 38,717
Reconcilement of net income to net cash provided:
Realized investment (gains) losses...................... 9,549 (51,868) (10,546)
Net change in trading account securities................ (51,239) (6,727) --
Interest credited and other charges..................... 158,557 173,958 198,206
Deferred insurance acquisition costs, net............... (64,290) (34,483) (34,973)
Amortization of value of business acquired.............. 12,955 17,677 24,948
Amortization of goodwill................................ 12,744 12,744 15,295
Amortization of discount and premium on investments..... 11,157 17,353 17,866
Deferred income taxes................................... (42,952) (12,469) (99,370)
Net change in current federal income taxes.............. (10,594) (73,162) 97,386
Benefits and premium taxes due related to separate
account bank-owned life insurance..................... 149,477 123,884 180,546
Other, net (11,901) (41,477) 17,168
----------- ----------- ---------
Net cash provided from operating activities........ 218,403 190,579 445,243
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity....................... 335,735 491,699 229,208
Fixed maturities sold prior to maturity................. 1,269,290 882,596 633,872
Equity securities....................................... 11,379 107,598 --
Mortgage loans, policy loans and other invested
assets................................................ 75,389 180,316 131,866
Cost of investments purchased or loans originated:
Fixed maturities........................................ (1,455,496) (1,319,119) (606,028)
Equity securities....................................... (8,703) (83,303) --
Mortgage loans, policy loans and other invested
assets................................................ (43,665) (66,331) (76,350)
Short-term investments, net............................... 15,943 177,723 (164,361)
Net change in receivable and payable for securities
transactions............................................ -- (677) 29,746
Net change in other assets................................ (2,725) -- 244
----------- ----------- ---------
Net cash provided from investing activities........ 197,147 370,502 178,197
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits................................................ 383,874 180,124 145,687
Withdrawals............................................. (694,848) (649,400) (745,510)
Capital contributions from parent......................... -- 4,261 45,000
Dividends to parent....................................... (115,000) (95,000) (29,250)
Other..................................................... 8,953 (11,448) (18,275)
----------- ----------- ---------
Net cash used in financing activities.............. (417,021) (571,463) (602,348)
----------- ----------- ---------
Net increase (decrease) in cash................ (1,471) (10,382) 21,092
CASH, beginning of period................................... 13,486 23,868 2,776
----------- ----------- ---------
CASH, end of period......................................... $ 12,015 $ 13,486 $ 23,868
=========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE> 63
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"). Kemper and the Company are wholly-owned subsidiaries of
Zurich Financial Services ("ZFS" or "Zurich"). ZFS is owned by Zurich Allied AG
and Allied Zurich p.l.c., fifty-seven percent and forty-three percent,
respectively. Zurich Allied AG is listed on the Swiss Market Index. Allied
Zurich p.l.c. 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 1998 and 1997
consolidated financial statements in order for them to conform to the 1999
presentation. The accompanying consolidated financial statements of the Company
as of and for the years ended December 31, 1999, 1998 and 1997, have been
prepared in conformity with accounting principles generally accepted in the
United States.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 goodwill,
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, 1999, the Company
believes that no such adjustment is necessary.
In December of 1997, the Company changed its amortization period from
twenty-five years 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
59
<PAGE> 64
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2004 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>
1997 (actual).................................. 168,692 (34,906) 9,958 143,744
1998 (actual).................................. 143,744 (26,807) 9,129 126,066
1999 (actual).................................. 126,066 (20,891) 7,936 113,111
2000........................................... 113,111 (23,418) 6,971 96,664
2001........................................... 96,664 (21,493) 5,890 81,061
2002........................................... 81,061 (17,805) 4,970 68,226
2003........................................... 68,226 (16,160) 4,185 56,251
2004........................................... 56,251 (14,625) 3,438 45,064
</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. This
adjustment increased the value of business acquired by $6.0 million as of
December 31, 1999 and decreased the value of business acquired by $7.2 million
as of December 31, 1998. Accumulated other comprehensive income increased by
approximately $3.9 million as of December 31, 1999 due to this adjustment and
decreased accumulated other comprehensive income by $4.7 million as of December
31, 1998.
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.
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.
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
60
<PAGE> 65
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 10.0 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 7.1 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
1999 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.
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 notes
receivable from real estate ventures and investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures. 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 (loss). Such unrealized gains are recorded net of deferred
income tax expense, while unrealized losses are not tax benefitted.
61
<PAGE> 66
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at fair value.
INCOME TAX
The Company files 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 $83.8 million, $126.0 million and $29.0 million
directly to the United States Treasury Department during 1999, 1998 and 1997,
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
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, 1999
U.S. treasury securities and obligations of U.S.
government agencies and authorities................ $ 6,516 $ 6,631 $ -- $ (115)
Obligations of states and political subdivisions,
special revenue and nonguaranteed.................. 21,656 22,107 -- (451)
Debt securities issued by foreign governments........ 23,890 24,749 380 (1,239)
Corporate securities................................. 2,063,054 2,147,606 2,750 (87,302)
Mortgage and asset-backed securities................. 1,160,901 1,196,095 450 (35,644)
---------- ---------- ------- ---------
Total fixed maturities........................ $3,276,017 $3,397,188 $ 3,580 $(124,751)
========== ========== ======= =========
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)
========== ========== ======= =========
</TABLE>
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1999, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the
62
<PAGE> 67
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
right to call or prepay obligations with or without call or prepayment penalties
and because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST
(in thousands) ---------- ----------
<S> <C> <C>
One year or less............................................ $ 49,221 $ 48,953
Over one year through five years............................ 747,086 765,064
Over five years through ten years........................... 1,022,850 1,073,468
Over ten years.............................................. 295,959 313,608
Securities not due at a single maturity date, primarily
mortgage and asset-backed securities(1)................... 1,160,901 1,196,095
---------- ----------
Total fixed maturities............................... $3,276,017 $3,397,188
========== ==========
</TABLE>
- - ---------------
(1) Weighted average maturity of 4.9 years.
Proceeds from sales of investments in fixed maturities prior to maturity were
$1,269.3 million, $882.6 million and $633.9 million during 1999, 1998 and 1997,
respectively. Gross gains of $7.9 million, $10.1 million and $3.1 million and
gross losses of $17.7 million, $8.0 million and $13.7 million were realized on
sales and write-downs of fixed maturities in 1999, 1998 and 1997, respectively.
Excluding agencies of the U.S. government, there were no individual investments
that exceeded ten percent of stockholder's equity at December 31, 1999.
At December 31, 1999, securities carried at approximately $6.2 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
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 $151.6 million real estate portfolio at December 31, 1999 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1999 and 1998, total impaired real estate-related
loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
(in millions) ------------ ------------
<S> <C> <C>
Impaired loans without reserves--gross...................... $ 74.9 $ 83.9
Impaired loans with reserves--gross......................... 23.4 25.0
------ ------
Total gross impaired loans........................... 98.3 108.9
Reserves related to impaired loans.......................... (18.5) (18.5)
Write-downs related to impaired loans....................... (3.5) (3.5)
------ ------
Net impaired loans................................... $ 76.3 $ 86.9
====== ======
</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
63
<PAGE> 68
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
$100.0 million and $54.6 million in impaired loans for 1999 and 1998,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance.
At December 31, 1999 and 1998, loans on nonaccrual status, before reserves and
write-downs, amounted to $98.3 million and $37.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
NET INVESTMENT INCOME
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................. $231,176 $232,707 $250,170
Dividends on equity securities.............................. 4,618 2,143 2,123
Income from short-term investments.......................... 3,568 5,391 4,128
Income from mortgage loans.................................. 6,296 14,964 16,283
Income from policy loans.................................... 20,131 21,096 20,549
Income from other real estate-related investments........... 155 352 6,631
Income from other loans and investments..................... 2,033 2,223 2,045
-------- -------- --------
Total investment income.............................. $267,977 $278,876 $301,929
Investment expense.......................................... (3,337) (5,364) (5,734)
-------- -------- --------
Net investment income................................ $264,640 $273,512 $296,195
======== ======== ========
</TABLE>
NET REALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the years ended December 31, 1999,
1998 and 1997, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------
1999 1998 1997
(in thousands) ------- -------- --------
<S> <C> <C> <C>
Real estate-related......................................... $ 4,201 $ 41,362 $ 19,758
Fixed maturities............................................ (9,755) 2,158 (10,656)
Trading account securities--gross gains..................... 491 3,254 --
Trading account securities--gross losses.................... (7,794) (417) --
Trading account securities--holding losses.................. -- (151) --
Equity securities........................................... 1,039 5,496 914
Other....................................................... 2,269 166 530
------- -------- --------
Realized investment gains (losses) before income tax
expense (benefit)...................................... $(9,549) $ 51,868 $ 10,546
Income tax expense (benefit)................................ (3,342) 18,154 3,691
------- -------- --------
Net realized investment gains (losses).................... $(6,207) $ 33,714 $ 6,855
======= ======== ========
</TABLE>
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity and other securities--the
difference
64
<PAGE> 69
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
between fair value and cost. The change in net unrealized investment gains
(losses) by class of investment for the years ended December 31, 1999, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-----------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ------------ ------------ -----------
<S> <C> <C> <C>
Fixed maturities........................................ $(182,456) $36,717 $ 87,787
Equity and other securities............................. (3,929) (1,075) (103)
Adjustment to deferred insurance acquisition costs...... 3,834 (2,399) (2,325)
Adjustment to value of business acquired................ 13,265 (1,954) (26,209)
--------- ------- --------
Unrealized gain (loss) before income tax expense
(benefit).......................................... (169,286) 31,289 59,150
Income tax expense (benefit)............................ (15,492) 10,952 (985)
--------- ------- --------
Net unrealized gain (loss) on investments........ $(153,794) $20,337 $ 60,135
========= ======= ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1999 and 1998 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, 1999 and 1998, the Company's net equity investment in
unconsolidated investees amounted to $0.9 million and $1.2 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $155 thousand, $241 thousand and $835 thousand in 1999,
1998 and 1997, 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 20.0 percent of the Company's investment-grade fixed maturities at
December 31, 1999 were mortgage-backed securities, down from 28.0 percent at
December 31, 1998, due to sales and paydowns during 1999. 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 16.8 percent and 15.4 percent of the Company's investment-grade
fixed maturities at December 31, 1999 and 1998, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (24.0%), commercial
mortgage-backed securities (22.8%), manufactured housing loans (12.5%), other
commercial assets (11.3%) and collateralized loan and bond obligations (10.6%).
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, 1999 was as follows: California (36.8%), Hawaii
(13.6%), Washington (10.9%) and Colorado (10.1%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1999 was as
follows: hotels (36.3%), land (36.1%) and residential (13.5%).
65
<PAGE> 70
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
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 scheduled, nor that Kemper's and the Company's plans with respect to
such projects may not change substantially.
Slightly more than 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, 1999, 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 $63.9 million, or
42.2 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties, one office building and one retail property.
At December 31, 1999, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
At December 31, 1999, 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 $55.4 million, or
36.5 percent, of the Company's real estate portfolio. Kemper's interest in the
MLP is 75.0 percent at December 31, 1999. Loans to the MLP were placed on
non-accrual status at the beginning of 1999 due to management's desire not to
increase book value of the MLP over net realizable value, as interest on these
loans has historically been added to principal. At December 31, 1999,
MLP-related commitments accounted for approximately $0.1 million of the
Company's off-balance-sheet legal commitments.
The remaining significant real estate-related investments amounted to $20.7
million at December 31, 1999 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
it completely disposes of all of its investments in Hawaii. At December 31,
1999, off-balance sheet legal commitments related to Hawaiian properties totaled
$4.0 million.
At December 31, 1999, 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, 1999.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Current................................................... $ 75,816 $ 52,273 $130,662
Deferred.................................................. (42,952) (12,469) (99,370)
-------- -------- --------
Total........................................... $ 32,864 $ 39,804 $ 31,292
======== ======== ========
</TABLE>
66
<PAGE> 71
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
Additionally, the deferred income tax (benefit) expense related to items
included in other comprehensive income was as follows for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- ------- -------
<S> <C> <C> <C>
Unrealized gains and losses on investments.................. $(21,477) $12,476 $ 9,002
Value of business acquired.................................. 4,643 (684) (9,173)
Deferred insurance acquisition costs........................ 1,342 (840) (814)
-------- ------- -------
Total............................................. $(15,492) $10,952 $ (985)
======== ======= =======
</TABLE>
The actual income tax expense for 1999, 1998 and 1997 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 1999, 1998, and 1997 to income before income tax expense.
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) ------- ------- -------
<S> <C> <C> <C>
Computed expected tax expense............................... $27,232 $36,734 $24,503
Difference between "expected" and actual tax expense:
State taxes............................................... 1,608 (434) 1,801
Amortization of goodwill.................................. 4,460 4,460 5,353
Dividend received deduction............................... -- (540) --
Foreign tax credit........................................ (306) (250) (278)
Other, net................................................ (130) (166) (87)
------- ------- -------
Total actual tax expense.......................... $32,864 $39,804 $31,292
======= ======= =======
</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 unrealized losses on investments to a
realizable amount. This amount is based on the evidence available and
management's judgment. 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.
67
<PAGE> 72
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
1999 1998 1997
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition costs ("DAC Tax")... $121,723 $ 86,332 $ 75,522
Unrealized losses on investments................... 43,758 -- --
Life policy reserves............................... 43,931 27,240 43,337
Unearned revenue................................... 59,349 42,598 37,243
Real estate-related................................ 7,103 13,944 13,400
Other investment-related........................... 928 5,770 3,298
Other.............................................. 3,133 4,923 4,371
-------- -------- --------
Total deferred federal tax assets............... 279,925 180,807 177,171
Valuation allowance................................ (58,959) (15,201) (15,201)
-------- -------- --------
Total deferred federal tax assets after
valuation allowance........................... 220,966 165,606 161,970
-------- -------- --------
Deferred federal tax liabilities:
Value of business acquired......................... 55,884 41,598 48,469
Deferred insurance acquisition costs............... 41,706 32,040 20,811
Depreciation and amortization...................... 19,957 19,111 20,201
Other investment-related........................... 7,670 14,337 18,774
Unrealized gains on investments.................... -- 21,477 9,002
Other.............................................. 2,247 1,984 4,720
-------- -------- --------
Total deferred federal tax liabilities.......... 127,464 130,547 121,977
-------- -------- --------
Net deferred federal tax assets...................... $ 93,502 $ 35,059 $ 39,993
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the DAC Tax
associated with $1.6 billion and $1.5 billion of new and renewal sales in 1999
and 1998, 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 and $45.0
million during 1998 and 1997, respectively. The Company paid cash dividends of
$115.0 million, $95.0 million and $29.3 million to Kemper during 1999, 1998 and
1997, respectively.
The Company has loans to joint ventures, consisting primarily of mortgage loans
on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1999 and 1998, joint venture mortgage loans
totaled $67.2 million and $65.8 million, respectively, and during 1999, 1998 and
1997, the Company earned interest income on these joint venture loans of $0.6
million, $6.8 million and $7.5 million, respectively.
68
<PAGE> 73
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
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 1999
and 1998, expenses allocated to the Company from SKI amounted to $17 thousand
and $43 thousand, respectively. During 1997, expenses allocated to the Company
from SKI and KSvC amounted to $114 thousand. The Company also paid to SKI
investment management fees of $1.8 million, $3.1 million and $3.5 million during
1999, 1998 and 1997, respectively. In addition, expenses allocated to the
Company from FKLA during 1999, 1998 and 1997 amounted to $34.1 million, $35.5
million and $30.0 million, respectively. The Company also paid to Kemper real
estate subsidiaries fees of $1.0 million, $1.5 million and $2.2 million in 1999,
1998 and 1997, respectively, related to the management of the Company's real
estate portfolio.
(8) REINSURANCE
As of December 31, 1999 and 1998, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $309.7 million
and $344.8 million, respectively.
In 1996, the Company assumed, on a yearly renewable term basis, term life
insurance from FKLA. Premiums assumed during 1999 under the terms of the treaty
amounted to $21.3 million and the face amount which remained outstanding at
December 31, 1999 amounted to $10.4 billion.
Effective January 1, 1997, the Company ceded 90 percent of all new direct life
insurance premiums to outside reinsurers. Life reserves ceded to outside
reinsurers on the Company's direct business amounted to approximately $595
thousand and $413 thousand as of December 31, 1999 and 1998, respectively.
During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, Zurich Insurance Company, Bermuda
Branch ("ZICBB"), formerly ZC Life Reinsurance Limited. Under the terms of this
agreement, the Company ceded, on a yearly renewable term basis, 90 percent of
the net amount at risk (death benefit payable to the insured less the insured's
separate account cash surrender value) related to BOLI, which is held in the
Company's separate accounts. As consideration for this reinsurance coverage, the
Company cedes separate account fees (cost of insurance charges) to ZICBB and
retains a portion of such funds under the terms of the reinsurance agreement in
a funds withheld account which is included as a component of benefits and funds
payable in the accompanying consolidated balance sheets. During 1998, the
Company modified the reinsurance agreement to increase the reinsurance from
ninety percent to one hundred percent.
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement (in millions):
BANK OWNED LIFE INSURANCE (BOLI)
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Face amount in force........................................ $ 82,021 $ 66,186 $ 59,338
======== ======== ========
Net amount at risk ceded.................................... $(75,979) $(62,160) $(51,066)
======== ======== ========
Cost of insurance charges ceded............................. $ 166.4 $ 175.5 $ 24.3
======== ======== ========
Funds withheld account...................................... $ 263.4 $ 170.9 $ 23.4
======== ======== ========
</TABLE>
The Company has a 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 was marked-to-market based predominantly
69
<PAGE> 74
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
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. In November 1998, to
properly match revenue and expenses, the Company had also placed assets
supporting the FWA in a segmented portion of its General Account. This portfolio
was classified as "trading" under Statement of Financial Accounting Standards
No. 115 ("FAS 115") at December 31, 1998 and through November 30, 1999. 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 $7.3 million and $0.2 million related to the changes
in fair value of this portfolio during 1999 and 1998, respectively.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, the Company no longer marked-to-market a portion of
the FWA liability and therefore no longer designated the related portion of
assets as "trading". As a result, changes in fair value to the FWA and the
assets supporting the FWA no longer flow through the Company's operating
results.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a health and welfare benefit plan that provides insurance benefits
covering substantially all eligible, active and retired employees of FKLA and
their covered dependents and beneficiaries. The Company is allocated a portion
of the costs of providing such benefits. The Company is self insured with
respect to medical benefits, and the plan is not funded except with respect to
certain disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.2 million and $2.0 million at December 31, 1999 and 1998,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 8.0 percent and 7.0 percent for 1999 and 1998, respectively. The
assumed health care trend rate used was based on projected experience for 1999,
7.2 percent for 2000, gradually declining to 5.6 percent by the year 2004 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, 1999 and 1998 by $190 thousand and $312 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
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
70
<PAGE> 75
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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, 1999, the Company had future legal loan commitments and stand-by
financing agreements totaling $29.8 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
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
71
<PAGE> 76
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 1999 and 1998 to be 4.78 percent and 4.75 percent,
respectively, while the assumed average market crediting rate was 5.0 percent in
both 1999 and 1998.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities................................. $3,276,017 $3,276,017 $3,482,820 $3,482,820
Trading account securities....................... -- -- 101,781 101,781
Cash and short-term investments.................. 54,406 54,406 71,820 71,820
Mortgage loans and other real estate-related
assets........................................ 151,623 151,623 164,375 164,375
Policy loans..................................... 261,788 261,788 271,540 271,540
Equity securities................................ 61,592 61,592 66,854 66,854
Other invested assets............................ 25,620 26,226 23,645 27,620
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life
reserves...................................... 3,399,299 3,299,254 3,551,050 3,657,510
Funds withheld account........................... 263,428 263,428 170,920 170,920
</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 2000 is $59.1 million. The
Company paid cash dividends of $115.0 million, $95.0 million and $29.3 million
to Kemper during 1999, 1998 and 1997, respectively.
The Company's net income and capital and surplus as determined in accordance
with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 59,116 $ 64,871 $ 58,372
======== ======== ========
Statutory capital and surplus............................... $394,966 $455,213 $476,924
======== ======== ========
</TABLE>
In March 1998, the National Association of Insurance Commissioners approved the
codification of statutory accounting principles. Codification is effective
January 1, 2001. The Company has not quantified the impact that codification
will have on its statutory financial position or results of operations.
72
<PAGE> 77
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>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
QUARTER ENDED -------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1999 OPERATING SUMMARY
Revenues........................... $95,646 $ 86,164 $78,301 $103,308 $363,419
======= ======== ======= ======== ========
Net operating income, excluding
realized gains (losses)......... $11,222 $ 14,385 $11,568 $ 13,971 $ 51,147
Net realized investment gains
(losses)........................ (627) (1,286) (5,098) 805 (6,207)
------- -------- ------- -------- --------
Net income................. $10,595 $ 13,099 $ 6,470 $ 14,776 $ 44,940
======= ======== ======= ======== ========
1998 OPERATING SUMMARY
Revenues........................... $98,026 $110,003 $98,752 $112,958 $419,739
======= ======== ======= ======== ========
Net operating income, excluding
realized gains.................. $ 8,025 $ 5,700 $ 7,169 $ 10,541 $ 31,435
Net realized investment gains...... 1,205 10,187 5,818 16,504 33,714
------- -------- ------- -------- --------
Net income................. $ 9,230 $ 15,887 $12,987 $ 27,045 $ 65,149
======= ======== ======= ======== ========
1997 OPERATING SUMMARY
Revenues........................... $89,055 $ 99,293 $86,071 $151,061 $425,480
======= ======== ======= ======== ========
Net operating income, excluding
realized gains(losses).......... $ 9,590 $ 7,701 $ 6,075 $ 8,496 $ 31,862
Net realized investment gains
(losses)........................ 578 5,305 (1,971) 2,943 6,855
------- -------- ------- -------- --------
Net income................. $10,168 $ 13,006 $ 4,104 $ 11,439 $ 38,717
======= ======== ======= ======== ========
</TABLE>
(15) OPERATING SEGMENTS AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"), DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. FAS 131 established
standards for how to report information about operating segments. It also
established standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted FAS 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, FAS 131 requires comparative information for earlier
years to be restated, unless impracticable to do so.
The Company, FKLA, Zurich Life Insurance Company of America, ("ZLICA"), and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, 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 SBUs to consolidated revenues, operating results and certain
balance sheet data pertaining thereto, are shown in the following tables on the
basis of accounting principles generally accepted in the United States.
Zurich Kemper Life is segregated into the Life Brokerage, Financial, Retirement
Solutions Group ("RSG") and Direct SBUs. The SBUs are not managed at the legal
entity level, but rather at the Zurich Kemper Life level.
73
<PAGE> 78
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
Zurich Kemper Life's SBUs 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 RSG SBUs.
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 1999, 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 SBUs are as follows:
LIFE BROKERAGE: The Life Brokerage 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. Institutional business includes BOLI and funding agreements (included
in FKLA).
RSG: The RSG 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.
74
<PAGE> 79
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
Summarized financial information for ZKL's SBU's are as follows:
As of and for the period ending December 31, 1999:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
INCOME STATEMENT ---------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income..................... $ 145,533 $ 410 $ -- $ 8,038 $ 153,981
Net investment income.............. 137,106 175,590 101,202 1,297 415,195
Realized investment gains
(losses)........................ 976 (6,980) (98) -- (6,102)
Fees and other income.............. 70,477 48,873 35,742 44,528 199,620
---------- ----------- ---------- -------- -----------
Total revenue.............. 354,092 217,893 136,846 53,863 762,694
---------- ----------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits.............. 200,161 112,869 68,801 3,529 385,360
Intangible asset amortization...... 54,957 12,053 13,989 -- 80,999
Net deferral of insurance
acquisition costs............... (37,433) (43,664) (20,624) (41,412) (143,133)
Commissions and taxes, licenses and
fees............................ 21,881 66,702 26,700 17,411 132,694
Operating expenses................. 56,179 25,101 23,611 71,194 176,085
---------- ----------- ---------- -------- -----------
Total benefits and
expenses................. 295,745 173,061 112,477 50,722 632,005
---------- ----------- ---------- -------- -----------
Income before income tax expense..... 58,347 44,832 24,369 3,141 130,689
Income tax expense................... 25,707 19,235 10,966 1,114 57,022
---------- ----------- ---------- -------- -----------
Net income................. $ 32,640 $ 25,597 $ 13,403 $ 2,027 $ 73,667
========== =========== ========== ======== ===========
BALANCE SHEET
Total assets....................... $3,066,956 $10,311,850 $4,755,437 $144,189 $18,278,432
========== =========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- ------- -------------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $762,694 $73,667 $18,278,432
-------- ------- -----------
Less:
Revenue, net income and assets of FKLA.................... 305,334 24,801 3,162,048
Revenue, net income and assets of ZLICA................... 49,460 8,528 456,283
Revenue, net loss and assets of Zurich Direct............. 44,481 (4,602) 4,385
-------- ------- -----------
Totals per the Company's consolidated financial
statements............................................. $363,419 $44,940 $14,655,716
======== ======= ===========
</TABLE>
75
<PAGE> 80
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1998:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG 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
INCOME
REVENUE (LOSS) 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 of Zurich Direct........... 23,548 885 4,322
-------- -------- -----------
Totals per the Company's consolidated financial
statements........................................ $419,739 $ 65,149 $12,239,721
======== ======== ===========
</TABLE>
76
<PAGE> 81
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG 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..... 351,420 247,532 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>
NET
INCOME
REVENUE (LOSS) 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>
(16) SUBSEQUENT EVENT
In February 2000, the Company announced that it had entered into an agreement to
purchase for $5.5 million the following related entities, all privately held New
York corporations:
- PMG Securities Corporation
- PMG Asset Management, Inc.
- PMG Life Agency, Inc., and
- PMG Marketing, Inc.
These companies were primarily purchased for their specialization in the target
market of the RSG SBU. The acquisition is expected to close at the end of the
first quarter 2000.
77
<PAGE> 82
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
</TABLE>
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Contract 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 we are then crediting (at
the time of the withdrawal) on new Contracts 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 we are then crediting 6.5% for
a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
(1 + .05) 4
-.0726961* = [ ----------------- ] -1
(1 + .065 + .005)
</TABLE>
The Market Value Adjustment is a reduction of $3,053.24 from the Guarantee
Period Value:
-3,053.24 = -.0726961 X 42,000.00
The Market Adjusted Value would be:
$38,946.76 = $42,000.00 - $3,053.24
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 15% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$1,986.29 = $38,946.76 X .85 X .06
Thus, the amount payable on a full withdrawal would be:
$36,960.48 = $38,946.76 - $1,986.29
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,526.62 = -.0726961 X $21,000.00
The Market Adjusted Value would be:
$19,473.38 = $21,000.00 - $1,526.62
- - ---------------
* Actual calculation utilizes 10 decimal places.
78
<PAGE> 83
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:
$819.68 = ($19,473.38 - .15 X $38,946.76) X .06
Thus, the amount payable on this partial withdrawal would be:
$18,653.70 = $19,473.38 - $819.68
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and we are then crediting 4% for a four-year Guarantee Period. Upon a full
withdrawal, the market value adjustment factor would be:
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
(1 + .05) 4
+.0192766 = [ ---------------- ] -1
(1 + .04 + .005)
</TABLE>
The Market Value Adjustment is an increase of $809.62 to the Guarantee Period
Value:
$809.62 = $42,000.00 X .0192766
The Market Adjusted Value would be:
$42,809.62 = $42,000.00 + $809.62
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,183.29 = $42,809.62 X .85 X .06
Thus, the amount payable on withdrawal would be:
$40,626.33 = $42,809.62 - $2,183.29
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$404.81 = $21,000.00 X .0192766
The Market Adjusted Value of $21,000.00 would be:
$21,404.81 = $21,000.00 + $404.81
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:
$899.00 = ($21,404.81 - .1 X $42,809.62) X .06
Thus, the amount payable on this partial withdrawal would be:
$20,505.81 = $21,404.81 - $899.00
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
79
<PAGE> 84
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 traditional 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. Except where otherwise indicated, IRA discussion includes Simplified
Employee Pension IRAs (SEP IRAs). 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 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
80
<PAGE> 85
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.
6. 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. In the case of a married couple filing a joint return, up to $2,000 can be
contributed to each spouse's IRA, even if one spouse has little or no
compensation. This means that the total combined contributions that can be made
to both IRAs can be as much as $4,000 for the year. Previously, if one spouse
had no compensation or elected to be treated as having no compensation, the
total combined contributions to both IRAs could not be more than $2,250.
3. 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. Even if your spouse is covered by an employer retirement plan, you may be
able to deduct your contributions to an IRA if you are not covered by an
employer plan. The deduction is limited to $2,000 and it must be reduced if your
adjusted gross income on a joint return is more than $150,000 but less than
$160,000. Your deduction is eliminated if your income on a joint return is
$160,000 or more.
5. Contributions to your IRA can be made at any time. If you make the
contribution between January 1 and April 15, however, you may elect to treat the
contribution as made either in that year or in the preceding year. You may file
a tax return claiming a deduction for your IRA contribution before the
contribution is actually made. You must, however, make the contribution by the
due date of your return not including extensions.
6. You cannot make a contribution other than a rollover contribution to your IRA
for the year in which you reach age 70 1/2 or thereafter.
81
<PAGE> 86
E. SEP IRAs
1. SEP IRA rules concerning eligibility and contributions are governed by Code
Section 408(k). The maximum deductible contribution for a 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.
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
82
<PAGE> 87
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. ROTH IRAs
1. If your Contract is a special type of individual retirement plan known as
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to an "IRA"
are to an "individual retirement plan," within the meaning of Section
7701(a)(37) of the 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. We reserve the
right to amend the Contract as necessary or advisable from time to time to
comply with future changes in the Internal Revenue Code, regulations or other
requirements imposed by the IRS to obtain or maintain its approval of the
annuity as a Roth IRA.
4. Earnings in your Roth IRA are not taxed until they are distributed to you,
and will not be taxed if they are paid as a "qualified distribution," as
described to you in section L, below.
J. ELIGIBILITY AND CONTRIBUTIONS FOR ROTH IRAs
1. Generally, you are eligible to establish or make a contribution to your Roth
IRA only if you meet certain income limits. No deduction is allowed for
contributions to your Roth IRA. Contributions to your Roth IRA may be made even
after you attain age 70 1/2.
2. The aggregate amount of contributions for any taxable year to all IRAs,
including all Roth IRAs, maintained for your benefit (the "contribution limit")
generally is the lesser of $2,000 and 100% of your compensation for the taxable
year. However, if you file a joint return and receive less compensation for the
taxable year than your spouse, the contribution limit for the taxable year is
the lesser of $2,000 and the sum of (1) your compensation for the taxable year,
and (2) your spouse's compensation for the taxable year reduced by any
deductible contributions to an IRA of your spouse, and by any contributions to a
Roth IRA for your spouse, for the taxable year.
The contribution limit for any taxable year is reduced (but not below zero) by
the amount which bears the same ratio to such amount as:
(a) the excess of (i) your adjusted gross income for the taxable year, over
(ii) the "applicable dollar amount", bears to
(b) $15,000 (or $10,000 if you are married).
For this purpose, "adjusted gross income" is determined in accordance with
Section 219(g)(3) of the Code and (1) excludes any amount included in gross
income as a result of any rollover from, transfer from, or conversion of an IRA
to a Roth IRA, and (2) is reduced by any deductible IRA contribution. In
addition, the "applicable dollar amount" is equal to $150,000 for a married
individual filing a joint return, $0 for a married individual filing a separate
return, and $95,000 for any other individual.
A "qualified rollover contribution" (discussed in section K, below), and a
non-taxable transfer from another Roth IRA, are not taken into account for
purposes of determining the contribution limit.
K. ROLLOVERS, TRANSFERS AND CONVERSIONS TO ROTH IRAs
1. Rollovers and Transfers -- A rollover may be made to a Roth IRA only if it is
a "qualified rollover contribution." A "qualified rollover contribution" is a
rollover to a Roth IRA from another Roth IRA or from an
83
<PAGE> 88
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, Code
Section 72(t) (relating to the 10 percent penalty tax on premature
distributions) will not apply. If such a rollover or transfer occurs before
January 1, 1999, any portion of the amount rolled over or transferred which is
required to be included in gross income will be so included ratably over the
4-taxable year period beginning with the taxable year in which the rollover or
transfer is made.
Pending legislation may modify these rules retroactively to January 1, 1998.
3. Transfers of Excess IRA Contributions to Roth IRAs -- If, before the due date
of your federal income tax return for any taxable year (not including
extensions), you transfer, from an IRA, contributions for such taxable year (and
earnings thereon) to a Roth IRA, such amounts will not be includible in gross
income to the extent that no deduction was allowed with respect to such amount.
4. Taxation of Conversions of IRAs to Roth IRAs -- All or part of amounts in an
IRA maintained for your benefit may be converted into a Roth IRA maintained for
your benefit. The conversion of an IRA to a Roth IRA is treated as a special
type of qualified rollover contribution. Hence, you must be eligible to make a
qualified rollover contribution in order to convert an IRA to a Roth IRA. A
conversion typically will result in the inclusion of some or all of your IRA's
value in gross income, as described above.
A conversion of an IRA to a Roth IRA can be made without taking an actual
distribution from your IRA. For example, an individual may make a conversion by
notifying the IRA issuer or trustee, whichever is applicable.
UNDER SOME CIRCUMSTANCES, IT MIGHT NOT BE ADVISABLE TO ROLLOVER, TRANSFER, OR
CONVERT ALL OR PART OF AN IRA TO A ROTH IRA. WHETHER YOU SHOULD DO SO WILL
DEPEND ON YOUR PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING, BUT NOT LIMITED
TO, SUCH FACTORS AS WHETHER YOU QUALIFY TO MAKE SUCH A ROLLOVER, TRANSFER, OR
CONVERSION, YOUR FINANCIAL SITUATION, AGE, CURRENT AND FUTURE INCOME NEEDS,
YEARS TO RETIREMENT, CURRENT AND FUTURE TAX RATES, YOUR 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 ADVISER 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
adviser if you intend to contribute rollover, transfer, or conversion amounts to
your Contract, or
84
<PAGE> 89
if you intend to roll over or transfer amounts from your Contract to another
Roth IRA maintained for your benefit.
L. INCOME TAX CONSEQUENCES OF ROTH IRAs
1. Qualified Distributions -- Any "qualified distribution" from a Roth IRA is
excludible from gross income. A "qualified distribution" is a payment or
distribution which satisfies two requirements. First, the payment or
distribution must be (a) made after you attain 59 1/2, (b) made after your
death, (c) attributable to your being disabled, or (d) a "qualified special
purpose distribution" (I.E., a qualified first-time homebuyer distribution under
Section 72(t)(2)(F) of the Code). Second, the payment or distribution must be
made in a taxable year that is at least five years after (1) the first taxable
year for which a contribution was made to any Roth IRA established for you, or
(2) in the case of a rollover from, or a conversion of, an IRA to a Roth IRA,
the taxable year in which the rollover or conversion was made if the payment or
distribution is allocable (as determined in the manner set forth in guidance
issued by the IRS) to the rollover contribution or conversion (or to income
allocable thereto).
2. Nonqualified Distributions -- A distribution from a Roth IRA which is not a
qualified distribution is taxed under Section 72 (relating to annuities), except
that such distribution is treated as made first from contributions to the Roth
IRA to the extent that such distribution, when added to all previous
distributions from the Roth IRA, does not exceed the aggregate amount of
contributions to the Roth IRA. For purposes of determining the amount taxed, (a)
all Roth IRAs established for you will be treated as one contract, (b) all
distributions during any taxable year from Roth IRAs established for you will be
treated as one distribution, and (c) the value of the contract, income on the
contract, and investment in the contract, if applicable, will be computed as of
the close of the calendar year in which the taxable year begins.
An additional tax of 10% is imposed on nonqualified distributions (including
amounts deemed distributed as the result of a prohibited loan or use of your
Roth IRA as security for a loan) made before the benefited individual has
attained age 59 1/2, unless one of the exceptions discussed in Section N
applies.
M. TAX ON EXCESS CONTRIBUTIONS
1. You must pay a 6% excise tax each year on excess contributions that remain in
your 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.
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 taxable amount. 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 Code Section 72(m)(7);
3. To a distribution which is part of a series of substantially equal periodic
payments (made at least annually) over your life or your life expectancy or the
joint life or joint life expectancy of you and your beneficiary; or
4. To a distribution which is used for qualified first-time homebuyer expenses,
qualified high education expenses, certain medical expenses, or by an unemployed
individual to pay health insurance premiums.
85
<PAGE> 90
O. IRA EXCISE TAX REPORTING
Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA, Roth IRA or SIMPLE IRA excise taxes,
you do not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
P. BORROWING
If you borrow money against your 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.
S. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
AND MVA OPTION.
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.25% per annum.
2. An annual records maintenance charge of $30.00 will be assessed against the
Separate Account Value each Contract Year. If no values are in the Subaccounts,
the charge will be assessed against Guarantee Period Value.
3. Withdrawal and early annuitization charges will be assessed based on the
Contract Years elapsed since the Contract was issued as described in the
prospectus under the heading "Withdrawal Charge."
Withdrawals, transfers and early annuitizations of Guarantee Period Value may be
subject to a Market Value Adjustment as described in the prospectus under the
heading "Market Value Adjustment."
4. The method used to compute and allocate the annual earnings is contained in
the prospectus under the heading "Accumulation Unit Value" for Separate Account
Value and under the headings "Guarantee Periods of the MVA Option" and
"Establishment of Guaranteed Interest Rates" for Guarantee Period Value.
5. The growth in value of your Contract is neither guaranteed nor projected but
is based on the investment experience of the Subaccounts or rates of interest as
declared by Kemper Investors Life Insurance Company.
86
<PAGE> 91
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
- - --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED
DEFERRED ANNUITY CONTRACTS
- - --------------------------------------------------------------------------------
KEMPER PASSPORT
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 2000. 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-3
Experts..................................................... B-3
Financial Statements........................................ B-3
Report of Independent Public Accountants.................... B-4
Financial Statements of the Separate Account................ B-6
Appendix A Table of Historical Hypothetical Accumulation
Unit Values and Performance Information................... B-23
Appendix B State Premium Tax Chart.......................... B-28
</TABLE>
<PAGE> 92
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Portfolio
of the Kemper Investors Fund (the "Fund") by each of the Subaccounts. All
expenses incurred in the operations of the Separate Account, except the charge
for mortality and expense risk and administrative expenses, and records
maintenance charge (as described in the Prospectus) are borne by KILICO.
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the years ended December 31, 1999, 1998 and 1997.
The firm performed the annual audit of the financial statements of the Separate
Account and KILICO for the years ended December 31, 1999, 1998 and 1997.
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 the affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments. During 1999, 1998 and 1997, KILICO incurred gross commissions payable
of approximately $2.0, $4.2, and $5.6 million, respectively, to licensed
insurance agents.
PERFORMANCE INFORMATION OF SUBACCOUNTS
As described in the Prospectus, a Subaccount's historical performance may be
shown in the form of standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, Kemper Investment Grade Bond Subaccount, Kemper Government
Securities Subaccount, and Kemper Strategic Income Subaccount (formerly Kemper
Global Income Subaccount); and "yield" and "effective yield" information may be
provided in the case of the Kemper Money Market Subaccount #1 and Kemper Money
Market Subaccount #2 (collectively, the "Kemper Money Market Subaccounts").
These various measures of performance are described below.
A Subaccount's standardized average annual total return quotation is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a
Subaccount for a specific period is found by first taking a hypothetical $1,000
investment in each of the Subaccount's units on the first day of the period at
the maximum offering price, which is the Accumulation Unit value per unit
("initial investment") and computing the ending redeemable value ("redeemable
value") of that investment at the end of the period. The redeemable value
reflects the effect of the applicable Withdrawal Charge that may be imposed at
the end of the period as well as all other recurring charges and fees applicable
under the 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 total return
performance. Nonstandardized total return performance for a specific period is
calculated by first taking an investment (assumed to be $40,000 below) in each
Subaccount's units on the first day of the period at the maximum offering price,
which is the Accumulation Unit Value per unit ("initial investment") and
computing the ending value ("ending value") of that investment at the end of the
period. The ending value does not include the effect of the applicable
Withdrawal Charge that may be imposed at the end of the period, and thus may be
higher than if such charge were deducted. Premium taxes are not included in the
term charges. The nonstandardized total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
An assumed investment of $40,000 was chosen because that approximates the size
of a typical account. The account size used affects the performance figure
because the Records Maintenance Charge is a fixed per account charge. Both
annualized and nonannualized (cumulative) nonstandardized total return figures
may be provided. Annualized nonstandardized total return figures represent the
B-1
<PAGE> 93
average annual percentage change in the value of a Subaccount over the
applicable period while nonannualized (cumulative) figures represent the actual
percentage change over the applicable period.
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover periods of one, three, five and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in a
Subaccount (life of Subaccount). Nonstandardized total return will cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper Money Market Subaccount, Kemper Total Return Subaccount and
Kemper High Yield Subaccount, and for periods from December 9, 1983 (inception)
for the Kemper Growth Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount, the Kemper Investment Grade Bond
Subaccount, and the Kemper Government Securities Subaccount, and the Kemper
Strategic Income Subaccount (formerly Kemper Global Income Subaccount) is
computed in accordance with a standard method prescribed by rules of the
Securities and Exchange Commission. The yields for the Kemper High Yield
Subaccount, the Kemper Government Securities Subaccount, the Kemper Investment
Grade Bond Subaccount and the Kemper Strategic Income Subaccount (formerly
Kemper Global Income Subaccount), based upon the one month period ended March
31, 2000 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 Subaccounts' yields are computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit Value during
the period is divided by the Accumulation Unit Value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Account's portfolio are not included in the calculation. The
yield for the seven-day period ended March 31, 2000 was 4.30% for the Kemper
Money Market Subaccount #1 and 5.50% for Kemper Money Market Subaccount #2. The
average portfolio maturity was 14 days.
The Kemper Money Market Subaccounts' effective yields are determined by taking
the base period return (computed as described above) and calculating the effect
of assumed compounding. The formula for the effective
B-2
<PAGE> 94
yield is: (base period return +1) (365) / (7) - 1. The effective yield for the
seven-day period ended March 31, 2000 was 4.39% for the Kemper Money Market
Subaccount #1 and 5.65% for Kemper Money Market Subaccount #2.
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years.
Yield, effective yield and nonstandardized total return do not reflect the
effect of the Withdrawal Charge or premium taxes that may be imposed upon the
redemption of units. Standardized average annual total return reflects the
effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the period in question.
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes described in the
Prospectus. 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 tables in Appendix A include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1999.
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, 1999 and the related statements of
operations for the year then ended and the statements of changes in contract
owners' equity for the years ended December 31, 1999 and 1998 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
reflect assets attributable to other variable annuity contracts offered by
KILICO through the Separate Account.
B-3
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors of Kemper Investors Life Insurance Company and
Contract Owners of Kemper Investors Life Insurance Company's
KILICO Variable Annuity Separate Account
In our opinion, the accompanying statements of assets and liabilities and
contract owners' equity and the related statements of operations and changes in
contract owners' equity present fairly, in all material respects, the financial
position of the subaccounts of Kemper Investors Life Insurance Company's (the
"Company") KILICO Variable Annuity Separate Account, which includes the Kemper
Money Market Subaccount #1, Kemper Money Market Subaccount #2, Kemper Total
Return Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount,
Kemper Government Securities Subaccount, Kemper International Subaccount, Kemper
Small Cap Growth Subaccount, Kemper Investment Grade Bond Subaccount, Kemper
Contrarian Value Subaccount, Kemper Small Cap Value Subaccount, Kemper
Value+Growth Subaccount, Kemper Horizon 20+ Subaccount, Kemper Horizon 10+
Subaccount, Kemper Horizon 5 Subaccount, Kemper Blue Chip Subaccount, and Kemper
Global Income Subaccount (investment options within the Kemper Variable Series,
formerly Investors Fund Series) thereof at December 31, 1999, and the results of
their operations for the year then ended and the changes in their contract
owners' equity for the two years then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States 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, 1999 provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 24, 2000
B-4
<PAGE> 96
(This page intentionally left blank)
B-5
<PAGE> 97
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
---------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL KEMPER KEMPER GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT #1 SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in
underlying portfolio
funds, at current
values................ $137,366 2,679 716,720 218,357 574,900 71,783
Dividends and other
receivables........... 432 11 36 31 1 --
-------- ----- ------- ------- ------- ------
Total assets..... 137,798 2,690 716,756 218,388 574,901 71,783
-------- ----- ------- ------- ------- ------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense
risk and
administrative
charges............. 120 -- 731 225 586 68
Other payables........ 1 -- 217 445 282 6
-------- ----- ------- ------- ------- ------
Total
liabilities.... 121 -- 948 670 868 74
-------- ----- ------- ------- ------- ------
Contract owners'
equity................ $137,677 2,690 715,808 217,718 574,033 71,709
======== ===== ======= ======= ======= ======
ANALYSIS OF CONTRACT
OWNERS' EQUITY
Excess (deficiency) of
proceeds from units
sold over payments for
units redeemed........ $ 60,415 1,091 (6,653) 1,825 9,349 34,942
Accumulated net
investment income
(loss)................ 77,262 1,599 466,966 220,219 275,309 37,352
Accumulated net realized
gain (loss) on sales
of investments........ -- -- 138,146 3,970 100,375 346
Unrealized appreciation
(depreciation) of
investments........... -- -- 117,349 (8,296) 189,000 (931)
-------- ----- ------- ------- ------- ------
Contract owners'
equity................ $137,677 2,690 715,808 217,718 574,033 71,709
======== ===== ======= ======= ======= ======
<CAPTION>
KEMPER VARIABLE SERIES*
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
ASSETS
Investments in
underlying portfolio
funds, at current
values................ 159,793 166,144
Dividends and other
receivables........... 1 67
------- -------
Total assets..... 159,794 166,211
------- -------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense
risk and
administrative
charges............. 156 155
Other payables........ 86 --
------- -------
Total
liabilities.... 242 155
------- -------
Contract owners'
equity................ 159,552 166,056
======= =======
ANALYSIS OF CONTRACT
OWNERS' EQUITY
Excess (deficiency) of
proceeds from units
sold over payments for
units redeemed........ 42,661 65,173
Accumulated net
investment income
(loss)................ 29,318 23,953
Accumulated net realized
gain (loss) on sales
of investments........ 39,837 25,083
Unrealized appreciation
(depreciation) of
investments........... 47,736 51,847
------- -------
Contract owners'
equity................ 159,552 166,056
======= =======
</TABLE>
- - ---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
B-6
<PAGE> 98
<TABLE>
<CAPTION>
KEMPER VARIABLE 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 BLUE CHIP GLOBAL INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
18,607 92,226 31,631 48,370 10,321 15,416 9,194 36,190 1,513
290 134 5 -- -- -- -- 1 --
------ ------ ------ ------ ------ ------ ----- ------ -----
18,897 92,360 31,636 48,370 10,321 15,416 9,194 36,191 1,513
------ ------ ------ ------ ------ ------ ----- ------ -----
11 82 28 44 10 12 6 14 --
6 4 4 2 -- -- -- 4 --
------ ------ ------ ------ ------ ------ ----- ------ -----
17 86 32 46 10 12 6 18 --
------ ------ ------ ------ ------ ------ ----- ------ -----
18,880 92,274 31,604 48,324 10,311 15,404 9,188 36,173 1,513
====== ====== ====== ====== ====== ====== ===== ====== =====
18,577 77,678 31,478 32,016 7,600 11,824 7,948 30,602 1,496
312 7,165 79 763 119 195 96 (217) 105
368 15,069 1,825 6,973 1,033 1,727 537 974 (34)
(377) (7,638) (1,778) 8,572 1,559 1,658 607 4,814 (54)
------ ------ ------ ------ ------ ------ ----- ------ -----
18,880 92,274 31,604 48,324 10,311 15,404 9,188 36,173 1,513
====== ====== ====== ====== ====== ====== ===== ====== =====
</TABLE>
B-7
<PAGE> 99
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
---------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL KEMPER KEMPER GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT #1 SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Dividends and capital
gains distributions... $5,645 161 60,683 24,402 -- 3,826
EXPENSES
Mortality and expense
risk and
administrative
charges............... 1,424 2 9,543 3,256 7,131 1,011
------ --- ------ ------- ------- ------
Net investment income
(loss).................. 4,221 159 51,140 21,146 (7,131) 2,815
------ --- ------ ------- ------- ------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss)
on sales of
investments........... -- -- 29,197 (6,838) 30,772 (611)
Change in unrealized
appreciation
(depreciation) of
investments........... -- -- 8,683 (10,902) 134,497 (2,754)
------ --- ------ ------- ------- ------
Net realized and
unrealized gain (loss)
on investments.......... -- -- 37,880 (17,740) 165,269 (3,365)
------ --- ------ ------- ------- ------
Net increase (decrease) in
contract owners' equity
resulting from
operations.............. $4,221 159 89,020 3,406 158,138 (550)
====== === ====== ======= ======= ======
<CAPTION>
KEMPER VARIABLE SERIES*
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
REVENUE
Dividends and capital
gains distributions... 17,715 --
EXPENSES
Mortality and expense
risk and
administrative
charges............... 1,859 1,739
------ ------
Net investment income
(loss).................. 15,856 (1,739)
------ ------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss)
on sales of
investments........... 9,865 9,762
Change in unrealized
appreciation
(depreciation) of
investments........... 24,305 32,251
------ ------
Net realized and
unrealized gain (loss)
on investments.......... 34,170 42,013
------ ------
Net increase (decrease) in
contract owners' equity
resulting from
operations.............. 50,026 40,274
====== ======
</TABLE>
- - ---------------
*Formerly Investors Fund Series
See accompanying notes to financial statements.
B-8
<PAGE> 100
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
-----------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5 BLUE CHIP GLOBAL INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
465 7,006 279 1,163 186 321 168 74 103
214 1,206 423 580 124 200 128 247 26
---- ------- ---- ----- --- ----- --- ----- ----
251 5,800 (144) 583 62 121 40 (173) 77
---- ------- ---- ----- --- ----- --- ----- ----
(16) 6,046 (229) 4,628 459 1,175 203 845 (91)
(733) (24,707) 497 1,178 215 (258) 47 4,171 (115)
---- ------- ---- ----- --- ----- --- ----- ----
(749) (18,661) 268 5,806 674 917 250 5,016 (206)
---- ------- ---- ----- --- ----- --- ----- ----
(498) (12,861) 124 6,389 736 1,038 290 4,843 (129)
==== ======= ==== ===== === ===== === ===== ====
</TABLE>
B-9
<PAGE> 101
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
---------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL KEMPER KEMPER GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT #1 SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income
(loss)................ $ 4,221 159 51,140 21,146 (7,131) 2,815
Net realized gain (loss)
on sales of
investments........... -- -- 29,197 (6,838) 30,772 (611)
Change in unrealized
appreciation
(depreciation) of
investments........... -- -- 8,683 (10,902) 134,497 (2,754)
-------- ------ -------- ------- -------- -------
Net increase
(decrease) in
contract owners'
equity resulting
from operations..... 4,221 159 89,020 3,406 158,138 (550)
-------- ------ -------- ------- -------- -------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units
sold.................. 45,378 2,759 42,169 22,709 25,447 12,331
Net transfers (to) from
affiliate and
subaccounts........... 18,795 (4,779) (49,778) (27,431) (66,997) (4,399)
Payments for units
redeemed.............. (37,819) (158) (101,982) (43,328) (80,300) (14,018)
-------- ------ -------- ------- -------- -------
Net increase
(decrease) in
contract owners'
equity from account
unit transactions... 26,354 (2,178) (109,591) (48,050) (121,850) (6,086)
-------- ------ -------- ------- -------- -------
Total increase (decrease)
in contract owners'
equity.................. 30,575 (2,019) (20,571) (44,644) 36,288 (6,636)
Beginning of year......... 107,102 4,709 736,379 262,362 537,745 78,345
-------- ------ -------- ------- -------- -------
End of year............... $137,677 2,690 715,808 217,718 574,033 71,709
======== ====== ======== ======= ======== =======
<CAPTION>
KEMPER VARIABLE SERIES*
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
OPERATIONS
Net investment income
(loss)................ 15,856 (1,739)
Net realized gain (loss)
on sales of
investments........... 9,865 9,762
Change in unrealized
appreciation
(depreciation) of
investments........... 24,305 32,251
------- -------
Net increase
(decrease) in
contract owners'
equity resulting
from operations..... 50,026 40,274
------- -------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units
sold.................. 12,302 17,628
Net transfers (to) from
affiliate and
subaccounts........... (27,423) (22,588)
Payments for units
redeemed.............. (20,534) (13,139)
------- -------
Net increase
(decrease) in
contract owners'
equity from account
unit transactions... (35,655) (18,099)
------- -------
Total increase (decrease)
in contract owners'
equity.................. 14,371 22,175
Beginning of year......... 145,181 143,881
------- -------
End of year............... 159,552 166,056
======= =======
</TABLE>
- - ---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
B-10
<PAGE> 102
<TABLE>
<CAPTION>
KEMPER VARIABLE 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 BLUE CHIP GLOBAL INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
251 5,800 (144) 583 62 121 40 (173) 77
(16) 6,046 (229) 4,628 459 1,175 203 845 (91)
(733) (24,707) 497 1,178 215 (258) 47 4,171 (115)
------ ------- ------ ------ ------ ------ ----- ------ -----
(498) (12,861) 124 6,389 736 1,038 290 4,843 (129)
------ ------- ------ ------ ------ ------ ----- ------ -----
6,620 19,424 4,836 6,147 1,140 2,541 1,504 13,387 1,000
3,501 1,432 (2,966) (5,820) (365) (1,509) 1,348 11,996 (685)
(2,364) (11,571) (3,756) (5,397) (413) (2,105) (771) (2,837) (100)
------ ------- ------ ------ ------ ------ ----- ------ -----
7,757 9,285 (1,886) (5,070) 362 (1,073) 2,081 22,546 215
------ ------- ------ ------ ------ ------ ----- ------ -----
7,259 (3,576) (1,762) 1,319 1,098 (35) 2,371 27,389 86
11,621 95,850 33,366 47,005 9,213 15,439 6,817 8,784 1,427
------ ------- ------ ------ ------ ------ ----- ------ -----
18,880 92,274 31,604 48,324 10,311 15,404 9,188 36,173 1,513
====== ======= ====== ====== ====== ====== ===== ====== =====
</TABLE>
B-11
<PAGE> 103
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLES SERIES*
---------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL KEMPER KEMPER GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT #1 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 year......... 73,754 6,394 742,784 305,821 527,100 72,821
-------- ------ -------- ------- ------- -------
End of year............... $107,102 4,709 736,379 262,362 537,745 78,345
======== ====== ======== ======= ======= =======
<CAPTION>
KEMPER VARIABLES SERIES*
--------------------------
KEMPER
KEMPER 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 year......... 160,596 112,863
------- -------
End of year............... 145,181 143,881
======= =======
</TABLE>
- - ---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
B-12
<PAGE> 104
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
- - -------------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5 BLUE CHIP GLOBAL INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- - ---------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- -------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
98 1,760 443 404 143 157 103 (24) 35
311 6,261 911 1,727 397 414 236 102 36
78 6,236 (6,089) 3,626 309 604 115 589 56
- - ------ ------ ------ ------ ------ ------ ----- ----- -----
487 14,257 (4,735) 5,757 849 1,175 454 667 127
- - ------ ------ ------ ------ ------ ------ ----- ----- -----
2,850 15,517 6,528 7,814 2,155 2,644 1,628 2,261 47
3,781 (5,407) 1,040 8,749 116 3,301 221 4,001 933
(955) (6,599) (2,717) (3,236) (375) (841) (384) (223) (6)
- - ------ ------ ------ ------ ------ ------ ----- ----- -----
5,676 3,511 4,851 13,327 1,896 5,104 1,465 6,039 974
- - ------ ------ ------ ------ ------ ------ ----- ----- -----
6,163 17,768 116 19,084 2,745 6,279 1,919 6,706 1,101
5,458 78,082 33,250 27,921 6,468 9,160 4,898 2,078 326
- - ------ ------ ------ ------ ------ ------ ----- ----- -----
11,621 95,850 33,366 47,005 9,213 15,439 6,817 8,784 1,427
====== ====== ====== ====== ====== ====== ===== ===== =====
</TABLE>
B-13
<PAGE> 105
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
KILICO Variable Annuity Separate Account (the "Separate Account") is a unit
investment trust registered under the Investment Company Act of 1940, as
amended, established by Kemper Investors Life Insurance Company ("KILICO").
KILICO is a wholly-owned subsidiary of 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 is listed on the Swiss
Market Index (SMI). Allied Zurich p.l.c. 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 Kemper Advantage III periodic and flexible
payment variable annuity contracts ("Kemper Advantage III"), Kemper Passport
individual and group variable, fixed and market value adjusted deferred annuity
contracts ("Kemper Passport"), Kemper Destinations individual and group
variable, fixed and market value adjusted deferred annuity contracts ("Kemper
Destinations") and Farmers Variable Annuity I individual and group variable,
fixed and market value adjusted deferred annuity contracts ("Farmers Variable
Annuity I"). The Separate Account is divided into a total of fifty-nine
subaccounts with various subaccount options available to Contract Owners
depending upon their respective Contracts. The Kemper Advantage III contracts
have thirty-four subaccount options available to Contract Owners and each
subaccount invests exclusively in the shares of a corresponding portfolio in the
Kemper Variable Series (formerly Investors Fund Series), the Janus Aspen Series,
the Lexington Natural Resources Trust, the Lexington Emerging Markets Fund,
Inc., the Fidelity Variable Insurance Products Fund, the Fidelity Variable
Insurance Products Fund II, the Scudder Variable Life Investment Fund, The
Dreyfus Socially Responsible Growth Fund, Inc., the J.P. Morgan Series Trust II,
The Alger American Fund and the American Century Variable Portfolios, Inc., all
of which are open-end diversified management companies. The Kemper Passport
contracts have seventeen subaccount options available to the Contract Owners and
each subaccount invests exclusively in the shares of a corresponding portfolio
in the Kemper Variable Series, an open-end diversified management company. The
Kemper Destinations contracts have thirty-seven subaccount options available to
the Contract Owners and each subaccount invests exclusively in the shares of a
corresponding portfolio in the Kemper Variable Series, the Scudder Variable Life
Investment Fund, The Alger American Fund, the Dreyfus Investment Portfolios, The
Dreyfus Socially Responsible Growth Fund, Inc., the Janus Aspen Series and the
Warburg Pincus Trust, all of which are open-end diversified management
companies. The Farmers Variable Annuity I contracts have thirteen subaccount
options available to the Contract Owners and each subaccount invests exclusively
in the shares of a corresponding portfolio in the Kemper Variable Series, the
Scudder Variable Life Investment Fund, the Janus Aspen Series, the PIMCO
Variable Insurance Trust and the Templeton Variable Products Series Fund, all of
which are open-end diversified management companies.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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, 1999.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are generally 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 generally reported on a first in, first out (FIFO)
cost basis.
B-14
<PAGE> 106
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.
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, 1999, are as follows (in thousands,
differences are due to rounding):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
INVESTMENTS
KEMPER VARIABLE SERIES:
Kemper Money Market Subaccount #1........................... 137,366 $ 137,366
Kemper Money Market Subaccount #2........................... 2,679 2,679
Kemper Total Return Subaccount.............................. 248,650 599,371
Kemper High Yield Subaccount................................ 190,485 226,653
Kemper Growth Subaccount.................................... 141,800 385,900
Kemper Government Securities Subaccount..................... 62,065 72,714
Kemper International Subaccount............................. 74,482 112,057
Kemper Small Cap Growth Subaccount.......................... 62,603 114,297
Kemper Investment Grade Bond Subaccount..................... 16,897 18,984
Kemper Contrarian Value Subaccount.......................... 62,749 99,864
Kemper Small Cap Value Subaccount........................... 29,154 33,409
Kemper Value+Growth Subaccount.............................. 25,519 39,798
Kemper Horizon 20+ Subaccount............................... 6,393 8,762
Kemper Horizon 10+ Subaccount............................... 10,424 13,758
Kemper Horizon 5 Subaccount................................. 6,892 8,587
Kemper Blue Chip Subaccount................................. 23,065 31,376
Kemper Global Income Subaccount............................. 1,534 1,567
----------
TOTAL INVESTMENTS AT COST........................... $1,907,142
==========
</TABLE>
A description of the underlying investments of the subaccounts are summarized
below.
KEMPER VARIABLE SERIES
KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests in the Kemper Money
Portfolio of the Kemper Variable Series. The 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 can be no assurance that the Portfolio
will be able to do so. The Kemper Money Market Subaccount #1 represents the
Kemper Advantage III, Kemper Passport and Kemper Destinations Money Market
Subaccount. Kemper Money Market Subaccount #2 represents funds allocated by the
owner of a contract to the dollar cost averaging program. Under the dollar cost
averaging ("DCA") 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 Kemper Passport and Kemper
Destinations contracts.
KEMPER TOTAL RETURN SUBACCOUNT: This subaccount invests in the Kemper Total
Return Portfolio of the Kemper Variable Series. The Portfolio seeks high total
return, a combination of income and capital appreciation.
KEMPER HIGH YIELD SUBACCOUNT: This subaccount invests in the Kemper High Yield
Portfolio of the Kemper Variable Series. The Portfolio seeks to provide a high
level of current income.
KEMPER GROWTH SUBACCOUNT: This subaccount invests in the Kemper Growth Portfolio
of the Kemper Variable Series. The Portfolio seeks maximum appreciation of
capital.
B-15
<PAGE> 107
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests in the Kemper
Government Securities Portfolio of the Kemper Variable Series. The Portfolio
seeks high current return consistent with preservation of capital.
KEMPER INTERNATIONAL SUBACCOUNT: This subaccount invests in the Kemper
International Portfolio of the Kemper Variable Series. The Portfolio seeks total
return, a combination of capital growth and income.
KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount invests in the Kemper Small
Cap Growth Portfolio of the Kemper Variable Series. The Portfolio seeks maximum
appreciation of investors' capital.
KEMPER INVESTMENT GRADE BOND SUBACCOUNT: This subaccount invests in the Kemper
Investment Grade Bond Portfolio of the Kemper Variable Series. The Portfolio
seeks high current income.
KEMPER CONTRARIAN VALUE SUBACCOUNT: This subaccount invests in the Kemper
Contrarian Value Portfolio of the Kemper Variable Series. The Portfolio seeks to
achieve a high rate of total return.
KEMPER SMALL CAP VALUE SUBACCOUNT: This subaccount invests in the Kemper Small
Cap Value Portfolio of the Kemper Variable Series. The Portfolio seeks long-term
capital appreciation.
KEMPER VALUE+GROWTH SUBACCOUNT: This subaccount invests in the Kemper
Value+Growth Portfolio of the Kemper Variable Series. The 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 HORIZON 20+ SUBACCOUNT: This subaccount invests in the Kemper Horizon 20+
Portfolio of the Kemper Variable Series. The Portfolio, designed for investors
with approximately a 20+ year investment horizon, seeks growth of capital, with
income as a secondary objective.
KEMPER HORIZON 10+ SUBACCOUNT: This subaccount invests in the Kemper Horizon 10+
Portfolio of the Kemper Variable Series. The Portfolio, designed for investors
with approximately a 10+ year investment horizon, seeks a balance between growth
of capital and income, consistent with moderate risk.
KEMPER HORIZON 5 SUBACCOUNT: This subaccount invests in the Kemper Horizon 5
Portfolio of the Kemper Variable Series. The Portfolio, 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.
KEMPER BLUE CHIP SUBACCOUNT: This subaccount invests in the Kemper Blue Chip
Portfolio of the Kemper Variable Series. The Portfolio seeks growth of capital
and of income.
KEMPER GLOBAL INCOME SUBACCOUNT: This subaccount invests in the Kemper Global
Income Portfolio of the Kemper Variable Series. The Portfolio seeks to provide
high current income consistent with prudent total return asset management.
(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 Kemper 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 Kemper 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
the Kemper Passport 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 the Kemper Destinations 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. KILICO
assesses that portion of each subaccount representing assets under the Farmers
Variable Annuity I 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 Kemper Passport and Kemper
Destinations DCA Money Market Subaccount #2, available for participation in the
B-16
<PAGE> 108
dollar cost averaging program, has no daily asset charge deduction. For the year
ended December 31, 1999, asset charges totaled $30,487,471, $6,803,293,
$2,551,583 and $9,209 for Kemper Advantage III, Kemper Passport, Kemper
Destinations and Farmers Variable Annuity I contracts, respectively.
KILICO also assesses against each Kemper 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 a maximum of $30 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 Kemper Passport, Kemper Destinations and Farmers Variable Annuity I
contract participating in one or more of the subaccounts a records maintenance
charge of $30, generally taken at the end of each contract year. The records
maintenance charge for Kemper Advantage III, Kemper Passport, Kemper
Destinations and Farmers Variable Annuity I contracts are waived for all
individual contracts whose investment value exceeds $50,000 on the date of
assessment. For the year ended December 31, 1999, records maintenance charges
totaled $1,395,893, $149,119 and $12,715 for Kemper Advantage III, Kemper
Passport and Kemper Destinations contracts, respectively.
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the Kemper Advantage III Contract Owners participating in the Kemper
Money Market, Kemper Total Return, Kemper High Yield and Kemper Growth
Subaccounts, whose direct and indirect operating expenses exceed eighty
hundredths of one percent (.80%) of average daily net assets. In determining
reimbursement of direct and indirect operating expenses, for each subaccount,
charges for mortality and expense risks and administrative expenses, and records
maintenance charges are excluded and, for each subaccount, charges for taxes,
extraordinary expenses, and brokerage and transaction costs are excluded. During
the year ended December 31, 1999, no such payment was made.
KILICO assesses an optional annual charge for the Guaranteed Retirement Income
Benefit ("GRIB"), related to the Kemper Destinations and Farmers Variable
Annuity I 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, 1999, GRIB charges totaled $351,417
and $1,019 for Kemper Destinations and Farmers Variable Annuity I contracts,
respectively.
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 Kemper Variable Series. 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.
B-17
<PAGE> 109
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
Contract Owners' equity at December 31, 1999, 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>
KEMPER ADVANTAGE III CONTRACTS
KEMPER VARIABLE SERIES:
KEMPER MONEY MARKET SUBACCOUNT #1
Flexible Payment, Qualified............................... 333 $ 2.588 $ 861
Flexible Payment, Nonqualified............................ 3,501 2.588 9,061
Periodic Payment, Qualified............................... 20,014 2.455 49,137
Periodic Payment, Nonqualified............................ 13,610 2.455 33,415
----------
92,474
----------
KEMPER TOTAL RETURN SUBACCOUNT
Flexible Payment, Qualified............................... 656 8.425 5,525
Flexible Payment, Nonqualified............................ 2,817 7.800 21,972
Periodic Payment, Qualified............................... 60,736 7.993 485,467
Periodic Payment, Nonqualified............................ 9,110 7.447 67,848
----------
580,812
----------
KEMPER HIGH YIELD SUBACCOUNT
Flexible Payment, Qualified............................... 197 6.442 1,268
Flexible Payment, Nonqualified............................ 1,138 6.168 7,018
Periodic Payment, Qualified............................... 15,887 6.112 97,105
Periodic Payment, Nonqualified............................ 4,245 5.945 25,274
----------
130,665
----------
KEMPER GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 153 9.858 1,509
Flexible Payment, Nonqualified............................ 823 9.824 8,084
Periodic Payment, Qualified............................... 40,027 9.401 376,285
Periodic Payment, Nonqualified............................ 6,263 9.387 58,790
----------
444,668
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Flexible Payment, Qualified............................... 145 1.823 264
Flexible Payment, Nonqualified............................ 779 1.823 1,421
Periodic Payment, Qualified............................... 15,187 1.769 26,859
Periodic Payment, Nonqualified............................ 7,529 1.769 13,315
----------
41,859
----------
KEMPER INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified............................... 170 2.708 460
Flexible Payment, Nonqualified............................ 457 2.708 1,237
Periodic Payment, Qualified............................... 32,639 2.645 86,334
Periodic Payment, Nonqualified............................ 5,066 2.645 13,399
----------
101,430
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 127 3.498 443
Flexible Payment, Nonqualified............................ 396 3.498 1,384
Periodic Payment, Qualified............................... 31,772 3.440 109,283
Periodic Payment, Nonqualified............................ 3,242 3.440 11,152
----------
122,262
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Flexible Payment, Qualified............................... 24 1.151 28
Flexible Payment, Nonqualified............................ 227 1.151 261
Periodic Payment, Qualified............................... 2,396 1.139 2,728
Periodic Payment, Nonqualified............................ 968 1.139 1,103
----------
4,120
----------
</TABLE>
B-18
<PAGE> 110
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER ADVANTAGE III CONTRACTS (CONTINUED)
KEMPER VARIABLE SERIES (CONTINUED):
KEMPER CONTRARIAN VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 57 $ 1.580 $ 91
Flexible Payment, Nonqualified............................ 110 1.580 174
Periodic Payment, Qualified............................... 21,269 1.563 33,239
Periodic Payment, Nonqualified............................ 3,541 1.563 5,534
----------
39,038
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 6 1.091 6
Flexible Payment, Nonqualified............................ 66 1.091 72
Periodic Payment, Qualified............................... 11,756 1.079 12,684
Periodic Payment, Nonqualified............................ 1,319 1.079 1,423
----------
14,185
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 33 1.941 65
Flexible Payment, Nonqualified............................ 33 1.941 64
Periodic Payment, Qualified............................... 6,861 1.920 13,176
Periodic Payment, Nonqualified............................ 1,727 1.920 3,316
----------
16,621
----------
KEMPER HORIZON 20+ SUBACCOUNT
Flexible Payment, Qualified............................... -- 1.655 --
Flexible Payment, Nonqualified............................ -- 1.630 --
Periodic Payment, Qualified............................... 1,713 1.637 2,804
Periodic Payment, Nonqualified............................ 225 1.637 369
----------
3,173
----------
KEMPER HORIZON 10+ SUBACCOUNT
Flexible Payment, Qualified............................... 7 1.513 11
Flexible Payment, Nonqualified............................ 9 1.513 13
Periodic Payment, Qualified............................... 2,086 1.497 3,121
Periodic Payment, Nonqualified............................ 306 1.497 458
----------
3,603
----------
KEMPER HORIZON 5 SUBACCOUNT
Flexible Payment, Qualified............................... -- 1.362 --
Flexible Payment, Nonqualified............................ -- 1.370 --
Periodic Payment, Qualified............................... 1,008 1.356 1,367
Periodic Payment, Nonqualified............................ 323 1.356 438
----------
1,805
----------
TOTAL KEMPER ADVANTAGE III CONTRACT OWNERS'
EQUITY............................................ $1,596,715
==========
KEMPER PASSPORT CONTRACTS
KEMPER VARIABLE SERIES:
KEMPER MONEY MARKET SUBACCOUNT #1
Qualified................................................. 5,707 $ 1.290 $ 7,360
Nonqualified.............................................. 16,496 1.290 21,273
----------
28,633
----------
KEMPER MONEY MARKET SUBACCOUNT #2
Qualified................................................. 324 1.424 462
Nonqualified.............................................. 670 1.424 954
----------
1,416
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified................................................. 11,261 2.173 24,475
Nonqualified.............................................. 36,480 2.173 79,286
----------
103,761
----------
</TABLE>
B-19
<PAGE> 111
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER PASSPORT CONTRACTS (CONTINUED)
KEMPER VARIABLE SERIES (CONTINUED):
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................. 7,927 $ 1.903 $ 15,088
Nonqualified.............................................. 27,992 1.903 53,278
----------
68,366
----------
KEMPER GROWTH SUBACCOUNT
Qualified................................................. 9,649 3.181 30,699
Nonqualified.............................................. 27,217 3.181 86,590
----------
117,289
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 3,318 1.429 4,740
Nonqualified.............................................. 11,272 1.429 16,103
----------
20,843
----------
KEMPER INTERNATIONAL SUBACCOUNT
Qualified................................................. 4,123 2.655 10,950
Nonqualified.............................................. 15,971 2.655 42,410
----------
53,360
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 2,345 3.449 8,089
Nonqualified.............................................. 6,735 3.449 23,230
----------
31,319
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 1,056 1.141 1,206
Nonqualified.............................................. 3,599 1.141 4,105
----------
5,311
----------
KEMPER CONTRARIAN VALUE SUBACCOUNT
Qualified................................................. 5,661 1.566 8,862
Nonqualified.............................................. 17,129 1.566 26,818
----------
35,680
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Qualified................................................. 2,899 1.081 3,133
Nonqualified.............................................. 8,400 1.081 9,079
----------
12,212
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Qualified................................................. 3,403 1.924 6,546
Nonqualified.............................................. 9,891 1.924 19,028
----------
25,574
----------
KEMPER HORIZON 20+ SUBACCOUNT
Qualified................................................. 1,054 1.640 1,728
Nonqualified.............................................. 2,654 1.640 4,352
----------
6,080
----------
KEMPER HORIZON 10+ SUBACCOUNT
Qualified................................................. 1,317 1.499 1,974
Nonqualified.............................................. 3,949 1.499 5,921
----------
7,895
----------
KEMPER HORIZON 5 SUBACCOUNT
Qualified................................................. 370 1.358 503
Nonqualified.............................................. 2,951 1.358 4,008
----------
4,511
----------
</TABLE>
B-20
<PAGE> 112
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER PASSPORT CONTRACTS (CONTINUED)
KEMPER VARIABLE SERIES (CONTINUED):
KEMPER BLUE CHIP SUBACCOUNT
Qualified................................................. 1,959 $ 1.539 $ 3,013
Nonqualified.............................................. 7,141 1.539 10,986
----------
13,999
----------
KEMPER GLOBAL INCOME SUBACCOUNT
Qualified................................................. 62 1.040 65
Nonqualified.............................................. 202 1.040 210
----------
275
----------
TOTAL KEMPER PASSPORT CONTRACT OWNERS' EQUITY....... $ 536,524
==========
KEMPER DESTINATIONS CONTRACTS
KEMPER VARIABLE SERIES:
KEMPER MONEY MARKET SUBACCOUNT #1
Qualified................................................. 786 $10.559 $ 8,303
Nonqualified.............................................. 783 10.559 8,267
----------
16,570
----------
KEMPER MONEY MARKET SUBACCOUNT #2
Qualified................................................. 68 10.795 732
Nonqualified.............................................. 50 10.795 542
----------
1,274
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified................................................. 1,224 11.936 14,608
Nonqualified.............................................. 1,393 11.936 16,627
----------
31,235
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................. 778 9.717 7,563
Nonqualified.............................................. 1,145 9.717 11,124
----------
18,687
----------
KEMPER GROWTH SUBACCOUNT
Qualified................................................. 407 13.532 5,512
Nonqualified.............................................. 485 13.532 6,564
----------
12,076
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 263 10.259 2,700
Nonqualified.............................................. 594 10.259 6,090
----------
8,790
----------
KEMPER INTERNATIONAL SUBACCOUNT
Qualified................................................. 163 13.549 2,210
Nonqualified.............................................. 188 13.549 2,552
----------
4,762
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 394 14.691 5,793
Nonqualified.............................................. 449 14.691 6,602
----------
12,395
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 422 10.062 4,243
Nonqualified.............................................. 518 10.062 5,206
----------
9,449
----------
</TABLE>
B-21
<PAGE> 113
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER DESTINATIONS CONTRACTS (CONTINUED)
KEMPER VARIABLE SERIES (CONTINUED):
KEMPER CONTRARIAN VALUE SUBACCOUNT
Qualified................................................. 907 $ 9.485 $ 8,601
Nonqualified.............................................. 944 9.485 8,955
----------
17,556
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Qualified................................................. 313 8.547 2,672
Nonqualified.............................................. 297 8.547 2,535
----------
5,207
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Qualified................................................. 231 12.291 2,843
Nonqualified.............................................. 267 12.291 3,286
----------
6,129
----------
KEMPER HORIZON 20+ SUBACCOUNT
Qualified................................................. 46 11.021 510
Nonqualified.............................................. 50 11.021 548
----------
1,058
----------
KEMPER HORIZON 10+ SUBACCOUNT
Qualified................................................. 124 10.998 1,361
Nonqualified.............................................. 231 10.998 2,545
----------
3,906
----------
KEMPER HORIZON 5 SUBACCOUNT
Qualified................................................. 172 10.707 1,840
Nonqualified.............................................. 96 10.707 1,032
----------
2,872
----------
KEMPER BLUE CHIP SUBACCOUNT
Qualified................................................. 808 12.827 10,368
Nonqualified.............................................. 920 12.827 11,806
----------
22,174
----------
KEMPER GLOBAL INCOME SUBACCOUNT
Qualified................................................. 69 9.986 689
Nonqualified.............................................. 55 9.986 549
----------
1,238
----------
TOTAL KEMPER DESTINATIONS CONTRACT OWNERS' EQUITY... $ 175,378
==========
FARMERS VARIABLE ANNUITY I CONTRACTS
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 1 $ 9.924 $ 15
Nonqualified.............................................. 20 9.924 202
----------
217
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 4 15.122 64
Nonqualified.............................................. 1 15.122 16
----------
80
----------
TOTAL FARMERS VARIABLE ANNUITY I CONTRACT OWNERS'
EQUITY............................................ $ 297
==========
</TABLE>
B-22
<PAGE> 114
APPENDIX A
TABLE OF HISTORICAL HYPOTHETICAL* ACCUMULATION UNIT VALUES
AND PERFORMANCE INFORMATION
The historical accumulation unit values are for the life of the Separate Account
in its present organization as a unit investment trust and in its prior
organization as several managed separate accounts based on current deductions
and charges applicable to the Contracts. The Contracts were first offered
January 6, 1992. Values may have varied had assets actually been allocated to
the Separate Account under the Contracts.
HISTORICAL HYPOTHETICAL ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
KEMPER MONEY MARKET
SUBACCOUNT #1
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
04/06/82 ................... .521904
12/31/82 ................... .561706
12/31/83 ................... .605415
12/31/84 ................... .661060
12/31/85 ................... .705934
12/31/86 ................... .743260
12/31/87 ................... .782353
12/31/88 ................... .830274
12/31/89 ................... .894703
12/31/90 ................... .955536
12/31/91 ................... .999459
12/31/92 ................... 1.021027
12/31/93 ................... 1.037409
12/31/94 ................... 1.065127
12/31/95 ................... 1.111573
12/31/96 ................... 1.153353
12/31/97 ................... 1.199008
12/31/98 ................... 1.245376
12/31/99 ................... 1.289616
</TABLE>
<TABLE>
<CAPTION>
KEMPER MONEY MARKET
SUBACCOUNT #2
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
04/06/82 ................... .488861
12/31/82 ................... .526477
12/31/83 ................... .569164
12/31/84 ................... .623384
12/31/85 ................... .669150
12/31/86 ................... .709261
12/31/87 ................... .752167
12/31/88 ................... .804725
12/31/89 ................... .874829
12/31/90 ................... .944037
12/31/91 ................... .999255
12/31/92 ................... 1.033619
12/31/93 ................... 1.063332
12/31/94 ................... 1.105349
12/31/95 ................... 1.167919
12/31/96 ................... 1.227089
12/31/97 ................... 1.291613
12/31/98 ................... 1.358323
12/31/99 ................... 1.424160
</TABLE>
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN
SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
04/14/82 ................... .271127
12/31/82 ................... .334579
12/31/83 ................... .388564
12/31/84 ................... .364932
12/31/85 ................... .462836
12/31/86 ................... .526008
12/31/87 ................... .522732
12/31/88 ................... .578123
12/31/89 ................... .707717
12/31/90 ................... .734077
12/31/91 ................... .997337
12/31/92 ................... 1.001657
12/31/93 ................... 1.109293
12/31/94 ................... .991561
12/31/95 ................... 1.233678
12/31/96 ................... 1.422563
12/31/97 ................... 1.685450
12/31/98 ................... 1.916699
12/31/99 ................... 2.173430
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
04/14/82 ................... .309713
12/31/82 ................... .382894
12/31/83 ................... .433711
12/31/84 ................... .482077
12/31/85 ................... .579127
12/31/86 ................... .673071
12/31/87 ................... .703823
12/31/88 ................... .805071
12/31/89 ................... .784945
12/31/90 ................... .655406
12/31/91 ................... .982658
12/31/92 ................... 1.142847
12/31/93 ................... 1.354484
12/31/94 ................... 1.307729
12/31/95 ................... 1.516342
12/31/96 ................... 1.707976
12/31/97 ................... 1.882768
12/31/98 ................... 1.886520
12/31/99 ................... 1.903343
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH
SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/13/83 ................... .336632
12/31/83 ................... .346384
12/31/84 ................... .378954
12/31/85 ................... .468051
12/31/86 ................... .504874
12/31/87 ................... .507011
12/31/88 ................... .502672
12/31/89 ................... .636443
12/31/90 ................... .632214
12/31/91 ................... .995577
12/31/92 ................... 1.018405
12/31/93 ................... 1.152836
12/31/94 ................... 1.092975
12/31/95 ................... 1.435510
12/31/96 ................... 1.724222
12/31/97 ................... 2.066379
12/31/98 ................... 2.349101
12/31/99 ................... 3.181420
</TABLE>
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
07/13/87 ................... .700085
12/31/87 ................... .710087
12/31/88 ................... .723278
12/31/89 ................... .811610
12/31/90 ................... .881949
12/31/91 ................... 1.004106
12/31/92 ................... 1.050227
12/31/93 ................... 1.104499
12/31/94 ................... 1.060977
12/31/95 ................... 1.246817
12/31/96 ................... 1.262885
12/31/97 ................... 1.358996
12/31/98 ................... 1.436583
12/31/99 ................... 1.428559
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
- - -----------------------------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/92 ....................................... .980721
12/31/93 ....................................... 1.286576
12/31/94 ....................................... 1.225134
12/31/95 ....................................... 1.365361
12/31/96 ....................................... 1.570689
12/31/97 ....................................... 1.698099
12/31/98 ....................................... 1.845192
12/31/99 ....................................... 2.655496
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
- - -----------------------------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/94 ....................................... 1.030937
12/31/95 ....................................... 1.324483
12/31/96 ....................................... 1.674797
12/31/97 ....................................... 2.219929
12/31/98 ....................................... 2.595291
12/31/99 ....................................... 3.449240
</TABLE>
B-23
<PAGE> 115
<TABLE>
<CAPTION>
KEMPER
INVESTMENT GRADE
BOND SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/96 ................... 1.027174
12/31/97 ................... 1.106151
12/31/98 ................... 1.179189
12/31/99 ................... 1.140652
</TABLE>
<TABLE>
<CAPTION>
KEMPER CONTRARIAN VALUE
SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/96 ................... 1.163902
12/31/97 ................... 1.498831
12/31/98 ................... 1.765483
12/31/99 ................... 1.565612
</TABLE>
<TABLE>
<S> <C> <C>
<CAPTION>
KEMPER
SMALL CAP VALUE
SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/96 ................... 1.010142
12/31/97 ................... 1.214542
12/31/98 ................... 1.064601
12/31/99 ................... 1.080849
</TABLE>
<TABLE>
<CAPTION>
KEMPER
VALUE+GROWTH
SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/96 ................... 1.136559
12/31/97 ................... 1.408420
12/31/98 ................... 1.671674
12/31/99 ................... 1.923721
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 20+
SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/96 ................... 1.144182
12/31/97 ................... 1.361426
12/31/98 ................... 1.519935
12/31/99 ................... 1.640127
</TABLE>
<TABLE>
<S> <C> <C>
<CAPTION>
KEMPER
HORIZON 10+
SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/96 ................... 1.104505
12/31/97 ................... 1.273820
12/31/98 ................... 1.400638
12/31/99 ................... 1.499320
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 5 SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/96 ................... 1.086828
12/31/97 ................... 1.209733
12/31/98 ................... 1.311331
12/31/99 ................... 1.358093
<CAPTION>
KEMPER
BLUE CHIP SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/97 ................... 1.106221
12/31/98 ................... 1.243830
12/31/99 ................... 1.538513
</TABLE>
<TABLE>
<CAPTION>
KEMPER
GLOBAL INCOME SUBACCOUNT
- - ---------------------------------------
UNIT
DATE VALUES
- - -------- --------
<S> <C> <C>
12/31/97 ................... 1.020218
12/31/98 ................... 1.118307
12/31/99 ................... 1.039893
</TABLE>
- - ---------------
* As of January 6, 1992 the accumulation unit values are based on actual
performance.
B-24
<PAGE> 116
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
CUMULATIVE ------------
YEAR TO DATE (%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
---------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT.................. -11.32%
Life of Subaccount (from 05/01/96)................ $ 62,624 56.56% 13.00% 11.65%
Life of Portfolio (from 05/01/96)................. 62,624 56.56 13.00 11.65
Three Years....................................... 53,805 34.51 10.39 8.78
One Year.......................................... 35,472 -11.32 -11.32 -15.86
KEMPER VALUE+GROWTH SUBACCOUNT...................... 15.08
Life of Subaccount (from 05/01/96)................ 76,948 92.37 19.52 18.10
Life of Portfolio (from 05/01/96)................. 76,948 92.37 19.52 18.10
Three Years....................................... 67,703 69.26 19.17 17.45
One Year.......................................... 46,031 15.08 15.08 9.19
KEMPER HORIZON 20+ SUBACCOUNT....................... 7.91
Life of Subaccount (from 05/01/96)................ 65,605 64.01 14.44 13.08
Life of Portfolio (from 05/01/96)................. 65,605 64.01 14.44 13.08
Three Years....................................... 57,337 43.34 12.75 11.12
One Year.......................................... 43,163 7.91 7.91 2.38
KEMPER MONEY MARKET SUBACCOUNT #1(7)................ 3.55
Life of Subaccount (from 04/06/82)................ 98,839 147.10 5.24 5.23
Life of Portfolio (from 04/06/82)................. 98,839 147.10 5.24 5.23
Ten Years......................................... 57,655 44.14 3.72 3.71
Five Years........................................ 48,430 21.08 3.90 3.17
Three Years....................................... 44,725 11.81 3.79 2.28
One Year.......................................... 41,420 3.55 3.55 -1.75
KEMPER HIGH YIELD SUBACCOUNT(6)..................... 0.89
Life of Subaccount (from 04/06/82)................ 239,478 498.70 10.62 10.62
Life of Portfolio (from 04/06/82)................. 239,478 498.70 10.62 10.62
Ten Years......................................... 96,992 142.48 9.26 9.25
Five Years........................................ 58,218 45.55 7.80 7.04
Three Years....................................... 44,575 11.44 3.68 2.17
One Year.......................................... 40,356 0.89 0.89 -4.27
KEMPER GOVERNMENT SECURITIES SUBACCOUNT............. -0.56
Life of Subaccount (from 11/03/89)................ 70,971 77.43 5.81 5.85
Life of Portfolio (from 09/03/87)................. 80,733 101.83 5.86 N/A
Ten Years......................................... 70,406 76.02 5.81 5.80
Five Years........................................ 53,858 34.65 6.13 5.38
Three Years....................................... 45,247 13.12 4.19 2.68
One Year.......................................... 39,776 -0.56 -0.56 -5.65
KEMPER INVESTMENT GRADE BOND SUBACCOUNT............. -3.27
Life of Subaccount (from 05/01/96)................ 45,626 14.07 3.65 2.41
Life of Portfolio (from 05/01/96)................. 45,626 14.07 3.65 2.41
Three Years....................................... 44,419 11.05 3.55 2.05
One Year.......................................... 38,692 -3.27 -3.27 -8.22
KEMPER GLOBAL INCOME SUBACCOUNT(5).................. -7.01
Life of Subaccount (from 05/01/97)................ 41,595 3.99 1.48 -0.51
Life of Portfolio (from 05/01/97)................. 41,595 3.99 1.48 -0.51
One Year.......................................... 37,195 -7.01 -7.01 -11.77
</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-27 for additional information.
B-25
<PAGE> 117
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
CUMULATIVE ------------
YEAR TO DATE (%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
---------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER GROWTH SUBACCOUNT............................ 35.43%
Life of Subaccount (from 12/09/83)................ $377,490 843.73% 15.00% 15.00%
Life of Portfolio (from 12/09/83)................. 377,490 843.73 15.00 15.00
Ten Years......................................... 199,950 399.88 17.46 17.45
Five Years........................................ 116,431 191.08 23.82 22.96
Three Years....................................... 73,805 84.51 22.65 20.88
One Year.......................................... 54,172 35.43 35.43 28.50
KEMPER SMALL CAP GROWTH............................. 32.90
Life of Subaccount (from 05/02/94)................ 137,969 244.92 24.41 23.65
Life of Portfolio (from 05/02/94)................. 137,969 244.92 24.41 23.65
Five Years........................................ 133,829 234.57 27.29 26.40
Three Years....................................... 82,379 105.95 27.23 25.39
One Year.......................................... 53,161 32.90 32.90 26.11
KEMPER SMALL CAP VALUE SUBACCOUNT................... 1.53
Life of Subaccount (from 05/01/96)................ 43,233 8.08 2.14 0.92
Life of Portfolio (from 05/01/96)................. 43,233 8.08 2.14 0.92
Three Years....................................... 42,799 7.00 2.28 0.79
One Year.......................................... 40,610 1.53 1.53 -3.67
KEMPER INTERNATIONAL SUBACCOUNT(5).................. 43.91
Life of Subaccount (from 01/06/92)................ 106,219 165.55 13.00 12.99
Life of Portfolio (from 01/06/92)................. 106,219 165.55 13.00 12.99
Five Years........................................ 86,734 116.84 16.74 15.93
Three Years....................................... 67,626 69.07 19.13 17.40
One Year.......................................... 57,565 43.91 43.91 36.55
KEMPER TOTAL RETURN SUBACCOUNT(6)................... 13.39
Life of Subaccount (from 04/06/82)................ 299,487 648.72 12.03 12.02
Life of Portfolio (from 04/06/82)................. 299,487 648.72 12.03 12.02
Ten Years......................................... 123,129 207.82 11.90 11.89
Five Years........................................ 88,090 120.23 17.10 16.29
Three Years....................................... 61,113 52.78 15.17 13.50
One Year.......................................... 45,357 13.39 13.39 7.59
KEMPER HORIZON 10+ SUBACCOUNT....................... 7.05
Life of Subaccount (from 05/01/96)................ 59,972 49.93 11.67 10.34
Life of Portfolio (from 05/01/96)................. 59,972 49.93 11.67 10.34
Three Years....................................... 54,298 35.75 10.72 9.12
One Year.......................................... 42,818 7.05 7.05 1.57
KEMPER HORIZON 5 SUBACCOUNT......................... 3.57
Life of Subaccount (from 05/01/96)................ 54,323 35.81 8.70 7.41
Life of Portfolio (from 05/01/96)................. 54,323 35.81 8.70 7.41
Three Years....................................... 49,983 24.96 7.71 6.14
One Year.......................................... 41,426 3.57 3.57 -1.74
KEMPER BLUE CHIP SUBACCOUNT......................... 23.69
Life of Subaccount (from 05/01/97)................ 61,540 53.85 17.52 15.22
Life of Portfolio (from 05/01/97)................. 61,540 53.85 17.52 15.22
One Year.......................................... 49,476 23.69 23.69 17.36
</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-27 for additional information.
B-26
<PAGE> 118
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Nonstandardized Total Return figures quoted are based on a hypothetical
$40,000 initial investment and assumes the deduction of all recurring
charges and fees applicable under the Contract except for the Withdrawal
Charge and any charge for applicable premium taxes which may be imposed in
certain states.
(2) The Standardized Average Annual Total Return figures quoted are based on a
hypothetical $1,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract including the
applicable Withdrawal Charge that may be imposed at the end of the quoted
period. Premium taxes are not reflected.
(3) The Year to Date percentage return figures quoted are based on the change in
unit values for the period January 1, 1999 through December 31, 1999.
(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) 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.
(6) The high yield potential offered by these Subaccounts reflect the
substantial risks associated with investments in high-yield bonds.
(7) 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. Kemper Money Market Subaccount #2 is not shown because it
is available only for dollar cost averaging that will deplete your
Subaccount Value entirely at least by the end of the third Contract Year.
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
--------------------------------
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- -------------- -----------------------
<S> <C> <C> <C>
10 Years.............. $107,946 $ 86,448 $ 81,693
20 Years.............. 233,048 165,137 133,476
30 Years.............. 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Certificates. Income
on Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10%
tax penalty may apply to early withdrawals. See "Federal Income Taxes" in the
Prospectus. The chart does not reflect the following charges and expenses under
Kemper Passport: 1.10% mortality and expense risk; .15% administration charges;
6% maximum deferred withdrawal charge; and $30 annual records maintenance
charge. The tax-deferred accumulation would be reduced if these charges were
reflected. No implication is intended by the use of these assumptions that the
return shown is guaranteed in any way or that the return shown represents an
average or expected rate of return over the period of the Contracts.
[IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
B-27
<PAGE> 119
APPENDIX B
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
-------------------------------
QUALIFIED NON-QUALIFIED
STATE PLANS PLANS
----- --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
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-28
<PAGE> 120
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of issuance and distribution of the Contracts and Certificates,
other than any underwriting discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Registration Fees........ $14,729.64**
Printing and Engraving...................................... $50,000
Accounting Fees and Expenses................................ $15,000
Legal Fees and Expenses..................................... $ 2,500
----------
Total Expenses.......................... $82,229.64
==========
</TABLE>
- - ---------------
* Expenses are estimated and are for period ending May 1, 2001 for continuous
offering of interests pursuant to Rule 415 but are not deducted from
proceeds.
** $100 paid with initial registration on March 31, 1992. Registration fees of
$25,100 were previously paid under File No. 33-33547, No. 33-43462 and No.
33-46881, to which this Registration Statement relates pursuant to Rule 429
under the Securities Act of 1933.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI, Section 1. of the Bylaws of Kemper Investors Life Insurance Company
provides for indemnification of Directors and Officers as follows:
SECTION 1. The company shall indemnify any person against all expenses
(including attorneys fees), judgments, fines, amounts paid in settlement
and other costs actually and reasonably incurred by him in connection with
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by
or in the right of the company) in which he is a party or is threatened to
be made party by reason of his being or having been a director, officer,
employee or agent of the company, or serving or having served, at the
request of the company, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
or by reason of his holding a fiduciary position in connection with the
management or administration of retirement, pension, profit sharing or
other benefit plans including, but not limited to, any fiduciary liability
under the Employee Retirement Income Security Act of 1974 and any amendment
thereof, if he acted in good faith and in a manner he reasonably believed
to be in and not opposed to the best interests of the company, and with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that he did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, Registrant has sold, in reliance on Rule 506 of
Regulation D under the Securities Act of 1933, as amended, unregistered 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 and related liabilities. 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.
II-1
<PAGE> 121
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 "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> <C>
(1)1 (a) Distribution Agreement
(2)1 (b) Specimen Selling Group Agreement of Investors Brokerage
Services, Inc.
(2)1 (c) General Agent Agreement
(2)4 (a) Form of Group Variable and Market Value Adjusted Annuity
Contract
(2)4 (b) Form of Certificate to Variable and Market Value Adjusted
Annuity Contract and Enrollment Application
(2)4 (c) Form of Individual Variable and Market Value Adjusted
Annuity Contract and Enrollment Application
(2)4 (d) Form of Endorsement to Variable and Market Value Adjusted
Deferred Annuity Contract
(2)4 (e) Form of Endorsement to Certificate to Variable and Market
Value Adjusted Deferred Annuity Contract
(1)5 Opinion and Consent of Counsel regarding legality
23 (a) Consents of PricewaterhouseCoopers LLP, Independent Public
Accountants
(1)23 (b) Consent of Counsel (See Exhibit 5)
(2)24 Power of Attorney Forms
(5)99 (a) Schedule III: Supplementary Insurance Information (years
ended December 31, 1999 and 1998)
(5)99 (b) Schedule IV: Reinsurance (year ended December 31, 1999)
(4)99 (c) Schedule IV: Reinsurance (year ended December 31, 1998)
(3)99 (d) Schedule IV: Reinsurance (year ended December 31, 1997)
(5)99 (e) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1999)
(4)99 (f) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1998)
(3)99 (g) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1997)
(1)99 (h) Notice Concerning Regulatory Relief
</TABLE>
- - ---------------
(1) Incorporated herein by reference to the Registration Statement on Form S-1
(File No. 333-02491) filed on or about April 12, 1996.
(2) Incorporated herein by reference to Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-02491) filed on or about April 23, 1997.
(3) Incorporated herein by reference to 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.
(4) 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.
(5) Incorporated herein by reference to Form 10-K for Kemper Investors Life
Insurance Company for fiscal year ended December 31, 1999 filed on or about
March 29, 2000.
II-2
<PAGE> 122
(b) FINANCIAL STATEMENTS
Report of Independent Public Accountants
KILICO and Subsidiaries Consolidated Balance Sheets, as of December 31,
1999 and 1998
KILICO and Subsidiaries Consolidated Statements of Operations, years ended
December 31, 1999, 1998 and 1997
KILICO and Subsidiaries Consolidated Statements of Comprehensive Income,
years ended December 31, 1999, 1998 and 1997
KILICO and Subsidiaries Consolidated Statements of Stockholder's Equity,
years ended December 31, 1999, 1998 and 1997
KILICO and Subsidiaries Consolidated Statements of Cash Flows, years ended
December 31, 1999, 1998 and 1997
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) To reflect in the Prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the determining of any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liabilities under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officer and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 123
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 13th day of April, 2000.
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Registrant)
BY: /s/ GALE K. CARUSO
---------------------------------------
Gale K. Caruso, President and Chief
Executive Officer
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 13th day of April, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ GALE K. CARUSO President, Chief Executive Officer and Director
- - ----------------------------------------------- (Principal Executive Officer)
Gale K. Caruso
/s/ W.H. BOLINDER Chairman of the Board and Director
- - -----------------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial
- - ----------------------------------------------- Officer (Principal Financial Officer and
Frederick L. Blackmon Principal Accounting Officer)
/s/ 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-4
<PAGE> 124
EXHIBIT LIST
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- - ------- ----------- ------------
<C> <S> <C>
23(a) Consents of PricewaterhouseCoopers LLP, Independent Public
Accountants
</TABLE>
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC 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. 333-02491) of our report dated February 24, 2000, 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 14, 2000
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC 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. 333-02491) of our report dated March 17, 2000, 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 14, 2000
