<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 2000
REGISTRATION NO. 333-22389
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
AMENDMENT NO. 6 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Illinois 36-3050975
-------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Kemper Drive
Long Grove, Illinois 60049
(847) 550-5500
----------------------------------------------------- 6312
(Address, including zip code, and telephone number, -------------------------
including area code, of registrant's principal executive (Primary Standard Industrial
offices) Classification Code Number)
</TABLE>
Debra P. Rezabek, Esq.
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
(847) 550-7390
---------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
Frank Julian, Esq. Joan E. Boros, Esq.
Kemper Investors Life Insurance Company Jorden Burt Boros
1 Kemper Drive Cicchetti Berenson & Johnson
Long Grove, Illinois 60049 1025 Thomas Jefferson Street, N.W.
Suite 400E
Washington, D.C. 20007
</TABLE>
------------------
Approximate date of commencement of proposed sale to the public: as soon as
practicable after this Registration Statement becomes effective.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE> 2
This amendment to the registration statement on Form S-1 includes two
prospectuses describing Individual and Group Variable, Fixed and Market Value
Adjusted Deferred Annuity Contracts which are substantially identical, except
that the Contract described in the second prospectus makes available to Contract
owners different investment subaccounts of Registrant than does the Contract
described in the original prospectus.
<PAGE> 3
KEMPER INVESTORS LIFE INSURANCE COMPANY
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B)
<TABLE>
<CAPTION>
FORM S-1
ITEM NO. FORM S-1 CAPTION CAPTION IN PROSPECTUS
-------- ---------------- ---------------------
<S> <C> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus.................... Facing Page and Outside Front Cover Page of
Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Table of Contents.
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Summary; Not Applicable as to Ratio of
Earnings to Fixed Charges.
4. Use of Proceeds................................... KILICO, The MVA Option, The Separate Account
and The Funds--The MVA Option; Business--
Investments.
5. Determination of Offering Price................... Not Applicable.
6. Dilution.......................................... Not Applicable.
7. Selling of Security Holders....................... Not Applicable.
8. Plan of Distribution.............................. Distribution of Contracts.
9. Description of Securities to be Registered........ Summary; The Contracts; The Accumulation
Period; Contract Charges and Expenses.
10. Interests of Named Experts and Counsel............ Experts; Legal Matters.
11. Information with Respect to the Registrant........ Federal Income Taxes; Business; Management's
Discussion and Analysis of Financial
Condition and Results of Operations; Legal
Proceedings; Financial Statements.
12. Disclosure of Commission Position on
Indemnification For Securities Act Liabilities.... Part II, Item 17.
</TABLE>
<PAGE> 4
PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
- - --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE,
FIXED AND MARKET
VALUE ADJUSTED DEFERRED ANNUITY
CONTRACTS
- - --------------------------------------------------------------------------------
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
This Prospectus describes Variable, Fixed and Market Value Adjusted Deferred
Annuity Contracts (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 Contracts 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 thirty-eight investment options, each of which is a
Subaccount of KILICO Variable Annuity Separate Account. Currently, you may
choose among the following Portfolios or Funds:
- - - KEMPER VARIABLE SERIES:
- Kemper Money Market
- Kemper Government Securities
- Kemper Investment Grade Bond
- Kemper Strategic Income (formerly Kemper Global Income)
- Kemper Horizon 5
- Kemper High Yield
- Kemper Horizon 10+
- Kemper Total Return
- Kemper Horizon 20+
- Kemper Value+Growth
- Kemper Blue Chip
- Kemper International
- Kemper Contrarian Value
- Kemper Small Cap Value
- Kemper Small Cap Growth
- Kemper Growth
- Kemper Aggressive Growth
- Kemper Technology Growth
- Kemper Global Blue Chip
- Kemper New Europe (formerly Kemper International Growth and Income)
- KVS Dreman High Return Equity (formerly Kemper-Dreman High Return Equity)
- KVS Dreman Financial Services (formerly Kemper-Dreman Financial Services)
- KVS Index 500 (formerly Kemper Index 500)
- KVS Focused Large Cap Growth
- KVS Growth Opportunities
- KVS Growth And Income
- - -SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A SHARES):
- Scudder VLIF Global Discovery
- Scudder VLIF Growth and Income
- Scudder VLIF International
- Scudder VLIF Capital Growth
- Scudder VLIF 21st Century Growth
- - -THE ALGER AMERICAN FUND:
- Alger American Leveraged AllCap
- Alger American Balanced
- - -DREYFUS INVESTMENT PORTFOLIOS:
- MidCap Stock ("Dreyfus I.P. MidCap Stock")
- - -THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- - - WARBURG PINCUS TRUST:
- Warburg Pincus Emerging Markets
- Warburg Pincus Global Post-Venture Capital (formerly Warburg Pincus Post-
Venture Capital)
If your Contract was issued before May 1, 2000, you may also choose the Janus
Aspen Growth and Janus Aspen Growth and Income Portfolios of Janus Aspen Series,
and you may not choose the KVS Growth Opportunities and KVS Growth and Income
Portfolios of the Kemper Variable Series. Subaccounts and Portfolios may be
added or deleted in the future. Contract values allocated to any of the
Subaccounts vary, reflecting the investment
<PAGE> 5
experience of the selected Subaccounts. Contract values allocated to the Fixed
account or one or more Guarantee Periods of the Market Value Adjustment Option
accumulate on a fixed basis.
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 63. 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> 6
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 3
SUMMARY OF EXPENSES......................................... 5
CONDENSED FINANCIAL INFORMATION............................. 9
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 12
FIXED ACCOUNT OPTION........................................ 19
THE CONTRACTS............................................... 19
CONTRACT CHARGES AND EXPENSES............................... 26
THE ANNUITY PERIOD.......................................... 29
FEDERAL INCOME TAXES........................................ 32
DISTRIBUTION OF CONTRACTS................................... 38
VOTING RIGHTS............................................... 38
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 39
DOLLAR COST AVERAGING....................................... 39
SYSTEMATIC WITHDRAWAL PLAN.................................. 40
EXPERTS..................................................... 40
LEGAL MATTERS............................................... 40
SPECIAL CONSIDERATIONS...................................... 40
AVAILABLE INFORMATION....................................... 40
BUSINESS.................................................... 41
PROPERTIES.................................................. 46
LEGAL PROCEEDINGS........................................... 46
SELECTED FINANCIAL DATA..................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 48
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS................... 60
EXECUTIVE COMPENSATION...................................... 62
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 63
FINANCIAL STATEMENTS........................................ 63
CONTRACTS ISSUED BEFORE MAY 1, 2000......................... 63
</TABLE>
<PAGE> 7
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.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments and upon the continuation of whose life annuity payments
involving life contingencies depend.
ANNUITY DATE--The date on which annuity payments are to commence.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person designated to receive any benefits under a Contract
upon the death of the Annuitant or the Owner prior to the Annuity Period.
COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.
CONTRACT--A Variable, Fixed and Market Value Adjusted Annuity Contract
offered 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 Separate Account Contract
Value, Accumulated Guarantee Period Value and Fixed Account Contract Value.
CONTRACT YEAR--Period between anniversaries of the Contract's Date of
Issue.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Contract's
Date of Issue.
CONTRIBUTION YEAR--Each one year period following the date a Purchase
Payment is made.
DATE OF ISSUE--The date on which the first Contract Year commences.
FIXED ACCOUNT--The General Account of KILICO to which you may allocate all
or a portion of Purchase Payments or Contract Value. We guarantee a minimum
rate of interest on Purchase Payments allocated to the Fixed Account.
FIXED ACCOUNT CONTRACT VALUE--The value of your Contract interest in the
Fixed Account.
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 OR FUNDS--Kemper Variable Series, Scudder Variable Life Investment
Fund, Janus Aspen Series, Warburg Pincus Trust, The Dreyfus Socially
Responsible Growth Fund, Inc., Dreyfus Investment Portfolios and The Alger
American Fund including any Portfolios thereunder.
GENERAL ACCOUNT--All our assets other than those allocated to any separate
account.
GUARANTEED INTEREST RATE--The rate of interest we establish for a given
Guarantee Period.
GUARANTEE PERIOD--The time when an amount is credited with a Guaranteed
Interest Rate. Guarantee Period options may range from one to ten years, at
our option.
GUARANTEE PERIOD VALUE--The Guarantee Period Value is the sum of 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.
1
<PAGE> 8
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula on any date prior to the end of a Guarantee
Period.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula prior to the end of
that Guarantee Period. The adjustment reflects the change in the value of
the Guarantee Period Value due to changes in interest rates since the date
the Guarantee Period commenced. The adjustment is computed using the market
value adjustment formula stated in the Contract.
NON-QUALIFIED PLAN CONTRACT--A Contract which does not receive favorable
tax treatment under Sections 401, 403, 408, 408A or 457 of the Internal
Revenue Code.
OWNER ("YOU, YOUR, YOURS")--The person designated in the Contract as having
the privileges of ownership defined in the Contract.
PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to herein as a
Fund.
PURCHASE PAYMENTS--Amounts paid to us by you or on your behalf.
QUALIFIED PLAN CONTRACT--A Contract issued in connection with a retirement
plan which receives favorable tax treatment under Sections 401, 403, 408,
408A or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT CONTRACT VALUE--The sum of your Subaccount Values.
SUBACCOUNTS--The thirty-eight subdivisions of the Separate Account, the
assets of which consist solely of shares of the corresponding Portfolios.
SUBACCOUNT VALUE--The value of your interest in each Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which you have an
interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Contract Value in the first seven Contribution Years
after a Purchase Payment is made or against certain annuitizations of
Contract Value in the first seven Contribution Years after a Purchase
Payment is made.
WITHDRAWAL VALUE--Contract Value, plus or minus any applicable Market Value
Adjustment, less any premium tax payable if the Contract is being
annuitized, minus any Withdrawal Charge applicable to that Contract.
2
<PAGE> 9
SUMMARY
Because this is a summary; it does not contain all of the information that may
be important. Read the entire Prospectus and Statement of Additional Information
before deciding to invest.
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified Plan and Qualified Plan Contracts are described in
this Prospectus.
The minimum initial Purchase Payment is $1,000. Subject to certain exceptions,
the minimum subsequent payment is $500. An allocation to a Subaccount, Fixed
Account or Guarantee Period must be at least $500. Our prior approval is
required for Purchase Payments over $1,000,000. (See "The Contracts," page 19.)
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts that you select. Each Subaccount invests in one of
the following corresponding Portfolios or Funds:
- Kemper Money Market
- Kemper Government Securities
- Kemper Investment Grade Bond
- Kemper Strategic Income (formerly Kemper Global Income)
- Kemper Horizon 5
- Kemper High Yield
- Kemper Horizon 10+
- Kemper Total Return
- Kemper Horizon 20+
- Kemper Value+Growth
- Kemper Blue Chip
- Kemper International
- Kemper Contrarian Value
- Kemper Small Cap Value
- Kemper Small Cap Growth
- Kemper Growth
- Kemper Aggressive Growth
- Kemper Technology Growth
- Kemper Global Blue Chip
- Kemper New Europe (formerly Kemper International Growth and Income)
- - - KVS Dreman High Return Equity (formerly Kemper-Dreman High Return Equity)
- - - KVS Dreman Financial Services (formerly Kemper-Dreman Financial Services)
- - - KVS Index 500 (formerly Kemper Index 500)
- - - KVS Focused Large Cap Growth
- - - KVS Growth Opportunities
- - - KVS Growth And Income
- - - Scudder VLIF Global Discovery
- - - Scudder VLIF Growth and Income
- - - Scudder VLIF International
- - - Scudder VLIF Capital Growth
- - - Scudder VLIF 21st Century Growth
- - - Alger American Leveraged AllCap
- - - Alger American Balanced
- - - Dreyfus I.P. MidCap Stock
- - - The Dreyfus Socially Responsible Growth Fund, Inc.
- - - Warburg Pincus Emerging Markets
- - - Warburg Pincus Global Post-Venture Capital (formerly Warburg Pincus
Post-Venture Capital)
If your Contract was issued before May 1, 2000, Subaccounts investing in the
Janus Aspen Growth and Janus Aspen Growth and Income Portfolios also are KVS
Growth and Income Portfolios are not available (See "Contracts Issued Before May
1, 2000," page 63.) Contract Value allocated to the Separate Account varies with
the investment experience of the selected Subaccounts.
The Fixed Account has fixed accumulations and benefits. We guarantee that
Purchase Payments allocated to the Fixed Account earn a minimum fixed interest
rate of 3%. In our discretion, we may credit interest in excess of 3%. (See
"Fixed Account Option," page 19.)
The MVA Option also provides fixed accumulations. The MVA Option is only
available during the Accumulation Period. 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 three (3). We credit interest daily to amounts allocated to
the MVA Option. We declare the rate at our sole discretion. We guarantee amounts
allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee
Periods 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
3
<PAGE> 10
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 12.)
You bear the investment risk under the Contracts, unless Contract Values are
allocated to:
- the MVA Option and are guaranteed to receive the Guaranteed Interest
Rate, or
- the Fixed Option and are guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization,
subject to certain limitations. A transfer from a Guarantee Period is subject to
a Market Value Adjustment unless effected within 30 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 22 and 30, respectively.)
You may withdraw Contract Value subject to Withdrawal Charges, any applicable
Market Value Adjustment and other specified conditions. (See "Withdrawal During
Accumulation Period," page 22.)
We do not deduct sales charges from Purchase Payments. Each Contract Year, you
may withdraw or surrender the Contract, without Withdrawal Charge, up to the
greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, or
- 10% of Contract Value. If you withdraw a larger amount, the excess
Purchase Payments withdrawn are subject to a Withdrawal Charge.
The Withdrawal Charge is:
- 7% in the first Contribution Year,
- 6% in the second Contribution Year,
- 5% in the third and fourth Contribution Years,
- 4% in the fifth Contribution Year,
- 3% in the sixth Contribution Year,
- 2% in the seventh Contribution Year, and
- 0% thereafter.
(See "Withdrawal Charge," page 27.) The Withdrawal Charge also applies at the
annuitization of Accumulation Units in their seventh Contribution Year or
earlier, except as set forth under "Withdrawal Charge." Withdrawals may be
subject to income tax, a 10% penalty tax, and other tax consequences.
Withdrawals from Qualified Plan Contracts may be limited by the Internal Revenue
Code (the "Code"). (See "Federal Income Taxes," page 32.)
Contract charges include:
- mortality and expense risk,
- administrative expenses,
- records maintenance,
- applicable premium taxes, and
- Guaranteed Retirement Income Benefit.
(See "Charges Against the Separate Account," page 26.) In addition, the
investment advisers to the Funds deduct varying charges against the assets of
the Funds for which they provide investment advisory services. (See the Funds'
prospectuses for such information.)
The Contract may be purchased in connection with retirement plans qualifying
either under Section 401 or 403(b) of the Code or as individual retirement
annuities including Roth IRAs. The Contract is also available in connection with
state and municipal deferred compensation plans and non-qualified deferred
compensation plans. (See "Taxation of Annuities in General," page 33 and
"Qualified Plans," page 35.)
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 19.) In addition, a special
free look period applies in some circumstances to Contracts issued as Individual
Retirement Annuities, Simplified Employee Pensions--IRAs or as Roth Individual
Retirement Annuities.
4
<PAGE> 11
- - --------------------------------------------------------------------------------
SUMMARY OF EXPENSES
- - --------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments).............................. None
Contingent Deferred Sales Load (as a percentage of amount surrendered)(1)
Year of Withdrawal After Purchase
First year........................... 7%
Second year.......................... 6%
Third year........................... 5%
Fourth year.......................... 5%
Fifth year........................... 4%
Sixth year........................... 3%
Seventh year......................... 2%
Eighth year and following............ 0%
Surrender Fees...................................................................................... None
Exchange Fee(2)..................................................................................... $25
ANNUAL CONTRACT FEE (Records Maintenance Charge)(3)................................................. $30
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense Risk.............. 1.25%
Administration.......................... .15%
Account Fees and Expenses............... 0%
---------
Total Separate Account
Annual Expenses....................... 1.40%
=========
GUARANTEED RETIREMENT INCOME BENEFIT
CHARGE
Annual Expense (as a percentage of
Contract Value)....................... .25%
</TABLE>
FUND ANNUAL EXPENSES (After Fee Waivers and Expense Reductions)
(as percentage of each Portfolio's average net assets for the period ended
December 31, 1999)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY GOVERNMENT INVESTMENT STRATEGIC KEMPER HIGH HORIZON TOTAL
MARKET SECURITIES GRADE BOND(7) INCOME(13) HORIZON 5(7) YIELD 10+(7) RETURN
------ ---------- ------------- ---------- ------------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees.................... .50% .55% .60% .65% .60% .60% .60% .55%
Other Expenses..................... .04 .08 .05 .28 .16 .07 .12 .06
Total Portfolio Annual Expenses.... .54 .63 .65 .93 .76 .67 .72 .61
</TABLE>
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
HORIZON VALUE+ BLUE KEMPER CONTRARIAN SMALL CAP SMALL CAP KEMPER
20+(7) GROWTH(7) CHIP(7) INTERNATIONAL VALUE(7) VALUE(7) GROWTH GROWTH
------- --------- ------- ------------- ---------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees.................... .60% .75% .65% .75% .75% .75% .65% .60%
Other Expenses..................... .18 .08 .06 .19 .05 .09 .06 .06
Total Portfolio Annual Expenses.... .78 .83 .71 .94 .80 .84 .71 .66
</TABLE>
<TABLE>
<CAPTION>
KVS KVS
KEMPER KEMPER KEMPER KEMPER DREMAN DREMAN KVS
AGGRESSIVE TECHNOLOGY GLOBAL BLUE NEW HIGH RETURN FINANCIAL INDEX
GROWTH(5)(8) GROWTH(5)(8) CHIP(8) EUROPE(8) EQUITY(7) SERVICES(8) 500(6)(8)
------------ ------------ ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees.................. .00% .51% 0.00% 0.00% .75% .70% .16%
Other Expenses................... .95 .44 1.56 1.12 .11 .29 .39
Total Portfolio Annual
Expenses....................... .95 .95 1.56 1.12 .86 .99 .55
</TABLE>
<TABLE>
<CAPTION>
KVS KVS SCUDDER SCUDDER
KVS FOCUSED GROWTH GROWTH AND SCUDDER VLIF SCUDDER VLIF
LARGE CAP OPPORTUNITIES INCOME VLIF GLOBAL GROWTH AND VLIF CAPITAL
GROWTH(8)(12) (8)(12)(14) (8)(12)(14) DISCOVERY(9) INCOME INTERNATIONAL GROWTH
------------- ------------- ----------- ------------ ---------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees.............. .00% .00% .00% .98% .47% .85% .46%
Other Expenses............... 1.15 1.15 1.15 .65 .08 .18 .03
Total Portfolio Annual
Expenses................... 1.15 1.15 1.15 1.63 .55 1.03 .49
</TABLE>
<TABLE>
<CAPTION>
THE
DREYFUS
SCUDDER ALGER SOCIALLY JANUS
VLIF AMERICAN ALGER DREYFUS I.P. RESPONSIBLE JANUS ASPEN
21ST CENTURY LEVERAGED AMERICAN MIDCAP GROWTH ASPEN GROWTH AND
GROWTH(15) ALLCAP(10) BALANCED STOCK(11) FUND, INC. GROWTH(14)(16) INCOME(14)(16)
------------ ---------- -------- ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees....... 0.00% .85% .75% 0.26% .75% .65% 0.65%
Other Expenses........ 1.50 .08 .18 .71 .04 .02 0.40
Total Portfolio Annual
Expenses............ 1.50 .93 .93 .97 .79 .67 1.05
- - -----------------------
<CAPTION>
WARBURG
WARBURG PINCUS
PINCUS GLOBAL
EMERGING POST-VENTURE
MARKETS(4) CAPITAL(4)
---------- ------------
<S> <C> <C>
Management Fees....... 0.00% 1.07%
Other Expenses........ 1.40 .33
Total Portfolio Annual
Expenses............ 1.40 1.40
- - -----------------------
</TABLE>
(1) A Contract Owner may withdraw up to the greater of (i) the excess of
Contract Value over total Purchase Payments subject to Withdrawal Charges
less prior withdrawals that were previously assessed a Withdrawal Charge,
and (ii) 10% of the Contract Value in any Contract Year without assessment
of any charge. In certain circumstances we may reduce or waive the
contingent deferred sales charge.
(2) We reserve the right to charge a fee of $25 for each transfer of Contract
Value in excess of 12 transfers per calendar year.
5
<PAGE> 12
(3) Applies to Contracts with a Contract Value less than $50,000 on the date of
assessment. In certain circumstances we may reduce or waive the annual
Records Maintenance Charge.
(4) The expense figures shown are net of certain fee waivers or reductions from
the Portfolios' investment adviser and its affiliates based on actual
expenses for fiscal year ended December 31, 1999. Without such waivers,
Management Fees, Other Expenses and Total Portfolio Annual Expenses for the
Portfolios would have been 1.25%, 1.88% and 3.13%, respectively, for the
Warburg Pincus Emerging Markets Portfolio; and 1.25%, .33% and 1.58%,
respectively, for the Warburg Pincus Global Post-Venture Capital Portfolio.
Fee waivers and expense reimbursements may be discontinued at any time.
(5) Portfolios commenced operations on 5/1/99. "Other Expenses" have been
annualized.
(6) Portfolio commenced operations on 9/1/99. "Other Expenses" have been
estimated and annualized.
(7) 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: KVS Dreman High Return Equity Portfolio (.87%),
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.
(8) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on May 1, 2000, to limit their respective fees and to
reimburse other expenses to the extent necessary to limit total operating
expenses of the KVS Focused Large Cap Growth, KVS Growth And Income, KVS
Growth Opportunities, KVS Index 500, Kemper Aggressive Growth, Kemper
Technology Growth, KVS Dreman Financial Services, Kemper New Europe and
Kemper Global Blue Chip Portfolios of Kemper Variable Series to the amounts
set forth in the table above. Without taking into effect these expense caps
for the KVS Focused Large Cap Growth, KVS Growth And Income, KVS Growth
Opportunities, KVS Index 500, Kemper Aggressive Growth, Kemper Technology
Growth, KVS Dreman Financial Services, Kemper New Europe and Kemper Global
Blue Chip Portfolios of Kemper Variable Series: management fees would be
.95%, .95%, .95%, .45%, .75%, .75%, .75%, 1.00% and 1.00%, respectively.
Other Expenses are 6.54% (estimated), 1.63% (estimated), 1.65% (estimated),
.39% (estimated), 1.91%, .44%, .29%, 3.30% and 2.47%, respectively, and
Total Portfolio Annual Expenses are 7.49% (estimated), 2.58% (estimated),
2.60% (estimated), .84% (estimated), 2.66%, 1.19%, 1.04%, 4.30% and 3.47%,
respectively. In addition, for Kemper New Europe and Kemper Global Blue
Chip, the investment manager has agreed to limit its management fees to
.70% and .85%, respectively, of such portfolios for one year commencing May
1, 2000.
(9) Beginning May 1, 2000 until at least April 30, 2001, the Adviser has agreed
to maintain the expenses of the Global Discovery Portfolio at 1.25% of the
average daily net assets.
(10) Included in Other Expenses is 0.01% of interest expense.
(11) The expense figures shown are net of certain fee waivers or reductions from
the Portfolio's investment adviser and/or its affiliates. Without such
waivers or reductions, Management Fees, Other Expenses and Total Portfolio
Annual Expenses for Dreyfus I.P. MidCap Stock would have been: .75%, .71%
and 1.46%, respectively.
(12) Portfolios commenced operations on 10/29/99. "Other Expenses" have been
estimated and annualized.
(13) 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 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.
(14) KVS Growth Opportunities and KVS Growth And Income are only available under
Contracts issued on or after [May 1, 2000]. Janus Aspen Growth and Janus
Aspen Growth and Income are only available under Contracts issued before
[May 1, 2000].
(15) Until April 30, 2001, the Adviser has agreed to maintain the management
expenses for the Scudder VLIF 21st Century Growth Portfolio at 1.50% of the
average daily net assets. Without such agreement, Management Fees, Other
Expenses and Total Portfolio Annual Expenses for the Portfolio for the
fiscal year ended December 31, 1999, would have been: .88%, 2.02% and
2.90%, respectively.
(16) Expenses are based upon expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fees for Janus
Aspen Growth and Janus Aspen Growth and Income Portfolios. Expenses are
shown without the effect of any expense offset arrangements.
6
<PAGE> 13
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your Contract at the Kemper Money Market #1(1)
end of $ 92 $117 $153 $231
the periods shown, you would pay the Kemper Government Securities 93 120 158 240
following expenses on a $1,000 Kemper Investment Grade Bond
investment, 93 120 159 243
assuming 5% annual return on assets: Kemper Strategic Income 96 128 173 272
94 123 164 254
Kemper Horizon 5
93 121 160 245
Kemper High Yield
94 122 162 250
Kemper Horizon 10+
93 119 157 238
Kemper Total Return
95 124 165 256
Kemper Horizon 20+
95 125 168 261
Kemper Value+Growth
94 122 162 249
Kemper Blue Chip
96 129 173 273
Kemper International
95 125 166 258
Kemper Contrarian Value
95 126 168 262
Kemper Small Cap Value
94 122 162 249
Kemper Small Cap Growth
93 120 159 244
Kemper Growth
96 129 -- --
Kemper Aggressive Growth
96 129 -- --
Kemper Technology Growth
102 147 203 334
Kemper Global Blue Chip
98 134 182 291
Kemper New Europe
95 126 169 264
KVS Dreman High Return Equity
97 130 176 278
KVS Dreman Financial Services
92 117 -- --
KVS Index 500
98 135 -- --
KVS Focused Large Cap Growth
98 135 -- --
KVS Growth Opportunities
98 135 -- --
KVS Growth And Income
103 149 206 341
Scudder VLIF Global Discovery
92 117 154 232
Scudder VLIF Growth and Income
97 131 178 282
Scudder VLIF International
92 115 151 226
Scudder VLIF Capital Growth
101 145 -- --
Scudder VLIF 21st Century Growth
96 128 -- --
Alger American Leveraged AllCap
96 128 -- --
Alger American Balanced
96 129 -- --
Dreyfus I.P. MidCap Stock
95 124 -- --
Dreyfus Socially Responsible Growth
93 121 160 245
Janus Aspen Growth
97 132 178 284
Janus Aspen Growth and Income
100 142 195 319
Warburg Pincus Emerging Markets
100 142 195 319
Warburg Pincus Global Post-Venture
Capital
</TABLE>
7
<PAGE> 14
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you do not surrender your Contract, Kemper Money Market #1(1) $ 20 $ 62 $107 $231
you would pay the following expenses Kemper Government Securities 21 65 112 240
on a $1,000 investment, assuming Kemper Investment Grade Bond 21 66 113 243
5% annual return on assets: Kemper Strategic Income 24 74 127 272
22 69 118 254
Kemper Horizon 5
21 66 114 245
Kemper High Yield
22 68 116 250
Kemper Horizon 10+
21 64 111 238
Kemper Total Return
23 70 119 256
Kemper Horizon 20+
23 71 122 261
Kemper Value+Growth
22 68 116 249
Kemper Blue Chip
24 75 128 273
Kemper International
23 70 120 258
Kemper Contrarian Value
23 72 123 262
Kemper Small Cap Value
22 68 116 249
Kemper Small Cap Growth
21 66 113 244
Kemper Growth
24 75 -- --
Kemper Aggressive Growth
24 75 -- --
Kemper Technology Growth
31 94 159 334
Kemper Global Blue Chip
26 80 137 291
Kemper New Europe
23 72 124 264
KVS Dreman High Return Equity
25 76 130 278
KVS Dreman Financial Services
20 63 -- --
KVS Index 500
26 81 -- --
KVS Focused Large Cap Growth
26 81 -- --
KVS Growth Opportunities
26 81 -- --
KVS Growth And Income
31 96 163 341
Scudder VLIF Global Discovery
20 63 108 232
Scudder VLIF Growth and Income
25 77 132 282
Scudder VLIF International
20 61 104 226
Scudder VLIF Capital Growth
30 92 -- --
Scudder VLIF 21st Century Growth
24 74 -- --
Alger American Leveraged AllCap
24 74 -- --
Alger American Balanced
25 76 -- --
Dreyfus I.P. MidCap Stock
23 70 -- --
The Dreyfus Socially Responsible
Growth Fund, Inc.
21 66 114 245
Janus Aspen Growth
25 78 133 284
Janus Aspen Growth and Income
29 89 151 319
Warburg Pincus Emerging Markets
29 89 151 319
Warburg Pincus Global Post-Venture
Capital
</TABLE>
The purpose of the preceding table which includes the "SUMMARY OF EXPENSES" on
the prior page, 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. THE EXAMPLE SHOULD
NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE EXPENSES AND DOES NOT
INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH MAY BE ASSESSED BEFORE OR
UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
"Management Fees" and "Other Expenses" in the "SUMMARY OF EXPENSES" for the
Portfolios or Funds have been provided by the investment managers or advisers of
the Portfolios or Funds, and have not been independently verified. The Example
assumes a 5% annual rate of return pursuant to requirements of the Securities
and Exchange Commission. This hypothetical rate of return is not intended to be
representative of past or future performance of any Subaccount. The Records
Maintenance Charge is a single charge, it is not a separate charge for each
Subaccount. In addition, the effect of the Records Maintenance Charge has been
reflected in the Example by applying the percentage derived by dividing the
total amounts of annual Records Maintenance Charge collected by the total net
assets of all the Subaccounts in the Separate Account. See "Contract Charges and
Expenses" for more information regarding the various costs and expenses.
(1) 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 first Contribution Year.
8
<PAGE> 15
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
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD* ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kemper Money Market Subaccount #1 $10.213 $10.003
Kemper Money Market Subaccount #2 10.297 10.004
Kemper Government Securities Subaccount 10.332 10.012
Kemper Investment Grade Bond Subaccount 10.417 10.014
Kemper Strategic Income Subaccount 10.755 10.009
Kemper Horizon 5 Subaccount 10.354 9.974
Kemper High Yield Subaccount 9.646 10.003
Kemper Horizon 10+ Subaccount 10.290 9.957
Kemper Total Return Subaccount 10.542 9.983
Kemper Horizon 20+ Subaccount 10.228 9.951
Kemper Value+Growth Subaccount 10.697 9.937
Kemper Blue Chip Subaccount 10.386 9.964
Kemper International Subaccount 9.429 9.944
Kemper Contrarian Value Subaccount 10.712 10.029
Kemper Small Cap Value Subaccount 8.431 9.943
Kemper Small Cap Growth Subaccount 11.070 9.867
Kemper Growth Subaccount 10.007 9.889
Kemper Aggressive Growth Subaccount** 10.000 --
Kemper Technology Growth Subaccount** 10.000 --
Kemper Global Blue Chip Subaccount 10.103 9.989
Kemper New Europe Subaccount 9.130 9.964
KVS Dreman High Return Equity Subaccount 10.491 9.997
KVS Dreman Financial Services Subaccount 9.998 10.049
KVS Index 500 Subaccount*** 10.027 --
KVS Focused Large Cap Growth Subaccount**** 10.000 --
Scudder VLIF Global Discovery Subaccount 10.043 9.911
Scudder VLIF Growth and Income Subaccount 9.651 10.033
Scudder VLIF International Subaccount 9.837 9.972
Scudder VLIF Capital Growth Subaccount 10.823 9.985
Alger American Leveraged AllCap Subaccount***** 10.000 --
Alger American Balanced Subaccount***** 10.000 --
Dreyfus I.P. MidCap Stock Subaccount***** 10.000 --
Dreyfus Socially Responsible Growth
Subaccount***** 9.941 --
Warburg Pincus Emerging Markets Subaccount 7.994 9.755
Warburg Pincus Global Post-Venture Capital
Subaccount 9.720 9.882
</TABLE>
9
<PAGE> 16
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
ACCUMULATION UNIT VALUE AT END OF PERIOD ---- ----
<S> <C> <C>
Kemper Money Market Subaccount #1 $10.559 $10.213
Kemper Money Market Subaccount #2 10.795 10.297
Kemper Government Securities Subaccount 10.259 10.332
Kemper Investment Grade Bond Subaccount 10.062 10.417
Kemper Strategic Income Subaccount 9.986 10.755
Kemper Horizon 5 Subaccount 10.707 10.354
Kemper High Yield Subaccount 9.717 9.646
Kemper Horizon 10+ Subaccount 10.998 10.290
Kemper Total Return Subaccount 11.936 10.542
Kemper Horizon 20+ Subaccount 11.021 10.228
Kemper Value+Growth Subaccount 12.291 10.697
Kemper Blue Chip Subaccount 12.827 10.386
Kemper International Subaccount 13.549 9.429
Kemper Contrarian Value Subaccount 9.485 10.712
Kemper Small Cap Value Subaccount 8.547 8.431
Kemper Small Cap Growth Subaccount 14.691 11.070
Kemper Growth Subaccount 13.532 10.007
Kemper Aggressive Growth Subaccount 13.859 --
Kemper Technology Growth Subaccount 17.605 --
Kemper Global Blue Chip Subaccount 12.624 10.103
Kemper New Europe Subaccount 10.273 9.130
KVS Dreman High Return Equity Subaccount 9.192 10.491
KVS Dreman Financial Services Subaccount 9.362 9.998
KVS Index 500 Subaccount*** 10.735 --
KVS Focused Large Cap Growth
Subaccount**** 12.747 --
Scudder VLIF Global Discovery Subaccount 16.430 10.043
Scudder VLIF Growth and Income
Subaccount 10.096 9.651
Scudder VLIF International Subaccount 14.990 9.837
Scudder VLIF Capital Growth Subaccount 14.435 10.823
Alger American Leveraged AllCap
Subaccount***** 13.184 --
Alger American Balanced Subaccount***** 11.041 --
Dreyfus I.P. MidCap Stock
Subaccount***** 10.992 --
Dreyfus Socially Responsible Growth
Subaccount***** 11.289 --
Warburg Pincus Emerging Markets
Subaccount 14.302 7.994
Warburg Pincus Global Post-Venture
Capital Subaccount 15.673 9.720
</TABLE>
10
<PAGE> 17
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF PERIOD 1999 1998
(000'S OMITTED) ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Kemper Money Market Subaccount #1 1,569 82
Kemper Money Market Subaccount #2 118 21
Kemper Government Securities Subaccount 857 77
Kemper Investment Grade Bond Subaccount 940 66
Kemper Strategic Income Subaccount 124 7
Kemper Horizon 5 Subaccount 268 22
Kemper High Yield Subaccount 1,923 361
Kemper Horizon 10+ Subaccount 355 62
Kemper Total Return Subaccount 2,617 123
Kemper Horizon 20+ Subaccount 96 46
Kemper Value+Growth Subaccount 498 56
Kemper Blue Chip Subaccount 1,728 125
Kemper International Subaccount 351 56
Kemper Contrarian Value Subaccount 1,851 110
Kemper Small Cap Value Subaccount 610 125
Kemper Small Cap Growth Subaccount 843 106
Kemper Growth Subaccount 892 50
Kemper Aggressive Growth Subaccount** 89 --
Kemper Technology Growth Subaccount** 1,112 --
Kemper Global Blue Chip Subaccount 308 29
Kemper New Europe Subaccount 119 25
KVS Dreman High Return Equity Subaccount 3,389 518
KVS Dreman Financial Services Subaccount 603 121
KVS Index 500 Subaccount*** 633
KVS Focused Large Cap Growth Subaccount**** 5
Scudder VLIF Global Discovery Subaccount 509 74
Scudder VLIF Growth and Income Subaccount 1,073 175
Scudder VLIF International Subaccount 1,653 88
Scudder VLIF Capital Growth Subaccount 916 56
Alger American Leveraged AllCap Subaccount***** 49
Alger American Balanced Subaccount***** 19
Dreyfus I.P. MidCap Stock Subaccount***** 12
Dreyfus Socially Responsible Growth Subaccount***** 22
Warburg Pincus Emerging Markets Subaccount 213 7
Warburg Pincus Global Post-Venture Capital Subaccount 129 9
</TABLE>
* Commencement of Offering on June 1, 1998.
** Commencement of Offering on May 3, 1999 at initial accumulation unit value
of $10.000.
*** Commencement of Offering on September 10, 1999 at initial accumulation
unit value of $10.027.
**** Commencement of Offering on October 29, 1999 at initial accumulation unit
value of $10.000.
***** Commencement of Offering on November 1, 1999 at initial accumulation unit
value of $10.000, for all except Dreyfus Socially Responsible
Growth--$9.941.
11
<PAGE> 18
KILICO, THE MVA OPTION,
THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
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--4. Establishment of Guaranteed Interest Rates.")
Our investment strategy for the non-unitized separate account is generally to
match Guarantee Period liabilities with assets, such as debt instruments. We
expect to invest in debt instruments such as:
- securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the
United States Government;
- debt securities which have an investment grade, at the time of purchase,
within the four (4) highest grades assigned by Moody's Investors
Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other
nationally recognized rating service;
- other debt instruments including issues of or guaranteed by banks or bank
holding companies and corporations, which obligations, although not rated
by Moody's or Standard & Poor's, are deemed by our management to have an
investment quality comparable to securities which may be otherwise
purchased; and
- options and futures transactions on fixed income securities.
Our invested assets portfolio at December 31, 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.")
12
<PAGE> 19
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.
Thirty-eight Subaccounts of the Separate Account are currently available. Other
Subaccounts may be available under previously issued Contracts. Those
Subaccounts are described in "Contracts Issued Before May 1, 2000." Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios.
We may add or delete Subaccounts in the future. Not all Subaccounts may be
available in all jurisdictions or under all Contracts.
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges and to transfer assets from one Subaccount to another as you
request. All dividends and capital gains distributions received by the Separate
Account from a Fund or Portfolio of a Fund are reinvested in that Fund or
Portfolio at net asset value and retained as assets of the corresponding
Subaccount.
The Separate Account's financial statements appear in the Statement of
Additional Information.
THE FUNDS
The Separate Account invests in shares of the following open-end, management
investment companies:
- Kemper Variable Series
- Scudder Variable Life Investment Fund
- The Alger American Fund
- Dreyfus Investment Portfolios
- The Dreyfus Socially Responsible Growth Fund, Inc.
- Warburg Pincus Trust
The Funds provide investment vehicles for variable life insurance and variable
annuity contracts and, in the case of Warburg Pincus Trust, certain qualified
retirement plans. Shares of the Funds are sold only to insurance company
separate accounts and qualified retirement plans. Shares of the Funds may be
sold to separate accounts of other insurance companies, whether or not
affiliated with us. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts of companies unaffiliated with us, or for variable
life insurance separate accounts, variable annuity separate accounts and
qualified retirement plans to invest simultaneously in the Funds. Currently, we
do not foresee disadvantages to variable life insurance owners, variable annuity
owners or qualified retirement plans. The Funds monitor events for material
conflicts between owners and determine what action, if any, should be taken. In
addition, if we believe that a Fund's response to any of those events or
conflicts insufficiently protects Owners, we will take appropriate action.
A Fund may consist of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio.
13
<PAGE> 20
The thirty-seven Portfolios are summarized below:
KEMPER VARIABLE SERIES
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal. The Portfolio seeks to maintain a net
asset value of $1.00 per share.
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income.
KEMPER STRATEGIC INCOME (FORMERLY KEMPER GLOBAL INCOME) PORTFOLIO seeks high
current return.
KEMPER HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
KEMPER HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
KEMPER TOTAL RETURN PORTFOLIO seeks high total return, a combination of income
and capital appreciation.
KEMPER HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER VALUE+GROWTH PORTFOLIO seeks growth of capital. A secondary objective of
the Portfolio is the reduction of risk over a full market cycle compared to a
portfolio of only growth stocks or only value stocks.
KEMPER BLUE CHIP PORTFOLIO seeks growth of capital and of income.
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income.
KEMPER CONTRARIAN VALUE PORTFOLIO seeks to achieve a high rate of total return.
KEMPER SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation.
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital.
KEMPER AGGRESSIVE GROWTH PORTFOLIO seeks capital appreciation.
KEMPER TECHNOLOGY GROWTH PORTFOLIO seeks growth of capital.
KEMPER GLOBAL BLUE CHIP PORTFOLIO seeks long-term growth of capital.
KEMPER NEW EUROPE (FORMERLY KEMPER INTERNATIONAL GROWTH AND INCOME) PORTFOLIO
seeks long-term capital appreciation by investing in a portfolio consisting
primarily of equity securities of European companies.
KVS DREMAN HIGH RETURN EQUITY (FORMERLY KEMPER-DREMAN HIGH RETURN EQUITY)
PORTFOLIO seeks to achieve a high rate of total return.
KVS DREMAN FINANCIAL SERVICES (FORMERLY KEMPER-DREMAN FINANCIAL SERVICES)
PORTFOLIO seeks long-term capital appreciation.
KVS INDEX 500 (FORMERLY KEMPER INDEX 500) PORTFOLIO seeks to match, as closely
as possible, before expenses, the performance of the Standard & Poor's 500
Composite Stock Price Index, which emphasizes stocks of large U.S. companies.*
KVS FOCUSED LARGE CAP GROWTH PORTFOLIO seeks growth through long-term capital
appreciation.
- - ---------------
* "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc., and have been
licensed for use by Scudder Kemper Investments, Inc. The KVS Index 500
Portfolio is not sponsored, endorsed, sold or promoted by Standard & Poor's,
and Standard & Poor's makes no representation regarding the advisability of
investing in the Portfolio. Additional information may be found in the
Portfolio's Statement of Additional Information.
14
<PAGE> 21
KVS GROWTH OPPORTUNITIES PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital.*
KVS GROWTH AND INCOME PORTFOLIO seeks long-term capital growth and current
income.*
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF GLOBAL DISCOVERY PORTFOLIO seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
SCUDDER VLIF GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital,
current income and growth of income.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments.
SCUDDER VLIF CAPITAL GROWTH PORTFOLIO seeks to maximize long-term capital growth
through a broad and flexible investment program.
SCUDDER VLIF 21ST CENTURY GROWTH PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities issued by emerging growth companies.
THE ALGER AMERICAN FUND
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO seeks long-term capital appreciation.
ALGER AMERICAN BALANCED PORTFOLIO seeks current income and long-term capital
appreciation.
DREYFUS INVESTMENT PORTFOLIOS
DREYFUS I.P. MIDCAP STOCK seeks to provide investment results that are greater
than the total return performance of publicly traded common stocks of
medium-size domestic companies in the aggregate, as represented by the Standard
& Poor's MidCap 400(R) Index.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Fund's primary goal is to provide capital growth through investment in
common stocks of companies which not only meet traditional investment standards,
but also conduct their business in a manner that contributes to the enhancement
of the quality of life in America.
WARBURG PINCUS TRUST
WARBURG PINCUS EMERGING MARKETS PORTFOLIO seeks long-term growth of capital by
investing in equity securities of emerging markets.
WARBURG PINCUS GLOBAL POST-VENTURE CAPITAL (FORMERLY WARBURG PINCUS POST-VENTURE
CAPITAL) PORTFOLIO seeks long-term growth of capital by investing primarily in
equity securities of U.S. and foreign companies considered to be in their
post-venture-capital stage of development.
The Portfolios may not achieve their stated objective. More detailed
information, including a description of risks involved in investing in the
Portfolios is found in the Funds' prospectuses accompanying this Prospectus and
Statements of Additional Information, available from us upon request.
Scudder Kemper Investments, Inc. ("SKI") is the investment manager for the
twenty-six available Portfolios of Kemper Variable Series and the five available
Portfolios of Scudder Variable Life Investment Fund. Scudder Investments (U.K.)
Limited ("Scudder U.K."), an affiliate of SKI, is the sub-adviser for the Kemper
International Portfolio. Under the terms of the sub-advisory agreement with SKI,
Scudder U.K. renders investment advisory and management services with regard to
that portion of these Portfolios' assets as may be allocated by SKI to Scudder
U.K. from time to time for management, including services related to foreign
securities, foreign currency transactions and related investments. Dreman Value
Management L.L.C. ("DVM") serves as sub-adviser for the KVS Dreman High Return
Equity and KVS Dreman Financial Services Portfolios. Under the terms of the sub-
advisory agreement between SKI and DVM for each such Portfolio, DVM manages the
day-to-day investment
- - ---------------
* These Portfolios are not available under Contracts issued before May 1, 2000.
15
<PAGE> 22
and trading functions for each such Portfolio. Bankers Trust Company ("Bankers")
is the sub-adviser for the KVS Index 500 Portfolio. Under the terms of the
sub-advisory agreement with SKI, Bankers will handle day-to-day investment and
trading functions for the KVS Index 500 Portfolio. Eagle Asset Management, Inc.
("Eagle") is the sub-adviser for the KVS Focused Large Cap Growth Portfolio.
Under the terms of a sub-advisory agreement with SKI, Eagle will handle
day-to-day investment and trading functions for the KVS Focused Large Cap Growth
Portfolio under the guidance of SKI. Janus Capital Corporation ("Janus") serves
as the sub-adviser for the KVS Growth Opportunities Portfolio and the KVS Growth
And Income Portfolio. Under the terms of sub-advisory agreements with SKI, Janus
will handle day-to-day investment and trading functions for the KVS Growth
Opportunities Portfolio and the KVS Growth And Income Portfolio under the
guidance of SKI. Fred Alger Management, Inc. ("Alger") serves as the investment
adviser for the Alger American Leveraged AllCap Portfolio and the Alger American
Balanced Portfolio. The Dreyfus Corporation ("Dreyfus") is the investment
adviser for The Dreyfus Socially Responsible Growth Fund, Inc. and Dreyfus I.P.
MidCap Stock. NCM Capital Management Group, Inc. ("NCM") serves as the
sub-adviser for The Dreyfus Socially Responsible Growth Fund, Inc. Credit Suisse
Asset Management, LLC is the investment adviser for the two available Portfolios
of the Warburg Pincus Trust. The investment advisers are paid fees for their
services by the Funds they manage. We may receive compensation from the Funds or
the investment advisers of the Funds for services related to the Funds. Such
compensation will be consistent with the services rendered or the cost savings
resulting from the arrangement.
For their services to the Portfolios, the managers receive compensation at the
following rates:
KEMPER VARIABLE SERIES
For its services, SKI is paid a management fee based upon the average daily net
assets of each Portfolio, as follows: Kemper Money Market (.50 of 1%), Kemper
Government Securities (.55 of 1%), Kemper Investment Grade Bond (.60 of 1%),
Kemper Strategic Income (.65 of 1%), Kemper Horizon 5 (.60 of 1%), Kemper High
Yield (.60 of 1%), Kemper Horizon 10+ (.60 of 1%), Kemper Total Return (.55 of
1%), Kemper Horizon 20+ (.60 of 1%), Kemper Value+Growth (.75 of 1%), Kemper
Blue Chip (.65 of 1%), Kemper International (.75 of 1%), Kemper Contrarian Value
(.75 of 1%), Kemper Small Cap Value (.75 of 1%), Kemper Small Cap Growth (.65 of
1%), Kemper Growth (.60 of 1%), Kemper Global Blue Chip (1% for the first $250
million, .95% for the next $750 million and .90% over $1 billion), Kemper New
Europe (1%), KVS Dreman High Return Equity, KVS Dreman Financial Services,
Kemper Aggressive Growth and Kemper Technology Growth (.75% for the first $250
million, .72% for the next $750 million, .70% for the next $1.5 billion, .68%
for the next $2.5 billion, .65% for the next $2.5 billion, .64% for the next
$2.5 billion, .63% for the next $2.5 billion and .62% over $12.5 billion), KVS
Index 500 (.45% for the first $200 million, .42% for the next $550 million, .40%
for the next $1.25 billion, .38% for the next $3 billion and .35% for amounts
over $5 billion), KVS Focused Large Cap Growth, KVS Growth Opportunities and KVS
Growth And Income (.95% for the first $250 million, .925% for the next $250
million, .90% for the next $500 million, .875% for the next $1.5 billion and
.85% over $2.5 billion). SKI pays Scudder U.K. for its services as sub-adviser
for the Kemper International Portfolio a sub-advisory fee, payable monthly, at
an annual rate of .35 of 1% of the average daily net assets of such Portfolio.
SKI pays DVM for its services as sub-adviser for the KVS Dreman High Return
Equity and KVS Dreman Financial Services Portfolios a sub-advisory fee, payable
monthly, at the annual rate of .24% of the first $250 million of each
Portfolio's average daily net assets, .23% of the average daily net assets
between $250 million and $1 billion, .224% of average daily net assets between
$1 billion and $2.5 billion, .218% of average daily net assets between $2.5
billion and $5 billion, .208% of average daily net assets between $5 billion and
$7.5 billion, .205% of average daily net assets between $7.5 billion and $10
billion, .202% of average daily net assets between $10 billion and $12.5 billion
and .198% of each Portfolio's average daily net assets over $12 billion. SKI
pays Bankers for its services as sub-adviser for the KVS Index 500 Portfolio a
sub-advisory fee, calculated monthly as a percentage of the Portfolio's average
daily net assets, at the annual rate of .08% for the first $200 million, .05%
for the next $550 million and .025% over $750 million. The minimum annual fee is
set at $100,000; however, the minimum fee does not apply during the first year
of the Portfolio's operations. SKI pays Eagle for its services as sub-adviser
for the KVS Focused Large Cap Growth Portfolio a sub-advisory fee, calculated
monthly as a percentage of the Portfolio's average daily net assets, at the
annual rate of .45% for the first $50 million, 40% for the next $250 million and
.30% over $300 million. SKI pays Janus for its services as sub-adviser for the
KVS Growth Opportunities Portfolio and the KVS Growth And Income Portfolio a
sub-advisory fee based on the combined average daily net assets of the
Portfolios, payable monthly, at the annual rate of .55% of the first $100
million, .50% of the combined average daily net assets between $100 million and
$500 million and .45% of the combined average daily net assets over $500
million.
16
<PAGE> 23
SCUDDER VARIABLE LIFE INVESTMENT FUND
For its advisory services to the Portfolios, SKI receives compensation monthly
at the following annual rate for each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF THE AVERAGE
DAILY NET ASSET VALUES
PORTFOLIO OF EACH PORTFOLIO
--------- ----------------------
<S> <C>
Scudder VLIF Global Discovery............................... .975%
Scudder VLIF Growth and Income.............................. .475%
Scudder VLIF International
First $500,000,000........................................ .875%
Over $500,000,000......................................... .725%
Scudder VLIF Capital Growth
First $500,000,000........................................ .475%
Next $500,000,000......................................... .450%
Over $1,000,000,000....................................... .425%
Scudder VLIF 21st Century Growth............................ .875%
</TABLE>
THE ALGER AMERICAN FUND
Alger receives a monthly advisory fee based upon the average daily net assets of
the Alger American Leveraged AllCap Portfolio and the Alger American Balanced
Portfolio, as follows: .85% and .75%, respectively.
DREYFUS INVESTMENT PORTFOLIOS
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
Dreyfus receives a monthly advisory fee based upon the average daily net assets
of the Dreyfus I.P. MidCap Stock Portfolio and The Dreyfus Socially Responsible
Growth Fund, Inc. as follows: .75% and .75%, respectively. Dreyfus pays NCM for
its services as sub-adviser for The Dreyfus Socially Responsible Growth Fund,
Inc. a sub-advisory fee, calculated monthly as a percentage of the Fund's
average daily net assets and payable monthly, at an annual rate of .10% for the
first $32 million, .15% for the next $118 million, .20% for the next $150
million and .25% over $300 million.
WARBURG PINCUS TRUST
Credit Suisse Asset Management, LLC receives a monthly advisory fee based upon
the average daily net assets of each Warburg Pincus Portfolio, as follows:
Warburg Pincus Emerging Markets 1.25% and Warburg Pincus Global Post-Venture
Capital 1.25%.
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We may eliminate the shares of any of the Portfolios and to substitute
shares of another Portfolio or of another investment company, if the shares of a
Portfolio are no longer available for investment, or if in our judgment further
investment in any Portfolio becomes inappropriate in view of the purposes of the
Separate Account. We will not substitute any shares attributable to 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 Funds, or in shares of another investment
company. New subaccounts may be established when, in our discretion, marketing
needs or investment conditions warrant. New subaccounts may be made available to
existing Owners as we determine. We may also eliminate or combine one or more
subaccounts, transfer assets, or substitute one subaccount for another
subaccount, if, in our discretion, marketing, tax, or investment conditions
warrant. We will notify all Owners of any such changes.
If we deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be: (a) operated as a management company
under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with our other separate
accounts. To the extent
17
<PAGE> 24
permitted by law, we may transfer the assets of the Separate Account to another
separate account or to the General Account.
PERFORMANCE INFORMATION
The Separate Account may advertise several types of performance information for
the Subaccounts. All Subaccounts may advertise standardized "average annual
total return" and nonstandardized "total return." The Kemper High Yield
Subaccount, Kemper Government Securities Subaccount and Kemper Investment Grade
Bond Subaccount may also advertise "yield". The Kemper Money Market Subaccount
may advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of a Subaccount's
future performance.
Standardized average annual total return and nonstandardized total return
calculations measure a Subaccount's net income plus the effect of any realized
or unrealized appreciation or depreciation of the Subaccount's underlying
investments. Standardized average annual total return and nonstandardized total
return will be quoted for periods of at least one year, three years, five years
and ten years, if applicable. In addition, we will show standardized average
annual total return for the life of the Subaccount, meaning the time the
underlying Portfolio has been held in the Subaccount. We will show
nonstandardized total return for the life of the Portfolio, meaning the time the
underlying Portfolio has been in existence. Standardized average annual total
return will be current to the most recent calendar quarter. Nonstandardized
total return will be current to the most recent calendar month. Standardized
average annual total return figures are annualized and, therefore, represent the
average annual percentage change in the value of a Subaccount investment over
the applicable period. Nonstandardized total return may include annualized and
nonannualized (cumulative) figures. Nonannualized figures represent the actual
percentage change over the applicable period.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for the Kemper Money
Market Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period, compounded on a semi-annual basis. The effective yield for the
Kemper Money Market Subaccount is calculated similarly, but includes the effect
of assumed compounding calculated under rules prescribed by the SEC. The Kemper
Money Market Subaccount's effective yield will be slightly higher than its yield
due to this compounding effect.
The Subaccounts' units are sold at Accumulation Unit value. The Subaccounts'
performance figures and Accumulation Unit values fluctuate. You may redeem
Subaccount units at Accumulation Unit value, which may be more or less than
original cost. The standardized performance figures reflect the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first seven years may be subject to a Withdrawal
Charge that ranges from 7% the first year to 0% after seven years. Yield,
effective yield and nonstandardized total return figures do not include the
effect of any Withdrawal Charge that may be imposed upon the redemption of
units. In addition, nonstandardized total return figures do not include the
effect of the Records Maintenance Charge. Thus yield, effective yield and
nonstandardized total return figures may be higher than if such charges were
deducted. Standardized average annual total return figures include the effect of
the applicable Withdrawal Charge that may be imposed at the end of the period.
The Subaccounts may be compared to relevant indices and performance data from
independent sources, 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. In
particular, it should be noted that the comparative information with regard to
the indexes will not reflect the 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,
18
<PAGE> 25
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.
FIXED ACCOUNT OPTION
Amounts allocated or transferred to the Fixed Account are part of our General
Account, supporting insurance and annuity obligations. Interests in the Fixed
Account are not registered under the Securities Act of 1933 ("1933 Act"), and
the Fixed Account is not registered as an investment company under the
Investment Company Act of 1940 ("1940 Act"). Accordingly, neither the Fixed
Account nor any interests therein generally are subject to the provisions of the
1933 or 1940 Acts. We have been advised that the staff of the SEC has not
reviewed the disclosures in this Prospectus relating to the Fixed Account.
Disclosures regarding the Fixed Account, however, may be subject to the general
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
Under the Fixed Account Option, we pay a fixed interest rate for stated periods.
This Prospectus describes only the aspects of the Contract involving the
Separate Account, unless we refer to fixed accumulation and annuity elements.
We guarantee that payments allocated to the Fixed Account earn a minimum fixed
interest rate of 3%. At our discretion, we may credit interest in excess of 3%.
We reserve the right to change the rate of excess interest credited. We also
reserve the right to declare different rates of excess interest depending on
when amounts are allocated or transferred to the Fixed Account. As a result,
amounts at any designated time may be credited with a different rate of excess
interest than the rate previously credited to such amounts and to amounts
allocated or transferred at any other designated time.
THE CONTRACTS
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $1,000, and the minimum subsequent
payment is $500. The minimum subsequent payment is $100 if you authorize us to
draw on an account via check or electronic debit. Cumulative Purchase Payments
in excess of $1,000,000 require our prior approval. The Internal Revenue Code
may also limit the maximum annual amount of Purchase Payments. An allocation to
a Subaccount, the Fixed Account or a Guarantee Period must be at least $500.
We may, at any time, amend the Contract in accordance with changes in the law,
including applicable tax laws, regulations or rulings, and for other purposes.
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 die, and no designated
Beneficiary or contingent beneficiary is alive at that time, we will pay your or
the Annuitant's estate.
19
<PAGE> 26
Under a Qualified Plan Contract, the provisions of the applicable plan may
prohibit a change of Beneficiary. Generally, an interest in a Qualified Plan
Contract may not be assigned.
B. THE ACCUMULATION PERIOD.
1. APPLICATION OF PURCHASE PAYMENTS.
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 and Guaranteed Retirement Income Benefit Charge. The
number of Accumulation Units is reduced when the Records Maintenance Charge and
Guaranteed Retirement Income Benefit Charge are assessed.
If we are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, we will promptly request the
necessary information. If the requested information is not furnished within five
(5) business days after we receive the initial Purchase Payment, or if we
determine that we cannot issue the Contract within the five (5) day period, we
will return the initial Purchase Payment to you, unless you consent to our
retaining the Purchase Payment until the application is completed.
We will issue a Contract without a signed application if:
- a dealer provides us with application information, electronically or in
writing,
- we receive the initial Purchase Payment, and
- you confirm in writing, after the Contract is delivered, that all
information in the Contract is correct.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units purchased is based on
the Subaccount's Accumulation Unit value at the end of the current Valuation
Period. When amounts are transferred out of or deducted from a Subaccount, units
are redeemed in a similar manner.
The Accumulation Unit value for each subsequent Valuation Period is the
investment experience factor for that Valuation Period times the Accumulation
Unit value for the preceding Valuation Period. Each Valuation Period has a
single Accumulation Unit value which applies to each day in the Valuation
Period.
Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
Valuation Period.
The investment experience factor of a Subaccount for any Valuation Period is
determined by the following formula:
(1 / 2) - 3, where:
(1) is the net result of:
- the net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period;
plus
- 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;
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<PAGE> 27
(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.
3. 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 THE OWNER MAKES WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET
VALUE ADJUSTMENTS AND WITHDRAWAL CHARGES APPLY.
THE HYPOTHETICAL INTEREST RATE IS NOT INTENDED TO PREDICT FUTURE GUARANTEED
INTEREST RATES. ACTUAL GUARANTEED INTEREST RATES FOR ANY GUARANTEE PERIOD MAY BE
MORE OR LESS THAN THOSE SHOWN.
At the end of any Guarantee Period, we send written notice of the beginning of a
new Guarantee Period. A new Guarantee Period for the same duration starts unless
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 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, at 1 Kemper Drive, Long Grove, Illinois 60049 for the
new Guaranteed Interest Rates.
4. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
We declare the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate. Once
established, rates are guaranteed for the respective Guarantee Periods. We
advise 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
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<PAGE> 28
also consider, among other factors, the duration of a Guarantee Period,
regulatory and tax requirements, sales commissions and administrative expenses
we bear, and general economic trends.
WE MAKE THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED.
WE CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE GUARANTEED INTEREST RATES.
5. CONTRACT VALUE.
On any Valuation Date, Contract Value equals the total of:
- the number of Accumulation Units credited to each Subaccount, times
- the value of a corresponding Accumulation Unit for each Subaccount, plus
- your Accumulated Guarantee Period Value in the MVA Option, plus
- your interest in the Fixed Account.
6. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, you may transfer the Contract Value among the
Subaccounts, the Guarantee Periods and the Fixed Account subject to the
following provisions:
- the amount transferred must be at least $100 unless the total Contract
Value attributable to a Subaccount, Guarantee Period or Fixed Account is
transferred;
- the Contract Value remaining in a Subaccount, Guarantee Period or Fixed
Account must be at least $500 unless the total value is transferred;
- transfers may not be made from any Subaccount to the Fixed Account over
the six months following any transfer from the Fixed Account into one or
more Subaccounts; and
- transfers from the Fixed Account may be made one time during the Contract
Year during the thirty days following an anniversary of a Contract Year.
We may charge a $25 fee for each transfer in excess of 12 transfers per calendar
year. However, transfers made pursuant to the Asset Allocation and Dollar Cost
Averaging programs do not count toward these 12 transfers. In addition,
transfers of Guarantee Period Value are subject to Market Value Adjustment
unless the transfer is made within thirty days of the end of the Guarantee
Period. Because a transfer before the end of a Guarantee Period is subject to a
Market Value Adjustment, the amount transferred from the Guarantee Period may be
more or less than the requested dollar amount.
We make transfers pursuant to written or telephone instructions specifying in
detail the requested changes. Transfers involving a Subaccount are based upon
the Accumulation Unit values, as calculated after we receive transfer
instructions. We may suspend, modify or terminate the transfer provision. We
disclaim all liability if we follow in good faith instructions given in
accordance with our procedures, including requests for personal identifying
information, that are designed to limit unauthorized use of the privilege.
Therefore, you bear the risk of loss in the event of a fraudulent telephone
transfer.
If you authorize a third party to transact transfers on your behalf, we will
reallocate the Contract Value pursuant to the authorized asset allocation
program. However, we do not offer or participate in any asset allocation program
and we take no responsibility for any third party asset allocation program. We
may suspend or cancel acceptance of a third party's instructions at any time and
may restrict the investment options available for transfer under third party
authorizations.
You may elect to have transfers made automatically among the Subaccounts on an
annual, semiannual or quarterly basis so that Contract Value is reallocated to
match the percentage allocations in your predefined allocation elections.
Transfers under this program are not be subject to the $100 minimum transfer
limitation. An election to participate in the automatic asset reallocation
program must be in writing on our form and returned to us.
7. WITHDRAWAL DURING ACCUMULATION PERIOD.
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.
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<PAGE> 29
Partial withdrawals and surrenders are subject to the following:
In any Contract Year, you may withdraw or surrender the Contract, without
Withdrawal Charge, up to the
greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, or
- 10% of the Contract Value.
See "Contract Charges and Expenses -- Withdrawal Charge" for a discussion of
charges applicable to partial withdrawals and surrenders.
If Contract Value is allocated to more than one investment option, 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:
- Partial withdrawals are not permitted from the Fixed Account in the first
Contract Year.
- The minimum withdrawal is $100 (before any Market Value Adjustment), or
your entire interest in the investment option(s) from which withdrawal is
requested.
- You must leave at least $500 in each investment option from which the
withdrawal is requested, unless the total value is withdrawn.
Election to withdraw shall be made in writing to us at Suite 102, 1290 Silas
Deane Highway, Wethersfield, CT 06109 and should be accompanied by the Contract
if surrender is requested. Withdrawal requests are processed only on days when
the New York Stock Exchange is open. The Withdrawal Value attributable to the
Subaccounts is determined on the basis of the Accumulation Unit values, as
calculated after we receive the request. The Withdrawal Value attributable to
the Subaccounts is paid within seven (7) days after we receive the request.
However, we may suspend withdrawals or delay payment:
- during any period when the New York Stock Exchange is closed,
- when trading in a Portfolio is restricted or the SEC determines that an
emergency exists, or
- as the SEC by order may permit.
For withdrawal requests from the MVA Option and the Fixed Account, we may defer
any payment for up to six months, as permitted by state law. During the deferral
period, we will continue to credit interest at the current Guaranteed Interest
Rate for the same Guarantee Period.
Withdrawals are permitted from Contracts issued in connection with Section
403(b) Qualified Plans only under limited circumstances. (See "Federal Income
Taxes.")
A participant in the Texas Optional Retirement Program ("ORP") must obtain a
certificate of termination from the participant's employer before a Contract can
be redeemed. The Attorney General of Texas has ruled that participants in the
ORP may redeem their interest in a Contract issued pursuant to the ORP only upon
termination of employment in Texas public institutions of higher education, or
upon retirement, death or total disability. In those states adopting similar
requirements for optional retirement programs, we will follow similar
procedures.
8. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected during the "free look" period or within 30 days after a Guarantee
Period ends, may be adjusted up or down by a Market Value Adjustment. The Market
Value Adjustment applies before deduction of a Withdrawal Charge.
The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, the Market Value Adjustment
reduces Market Adjusted Value and results in a lower payment. Thus, if interest
rates increase, the withdrawal could be less than the original Purchase Payment
or the original amount allocated to a Guarantee Period. Conversely, if the
Guaranteed Interest Rate is higher than the applicable
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<PAGE> 30
Current Interest Rate, the Market Value Adjustment increases Market Adjusted
Value and results in a higher payment.
The Market Value Adjustment (MVA) uses this formula:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1 + I)
MVA = 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.
For an illustration showing an upward and a downward adjustment, see Appendix A.
9. GUARANTEED DEATH BENEFIT.
We pay a death benefit to the Beneficiary if any of the following occurs during
the Accumulation Period:
- the Owner, or a joint owner, dies,
- the Annuitant dies with no living contingent annuitant, or
- the contingent annuitant dies after the Annuitant.
The amount of the death benefit depends on the age of the deceased Owner or
Annuitant when the death benefit becomes payable. If the deceased Owner or
Annuitant dies before age 91, we will pay the Beneficiary the greatest of the
following:
- Contract Value,
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the deceased's age 80 or the date of
death, plus Purchase Payments minus all withdrawals from age 80 to the
date of death, or
- the greatest anniversary value before death.
The greatest anniversary value equals:
- the Contract Values on each Contract anniversary prior to the deceased's
age 81, plus the dollar amount of any Purchase Payments made since that
anniversary, minus
- withdrawals since that anniversary.
We pay Contract Value to the Beneficiary if the Owner or Annuitant dies after
age 91. The Owner or Beneficiary, as appropriate, may elect to have all or a
part of the death proceeds paid to the Beneficiary under one of the Annuity
Options described under "Annuity Options" below.
For Non-Qualified Plan Contracts, if the Beneficiary is the Owner's surviving
spouse, the surviving spouse may elect to continue the Contract in lieu of
taking a Death Benefit distribution. The spouse will become the successor Owner
of the Contract subject to the following:
- The Contract Value will be increased to reflect the amount of the Death
Benefit. The difference will be credited to the Kemper Money Market
Subaccount.
- No withdrawal charges will apply on existing values in the Contract.
However, Purchase Payments made after the spouse elects to continue the
Contract are subject to withdrawal charges.
- If the Guaranteed Retirement Income Benefit (GRIB) has been elected, the
GRIB base is calculated from the time the election to continue the
Contract is made. GRIB may not be exercised prior to the seventh Contract
Year anniversary date following the spouse's election to continue the
Contract. However, we will waive all other age restrictions that would
apply to exercising GRIB. The spouse may also elect to
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<PAGE> 31
discontinue GRIB at the time the election to continue the Contract is
made. All other rights and benefits under the Contract will continue.
The above option is subject to availability of this feature in your state.
As an alternative to the above election, the surviving spouse may elect to
continue a Non-Qualified Plan Contract without receiving the increase in Cash
Value attributable to the Death Benefit. In this case, all rights, benefits and
charges under the Contract will continue including the right to exercise GRIB
based on the existing exercise period and any applicable withdrawal charges.
10. GUARANTEED RETIREMENT INCOME BENEFIT.
Guaranteed Retirement Income Benefit (GRIB) is an optional Contract benefit.
GRIB provides a minimum fixed annuity guaranteed lifetime income to the
Annuitant as described below. You must elect GRIB on the initial Contract
application. GRIB may be discontinued after the seventh Contract anniversary by
written notice to us. Once discontinued, GRIB may not be elected again.
GRIB may be exercised only within thirty days after the seventh or later
Contract anniversary. In addition, GRIB must be exercised between the
Annuitant's 60th and 91st birthdays. However, if the Annuitant is age 44 or
younger on the Date of Issue, GRIB may be exercised after the Contract's 15th
Anniversary, even though the Annuitant is not yet 60 years old. GRIB may not be
appropriate for Annuitants age 80 and older.
Annuity payments are based on the greater of:
- the income provided by applying the GRIB base to the guaranteed annuity
factors, and
- the income provided by applying the Contract Value to the current annuity
factors.
The GRIB base is the greatest of:
- Contract Value,
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the Annuitant's age 80 or the GRIB
exercise date plus Purchase Payments minus all withdrawals from age 80 to
the GRIB exercise date, and
- the greatest anniversary value before the exercise date.
The greatest anniversary value equals:
- the highest of the Contract Values on each Contract anniversary prior to
the Annuitant's age 81, plus
- the dollar amount of any Purchase Payments made since that anniversary,
minus
- withdrawals since that anniversary.
The guaranteed annuity factors are based on the 1983a table projected using
projection scale G, with interest at 2.5% (the "Annuity 2000" table). However,
if GRIB is exercised on or after the 10th Contract anniversary, interest at
3.50% is assumed. Contracts issued in the state of Montana or in connection with
certain employer sponsored employee benefit plans are required to use unisex
annuity factors. In such cases, the guaranteed annuity factors will be based on
unisex rates.
Because GRIB is based on conservative actuarial factors, the income guaranteed
may often be less than the income provided under the regular provisions of the
Contract. If the regular annuitization provisions would provide a greater
benefit than GRIB, the greater amount will be paid.
GRIB is paid for the life of a single Annuitant or the lifetimes of two
Annuitants. If paid for the life of a single Annuitant, GRIB is paid in the
amount determined above. If paid for the lifetimes of two Annuitants, GRIB is
paid in the amount determined above, but the age of the older Annuitant is used
to determine the GRIB base.
If you elect GRIB payable for the life of a single Annuitant, you may elect a
period certain of 5, 10, 15, or 20 years. If the Annuitant dies before GRIB has
been paid for the period elected, the remaining GRIB payments are paid as they
fall due to the Beneficiary, if the Beneficiary is a natural person. If the
Beneficiary is not a natural person, the remaining payments may be commuted at a
minimum 2.50% interest rate and paid in a lump sum.
If you elect GRIB payable for the lifetimes of two Annuitants, the period
certain is 25 years. The full GRIB is payable as long as at least one of the two
Annuitants is alive, but for no less than 25 years. If both Annuitants die
before GRIB has been paid for 25 years, the remaining GRIB payments are paid as
they fall due to the Beneficiary,
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<PAGE> 32
if the Beneficiary is a natural person. If the Beneficiary is not a natural
person, the remaining payments may be commuted at a minimum 2.50% interest rate
and paid in a lump sum.
GRIB payments are also available on a quarterly, semi-annual or annual basis. We
may make other annuity options available.
If you purchased your Contract on or after May 1, 2000, and you exercise the
GRIB option to receive guaranteed benefits, you may elect to have payments made
under a commutable annuitization option. Under the commutable annuitization
option, partial lump sum payments are permitted, subject to the following
requirements:
- At the time you exercise the GRIB option, you must elect the commutable
annuitization option in order to be eligible for the lump sum payments.
- Lump sum payments are available only during the period certain applicable
under the payout option you elected; for example, lump sum payments can
be elected only during the 5, 10, 15, 20 or 25 year certain period that
applies to the payout.
- Lump sum payments are available once in each calendar year and may not be
elected until one year after annuitization has started.
- The Annuitant may elect to receive a partial lump sum payment of the
present value of the remaining payments in the period certain subject to
the restrictions described below. If a partial lump sum payment is
elected, the remaining payments in the period certain will be reduced
based on the ratio of the amount of the partial withdrawal to the amount
of the present value of the remaining installments in the period certain
prior to the withdrawal. If the Annuitant is still living after the
period certain is over, the Annuitant will begin receiving the original
annuitization payment amount again.
- Each time that a partial lump sum payment is made, we will determine the
percentage that the payment represents of the present value of the
remaining installments in the period certain. For Non-Qualified Plan
Contracts, the sum of these percentages over the life of the Contract
cannot exceed 75%. For Qualified Plan Contracts, partial lump sum
payments of up to 100% of the present value of the remaining installments
in the period certain may be made.
- In determining the amount of the lump sum payment that is available, the
present value of the remaining installments in the period certain will be
calculated based on an interest rate equal to the GRIB annuity factor
interest rate (3.5% if GRIB was exercised on or after the 10th Contract
anniversary; 2.5% if exercised before that date) plus an interest rate
adjustment. The interest rate adjustment is equal to the following:
<TABLE>
<CAPTION>
NUMBER OF YEARS REMAINING INTEREST RATE
IN THE PERIOD CERTAIN ADJUSTMENT
------------------------- -------------
<S> <C>
15 or more years............................................ 1.00%
10 - 14 years............................................... 1.50%
less than 10 years.......................................... 2.00%
</TABLE>
CONTRACT CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk,
- administrative expenses,
- Records Maintenance Charge,
- Withdrawal Charge, and
- Guaranteed Retirement Income Benefit charge, if elected.
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 1.25% per annum. Variable Annuity payments reflect the investment
experience of each Subaccount but are not affected by changes in actual
mortality experience or by actual expenses we incur.
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<PAGE> 33
The mortality risk we assume arises from two contractual obligations. First, if
you or Annuitant die before age 91 and before the Annuity Date, we may, in some
cases, pay more than Contract Value. (See "Guaranteed 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 a particular Contract.
3. RECORDS MAINTENANCE CHARGE.
We deduct an annual Records Maintenance Charge of $30 during the Accumulation
Period. The charge is assessed:
- at the end of each Contract Year,
- on Contract surrender, and
- upon annuitization.
However, we do not deduct the Records Maintenance Charge for Contracts with
Contract Value of at least $50,000 on the assessment date.
This charge reimburses us for the expenses of establishing and maintaining
Contract records. The Records Maintenance Charge reduces the net assets of each
Subaccount, Guarantee Period and the Fixed Account.
The Records Maintenance Charge is assessed equally among all investment options
in which you have an interest.
4. WITHDRAWAL CHARGE.
We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal
Charge covers Contract sales expenses, including commissions and other promotion
and acquisition expenses.
Each Contract Year, you may withdraw or surrender the Contract, without
Withdrawal Charge, up to the
greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, or
- 10% of the Contract Value.
If you withdraw a larger amount, the excess Purchase Payments withdrawn are
subject to a Withdrawal Charge. The Withdrawal Charge applies in the first seven
Contribution Years following each Purchase Payment as follows:
<TABLE>
<CAPTION>
CONTRIBUTION WITHDRAWAL
YEAR CHARGE
------------ ----------
<S> <C>
First...................................................... 7%
Second..................................................... 6%
Third...................................................... 5%
Fourth..................................................... 5%
Fifth...................................................... 4%
Sixth...................................................... 3%
Seventh.................................................... 2%
Eighth and following....................................... 0%
</TABLE>
Purchase Payments are deemed surrendered in the order in which they were
received.
When a withdrawal is requested, 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.
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<PAGE> 34
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;
- within thirty days following your discharge from a hospital or skilled
health care facility after a confinement of at least thirty days; or
- if you or Annuitant become disabled after the Contract is issued and
before age 65.
Restrictions and provisions related to the nursing care or hospitalization
disability waivers are described in Contract endorsements.
The Withdrawal Charge compensates us for Contract distribution expense.
Currently, we anticipate Withdrawal Charges will not fully cover distribution
expenses. Unrecovered distribution expenses may be recovered from our general
assets. Those assets may include proceeds from the mortality and expense risk
charge.
The Withdrawal Charge also applies at annuitization to amounts attributable to
Purchase Payments in their seventh Contribution Year or earlier. No Withdrawal
Charge applies upon annuitization if 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.
5. GUARANTEED RETIREMENT INCOME BENEFIT CHARGE.
The annual charge for GRIB is 0.25% of Contract Value. We deduct a pro rata
portion of the charge on each Contract Quarter anniversary. The quarterly charge
is deducted pro rata from the investment options in which you have an interest.
We no longer charge for GRIB after the Annuitant's 91st birthday.
6. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deduction of investment management
fees and certain general operating expenses. Subject to limitations, 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 Funds' Statements of Additional Information.
7. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If we pay state premium taxes, we may charge the amount
paid against Contract Value upon annuitization. See "Appendix--State Premium Tax
Chart" in the Statement of Additional Information.
8. EXCEPTIONS.
We may decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, we guarantee
that they will not increase. We bear the risk that such charges will not cover
our costs. On the other hand, should such charges exceed our costs, we will not
refund any charges. Any profit is available for corporate purposes including,
among other things, payment of distribution expenses.
We may also reduce or waive fees and charges, including but not limited to, the
Records Maintenance Charge, the Withdrawal Charge, and mortality and expense
risk and administrative charges, for certain sales that may result in cost
savings, such as those where we 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. We may
also reduce or waive fees and charges and/or credit additional amounts on
Contracts issued to:
- employees and registered representatives (and their families) of
broker-dealers (or their affiliated financial institutions) that have
entered into selling group agreements with IBS, and
- officers, directors and employees (and their families) 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.
Reductions in these fees and charges will not unfairly discriminate against any
Owner.
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<PAGE> 35
THE ANNUITY PERIOD
In addition to GRIB, Contracts may be annuitized under one of several Annuity
Options. Annuity payments begin on the Annuity Date and under the selected
Annuity Option. The Annuity Date must be at least one year after the Date of
Issue. Subject to state variation, the Annuity Date may not be deferred beyond
the later of the Annuitant's 91st birthday (100th birthday if the Contract is
part of a Charitable Remainder Trust) or ten (10) years after the Date of Issue.
However, annuitization is delayed beyond the Annuity Date if we are making
systematic withdrawals based on your life expectancy. In this case,
annuitization begins when life expectancy withdrawals are stopped.
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
- the selected Annuity Option, and
- the investment performance of the selected Subaccount(s) (if variable
annuitization is elected).
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly. Annuity payments may be subject to a Withdrawal Charge. (For
additional details, see "Withdrawal Charge.")
2. ANNUITY OPTIONS.
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 before the Annuitant's 91st birthday
(100th birthday if the Contract is part of a Charitable Remainder Trust) or
within ten (10) years after the Date of Issue, whichever is later. 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 ten (10) year period certain. Generally, annuity payments are made in
monthly installments. However, we may make a lump sum payment if the net
proceeds available to apply under an Annuity Option are less than $2,000. In
addition, if the first monthly payment is less than $25, we may change the
frequency of payments to quarterly, semiannual or annual intervals so that the
initial payment is at least $25.
The amount of periodic annuity payments may depend upon:
- the Annuity Option selected;
- the age and sex of the payee; and
- the investment experience of the selected Subaccount(s).
For example:
- if Option 1, income for a specified period, is selected, shorter
periods result in fewer payments with higher values.
- if Option 2, life income, is selected, it is likely that each payment
will be smaller than would result if income for a short period were
specified.
- if Option 3, life income with installments guaranteed, is selected,
each payment will probably be smaller than would result if the life
income option were selected.
- if Option 4, the joint and survivor annuity, is selected, each payment
is smaller than those measured by an individual life income option.
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. The sex of the payee influences the amount of periodic payments
because females live longer than males, resulting in smaller payments. Finally,
if you participate in a Subaccount with higher investment performance, it is
likely you will receive a higher periodic payment.
If you die before the Annuity Date, available Annuity Options are limited.
Unless you have imposed restrictions, the Annuity Options available are:
- Option 2, or
- Option 1 or 3 for a period no longer than the life expectancy of the
Beneficiary (but not less than 5 years from your death).
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<PAGE> 36
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.
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.
If you elect variable annuitization under Option 1, the payee may elect to
cancel all or part of the variable annuity payments remaining due. 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.
3. ALLOCATION OF ANNUITY.
You may elect payments on a fixed or variable basis, or a combination. Any Fixed
Account Contract Value or Guarantee Period Value is annuitized on a fixed basis.
Any Separate Account Contract Value is annuitized on a variable basis. The MVA
Option is not available during the Annuity Period. 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 seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the date we receive the notice.
- If we receive notice of transfer to a Subaccount less than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the annuity payment date.
- Transfers to the Fixed Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least thirty (30) days
prior to the anniversary.
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
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5. ANNUITY UNIT VALUE.
Annuity Unit value is determined independently for each Subaccount.
Annuity Unit value for any Valuation Period is:
- Annuity Unit value for the preceding Valuation Period, times
- the net investment factor for the current Valuation Period, times
- an interest factor which offsets the 2.5% per annum rate of investment
earnings assumed by the Contract's annuity tables.
The net investment factor for a Subaccount for any Valuation Period is:
- the Subaccount's Accumulation Unit value at the end of the current
Valuation Period, plus or minus the per share charge or credit for taxes
reserved; divided by
- the Subaccount's Accumulation Unit value at the end of the preceding
Valuation Period, plus or minus the per share charge or credit for taxes
reserved.
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
When annuity payments begin, the value of 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 2.5% per annum rate of investment earnings is assumed by the Contract's
annuity tables. If the actual net investment earnings rate exceeds 2.5% per
annum, payments increase accordingly. Conversely, if the actual rate is less
than 2.5% per annum, annuity payments decrease.
7. SUBSEQUENT PERIODIC PAYMENTS UNDER VARIABLE ANNUITY.
Subsequent annuity payments are determined by multiplying the number of Annuity
Units by the Annuity Unit value at the Valuation Period before each annuity
payment is due. The first annuity payment is divided by the Annuity Unit value
as of the Annuity Date to establish the number of Annuity Units representing
each annuity payment. This number does not change.
8. FIXED ANNUITY PAYMENTS.
Each Fixed Annuity payment is determined from tables we prepare. These tables
show the monthly payment for each $1,000 of Contract Value allocated to a Fixed
Annuity. Payment is based on the Contract Value at the date before the annuity
payment is due. Fixed Annuity payments do not change regardless of investment,
mortality or expense experience.
9. DEATH PROCEEDS.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, depend upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
10. COMMUTABLE ANNUITIZATION OPTION.
If you purchased your Contract on or after May 1, 2000, and, at the time you are
eligible to exercise the Guaranteed Retirement Income Benefit (GRIB), the
regular annuitization options under the Contract provide a greater benefit than
GRIB, then the following provisions will apply:
- If Option 3 is elected, you may elect a commutable annuitization option
which allows partial lump sum payments during the annuity period.
- The payout option you elect must correspond to one of the options
available under GRIB.
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- Lump sum payments are available only during the period certain applicable
under the payout option you elected; for example, lump sum payments can
be elected only during the 5, 10, 15, 20 or 25 year certain period that
applies to the payout.
- Lump sum payments are available once in each calendar year and may not be
elected until one year after annuitization has started.
- The Annuitant may elect to receive a partial lump sum payment of the
present value of the remaining payments in the period certain subject to
the restrictions described below. If a partial lump sum payment is
elected, the remaining payments in the period certain will be reduced
based on the ratio of the amount of the partial withdrawal to the amount
of the present value of the remaining installments in the period certain
prior to the withdrawal. If the Annuitant is still living after the
period certain is over, the Annuitant will begin receiving the original
annuitization payment amount again.
- Each time that a partial lump sum payment is made, we will determine the
percentage that the payment represents of the present value of the
remaining installments in the period certain. For Non-Qualified Plan
Contracts, the sum of these percentages over the life of the Contract
cannot exceed 75%. For Qualified Plan Contracts, partial lump sum
payments of up to 100% of the present value of the remaining installments
in the period certain may be made.
- In determining the amount of the lump sum payment that is available, the
present value of the remaining installments in the period certain will be
calculated based on an interest rate equal to the annuity factor interest
rate used at the time of annuitization to determine the amount of the
annuity payments plus an interest rate adjustment. The interest rate
adjustment is equal to the following:
<TABLE>
NUMBER OF YEARS REMAINING INTEREST RATE
IN THE PERIOD CERTAIN ADJUSTMENT
- - ------------------------------------------------------------ -----
<S> <C>
15 or more years............................................ 1.00%
10-14 years................................................. 1.50%
less than 10 years.......................................... 2.00%
</TABLE>
FEDERAL INCOME TAXES
A. INTRODUCTION
This discussion is not exhaustive and is not intended as tax advice. A qualified
tax adviser should always be consulted with regard to the application of the law
to individual circumstances. This discussion is based on the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Department regulations, and
interpretations existing on the date of this Prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and
judicial decisions.
This discussion does not address state or local tax consequences, 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.
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C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under the Code, except as described below, increases in the Contract Value of a
Non-Qualified Plan Contract are generally not taxable to you or Annuitant until
received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
- the Contract must be owned by an individual,
- Separate Account investments must be "adequately diversified",
- we, rather than 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 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 Plan 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. Then, 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.
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2. TAXATION OF PARTIAL AND FULL WITHDRAWALS
Partial withdrawals from a Non-Qualified Plan 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.
If the Policy includes the Guaranteed Retirement Income Benefit Endorsement (the
"GRIB Endorsement"), and the Guaranteed Retirement Income Benefit Base is
greater than the Contract Value, it is possible that the income on the contract
could be a greater amount than would otherwise be the case. This could result in
a larger amount being included in your income in connection with a partial
withdrawal, assignment, pledge or other transfer. There is also some uncertainty
regarding the treatment of the market value adjustment for purposes of
determining the income on the contract. This uncertainty could result in the
income on the contract being a greater (or lesser) amount.
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.
With respect to a Contract issued with the GRIB Endorsement, the Annuitant may
elect to receive a lump sum payment after the Annuity Date. In the case of a
Non-Qualified Plan Contract, the Company will treat a portion of such a lump sum
payment as includible in income, and will determine the taxable portion of
subsequent periodic payments by applying an exclusion ratio to the periodic
payments. However, the federal income tax treatment of such a lump sum payment,
and of the periodic payments made thereafter, is uncertain. It is possible the
IRS could take a position that greater amounts are includible in income than the
Company currently believes is the case. Prior to electing a lump sum payment
after the Annuity Date, you should consult a tax adviser about the tax
implications of making such an election.
4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon your or Annuitant's death. Before the Annuity
Date, death benefits are includible in income and:
- if distributed in a lump sum are taxed like a full withdrawal, or
- if distributed under an annuity option are taxed like annuity payments.
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After the Annuity Date, where a guaranteed period exists and the Annuitant dies
before the end of that period, payments made to the Beneficiary for the
remainder of that period are includible in income and:
- if received in a lump sum are includible in income if they exceed the
unrecovered investment, or
- if distributed in accordance with the selected annuity option are fully
excludable from income until the remaining investment in the contract is
deemed to be recovered.
Thereafter, all annuity payments are fully includible in income.
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
A 10% penalty tax applies to a taxable payment from a Non-Qualified Plan
Contract unless:
- received on or after 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 Plan
Contract may be determined by combining some or all of the Non-Qualified Plan
Contracts owned by an individual. For example, if a person purchases a Contract
and also purchases 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
a person purchases two or more deferred annuity contracts from the same company
(or its affiliates) during any calendar year, these contracts are treated as one
contract. The effects of this aggregation are not 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.
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
The Contracts are also designed for use in connection with retirement plans
which receive favorable treatment under sections 401, 403, 408, 408A or 457 of
the Code ("Qualified Plans"). Such contracts are referred to as "Qualified
Contracts." Numerous special tax rules apply to the participants in Qualified
Plans and to Qualified Plan Contracts. We make no attempt in this Prospectus to
provide more than general information about use of the Contract with the various
types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of plan
and the terms and conditions of the plan. For example, for both withdrawals and
annuity payments under certain Qualified Contracts, there may be no "investment
in the contract" and the total amount received may be taxable. Also, loans from
Qualified Contracts, where allowed, are subject to a variety of limitations,
including restrictions as to the amount that may be borrowed, the duration of
the loan, the number of allowable loans and the manner in which the loan must be
repaid. (Owners should always consult their tax advisers and retirement plan
fiduciaries prior to exercising their loan privileges.) Both the amount of the
contribution that may be made, and the tax deduction or exclusion that
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the Owner may claim for such contribution, are limited under Qualified Plans. If
this Contract is used with a Qualified Plan, the Owner and Annuitant generally
are the same individual. If a joint Annuitant is named, all distributions made
while the Annuitant is alive must be made to the Annuitant. Also, if a joint
Annuitant is named who is not the Annuitant's spouse, the annuity options which
are available may be limited, depending on the difference in their ages.
Furthermore, the length of any Guarantee Period may be limited in some
circumstances to satisfy certain minimum distribution requirements under the
Code.
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" ("IRAs"), 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 failure to comply with the minimum distribution requirements. This excise
tax generally equals 50% of the amount by which a minimum required distribution
exceeds the actual distribution from the Qualified Plan.
If you purchase a Qualified Contract with a GRIB Endorsement and elect to
receive a lump sum payment of a portion of the annuity income payments, it is
possible that the remaining annuity income payments will not satisfy the minimum
distribution requirements. You should consult a tax adviser about the
implications under the minimum distribution requirements of taking a lump sum
payment under the GRIB Endorsement.
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 Plan 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."
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 in connection with such plans should consult a tax adviser.
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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. An individual 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.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT-SHARING
PLANS. The Code permits corporate employers to establish various types of
tax-favored retirement plans for employees. The Self-Employed Individuals' Tax
Retirement Act of 1962, as amended, commonly referred to as "H.R. 10" or
"Keogh", permits self-employed individuals also to establish such tax-favored
retirement plans for themselves and their employees. Such retirement plans may
permit the purchase of the Contracts in order to provide benefits under the
plans. The Contract provides a death benefit that in certain circumstances may
exceed the greater of the Purchase Payments and the Contract Value. It is
possible that such death benefit could be characterized as an incidental death
benefit. There are limitations on the amount of incidental benefits that may be
provided under pension and profit sharing plans. In addition, the provision of
such benefits may result in current taxable income to participants. Employers
intending to use the Contract in connection with such plans should seek
competent advice.
TAX-SHELTERED ANNUITIES. Code Section 403(b) permits public school employees
and employees of certain types of charitable, educational and scientific
organizations to have their employers purchase annuity contracts for them and,
subject to certain limitations, to exclude the amount of purchase payments from
taxable gross income. These annuity contracts are commonly referred to as
"tax-sheltered annuities". 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
- contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988,
- earnings on those contributions, and
- earnings after December 31, 1988 on amounts attributable to salary
reduction contributions held as of December 31, 1998. These amounts can
be paid only if 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.)
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DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. The Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. Generally, a Contract purchased by a state or local
government or a tax-exempt organization will not be treated as an annuity
contract for federal income tax purposes. Those who intend to use the Contracts
in connection with such plans should seek competent advice.
2. DIRECT ROLLOVERS
If the Contract is used in connection with a retirement plan that is qualified
under sections 401(a), 403(a), or 403(b) of the Code, any "eligible rollover
distribution" from the Contract will be subject to "direct rollover" and
mandatory withholding requirements. An eligible rollover distribution generally
is any taxable distribution from such a qualified retirement plan, excluding
certain amounts such as
- minimum distributions required under section 401(a)(9) of the Code, and
- certain distributions for life, life expectancy, or for 10 years or more
which are part of a "series of substantially equal periodic payments."
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, 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.
38
<PAGE> 45
A Fund is not required to hold annual shareholders' meetings. Funds hold special
meetings as required or deemed desirable for such purposes as electing trustees,
changing fundamental policies or approving an investment advisory agreement.
Owners have voting rights in a Portfolio based upon the Owner's proportionate
interest in the corresponding Subaccount as measured by units. Owners have
voting rights before surrender, the Annuity Date or the death of the Annuitant.
Thereafter, the payee entitled to receive Variable Annuity payments has voting
rights. During the Annuity Period, Annuitants' voting rights decrease as Annuity
Units decrease.
REPORTS TO CONTRACT OWNERS AND INQUIRIES
After each Contract anniversary, we send you a statement showing amounts
credited to each Subaccount and to the Fixed Account Option. 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
Under our Dollar Cost Averaging program, a predesignated portion of Subaccount
Value is automatically transferred monthly, quarterly, semiannually or annually
for a specified duration to other Subaccounts, Guarantee Periods and the Fixed
Account. The Dollar Cost Averaging program is available only during the
Accumulation Period. You may also elect transfers from the Fixed Account on a
monthly or quarterly basis for a minimum duration of one year. You may enroll
any time by completing our Dollar Cost Averaging form. Transfers are made based
on the date you specify. We must receive the enrollment form at least five (5)
business days before the transfer date.
If you participate in the Dollar Cost Averaging program, you may allocate all or
a portion of the initial Purchase Payment to the Kemper Money Market Subaccount
#2. This is the only Subaccount with no deduction for the 1.40% charge for
mortality and expense risks and administrative costs. You must transfer all
Subaccount Value out of Kemper Money Market Subaccount #2 within one year from
the initial Purchase Payment. If you terminate Dollar Cost Averaging or do not
deplete all Subaccount Value in Kemper Money Market Subaccount #2 within one
year, we automatically transfer any remaining Subaccount Value to Kemper Money
Market Subaccount #1.
The minimum transfer amount is $100 per Subaccount, Guarantee Period or Fixed
Account. The total Contract Value in an account at the time Dollar Cost
Averaging is elected must be at least equal to the amount designated to be
transferred on each transfer date times the duration selected.
Dollar Cost Averaging ends if:
- the number of designated monthly transfers has been completed,
- Contract Value in the transferring account is insufficient to complete
the next transfer; the remaining amount is transferred,
- we receive the Owner's written termination at least five (5) business
days before the next transfer date, or
- the Contract is surrendered or annuitized.
If the Fixed Account balance is at least $10,000, you may elect automatic
calendar quarter transfers of interest accrued in the Fixed Account to one or
more of the Subaccounts or Guarantee Periods. You may enroll in this program any
time by completing our Dollar Cost Averaging form. Transfers are made within
five business days of the end of the calendar quarter. We must receive the
enrollment form at least ten (10) days before the end of the calendar quarter.
Dollar Cost Averaging is not available during the Annuity Period.
39
<PAGE> 46
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, or amounts based on your life expectancy, from the Fixed
Account, or from any of the Subaccounts or Guarantee Periods on a monthly,
quarterly, semi-annual or annual basis. The SWP is available 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 30
days after the Guarantee Period ends. SWP withdrawals from the Fixed Account are
not available in the first Contract Year and are limited to the amount not
subject to Withdrawal Charges. If the amounts distributed under the SWP from the
Subaccounts or Guarantee Periods exceed the free withdrawal amount, the
Withdrawal Charge is applied on any amounts exceeding the free withdrawal
amount. WITHDRAWALS TAKEN UNDER THE SWP MAY BE SUBJECT TO THE 10% TAX PENALTY ON
EARLY WITHDRAWALS AND TO INCOME TAXES AND WITHHOLDING. 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 Frank
Julian, our Associate General Counsel. Jorden Burt Boros Cicchetti Berenson &
Johnson, Washington, D.C., has advised us on certain legal matters concerning
federal securities laws applicable to the issue and sale of the Contracts.
SPECIAL CONSIDERATIONS
We reserve the right to amend the Contract to meet the requirements of federal
or state laws or regulations. We will notify 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. 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.
40
<PAGE> 47
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.
41
<PAGE> 48
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
42
<PAGE> 49
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.
43
<PAGE> 50
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.
44
<PAGE> 51
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
45
<PAGE> 52
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.
46
<PAGE> 53
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.
47
<PAGE> 54
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
48
<PAGE> 55
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.
49
<PAGE> 56
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
50
<PAGE> 57
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
51
<PAGE> 58
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.
52
<PAGE> 59
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
53
<PAGE> 60
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>
54
<PAGE> 61
<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.
55
<PAGE> 62
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.
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<PAGE> 63
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
57
<PAGE> 64
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
58
<PAGE> 65
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.
59
<PAGE> 66
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>
60
<PAGE> 67
<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 January ZLICA and ZD since March 1995. Chairman of the Board of FKLA
1996 to June 1999 and since April and FLA from January 1996 to June 1999 and since April 2000.
2000. Director Chairman of the Board of ZLICA and ZD from March 1995 to
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>
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<PAGE> 68
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.
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<PAGE> 69
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements. Please read the Statement of Additional
Information in conjunction with this Prospectus.
FINANCIAL STATEMENTS
Our included financial statements should be considered primarily as bearing on
our ability to meet our obligations under the Contracts. The Contracts are not
entitled to participate in earnings, dividends or surplus of KILICO.
CONTRACTS ISSUED BEFORE MAY 1, 2000
The investment options under Contracts issued before May 1, 2000 differ from the
options currently available. Both versions of the Contract otherwise are the
same. You may choose from among all of the investment options described in the
section headed "The Funds", except for KVS Growth Opportunities and KVS Growth
and Income. In addition, you may choose from two Subaccounts that invest in
Portfolios of Janus Aspen Series, which are described below.
Janus Aspen Series is an open-end management investment company. It provides an
investment vehicle for variable life insurance and variable annuity contracts
and certain qualified retirement plans. The general characteristics of Funds,
such as Janus Aspen Series, are described in "The Funds" above. Two Portfolios
of Janus Aspen Series are available under your Contract:
- JANUS ASPEN GROWTH PORTFOLIO seeks long-term growth of capital in a
manner consistent with the preservation of capital.
- JANUS ASPEN GROWTH AND INCOME PORTFOLIO seeks long term capital growth
and current income.
Janus Capital Corporation is the investment adviser for the two available
Portfolios of the Janus Aspen Series.
Janus Capital Corporation receives a monthly advisory fee at an annual rate of
.65% of average daily net assets for the Janus Aspen Growth Portfolio and Janus
Aspen Growth and Income Portfolio.
Annual Expenses for these two Portfolios are shown in the table on page 5 above.
ACCUMULATION UNIT VALUES
FOR CONTRACTS ISSUED BEFORE MAY 1, 2000
JANUS ASPEN GROWTH SUBACCOUNT
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATION
ACCUMULATION ACCUMULATION UNITS OUTSTANDING
YEAR ENDED UNIT VALUE AT UNIT VALUE AT AT END OF PERIOD
DECEMBER 31ST BEGINNING OF PERIOD* END OF PERIOD (000'S OMITTED)
------------- -------------------- ------------- ----------------------
<S> <C> <C> <C>
1998.......................... 9.912 11.943 252
1999.......................... 11.943 16.958 5,086
</TABLE>
JANUS ASPEN GROWTH AND INCOME SUBACCOUNT
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATION
ACCUMULATION ACCUMULATION UNITS OUTSTANDING
YEAR ENDED UNIT VALUE AT UNIT VALUE AT AT END OF PERIOD
DECEMBER 31ST BEGINNING OF PERIOD* END OF PERIOD (000'S OMITTED)
------------- -------------------- ------------- ----------------------
<S> <C> <C> <C>
1998.......................... 9.908 12.038 173
1999.......................... 12.038 20.663 3,250
</TABLE>
- - ---------------
* Commencement of offering on June 1, 1998.
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<PAGE> 70
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
64
<PAGE> 71
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.
65
<PAGE> 72
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.
66
<PAGE> 73
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.
67
<PAGE> 74
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.
68
<PAGE> 75
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.
69
<PAGE> 76
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
70
<PAGE> 77
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
71
<PAGE> 78
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.
72
<PAGE> 79
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
73
<PAGE> 80
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
74
<PAGE> 81
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
75
<PAGE> 82
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%).
76
<PAGE> 83
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>
77
<PAGE> 84
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.
78
<PAGE> 85
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.
79
<PAGE> 86
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 upon the
total return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account.
80
<PAGE> 87
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
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 unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
81
<PAGE> 88
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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
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
82
<PAGE> 89
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
83
<PAGE> 90
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.
84
<PAGE> 91
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.
85
<PAGE> 92
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>
86
<PAGE> 93
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>
87
<PAGE> 94
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>
88
<PAGE> 95
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
89
<PAGE> 96
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a 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>
<S> <C> <C> <C> <C> <C> <C> <C>
-.0551589* = [ (1 + .05) ] (4) -1
----------
(1 + .065)
</TABLE>
The Market Value Adjustment is a reduction of $2,316.67 from the Guarantee
Period Value:
- 2,316.67 = -.0551589 X 42,000.00
The Market Adjusted Value would be:
$39,683.33 = $42,000.00 - $2,316.67
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 10% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$2,142.90 = $39,683.33 X .90 X .06
Thus, the amount payable on a full withdrawal would be:
$37,540.43 = $39,683.33 - $2,142.90
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,158.34 = -.0551589 X $21,000.00
The Market Adjusted Value would be:
$19,841.66 = $21,000.00 - $1,158.34
- - ---------------
* Actual calculation utilizes 10 decimal places.
90
<PAGE> 97
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$952.39 = ($19,841.46 - .10 X $39,683.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$18.889.07 = $19,841.46 -$952.39
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and we are then crediting 4% for a four-year Guarantee Period. Upon a full
withdrawal, the market value adjustment factor would be:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
+.0390198 = [ (1 + .05) ] (4) -1
----------
(1 + .04)
</TABLE>
The Market Value Adjustment is an increase of $1638.83 to the Guarantee Period
Value:
$1,638.83 = $42,000.00 X .0390198
The Market Adjusted Value would be:
$43,638.33 = $42,000.00 +$1,638.83
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,356.47 = $43,638.33 X .90 X .06
Thus, the amount payable on withdrawal would be:
$41,281.85 = $43,638.33 - $2,356.47
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$819.42 = $21,000.00 X .0390198
The Market Adjusted Value of $21,000.00 would be:
$21,819.42 = $21,000.00 + $819.42
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$1,047.34 = ($21,819.42 - .1 X $43,638.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$20,772.08 = $21,819.42 - $1,047.34
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
91
<PAGE> 98
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
92
<PAGE> 99
annuity to an IRA. Tax-free rollovers can be made from a SIMPLE IRA to another
SIMPLE IRA or to a SIMPLE Individual Retirement Account under Section 408(p) of
the Code. An individual can make a tax-free rollover
to an IRA from a SIMPLE IRA after a two-year period has expired since the
individual first participated in a SIMPLE plan.
2. You must complete the transfer by the 60th day after the day you receive the
distribution from your IRA or other qualified employee benefit plan or SIMPLE
IRA.
3. A rollover distribution may be made to you only once a year. The one-year
period begins on the date you receive the rollover distribution, not on the date
you roll it over (reinvest it).
4. A direct transfer to an IRA of funds in an IRA from one trustee or insurance
company to another is not a rollover. It is a transfer that is not affected by
the one-year waiting period.
5. All or a part of the premium for this Contract used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or
tax-sheltered annuity, or from a direct transfer from another IRA. All or part
of the premium for this Contract used as a SIMPLE IRA may be paid from a
rollover from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the
extent permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE
Individual Retirement Account.
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 no 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.
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You may file a tax return claiming a deduction for your IRA contribution before
the contribution is actually made. You must, however, make the contribution by
the due date of your return not including extensions.
6. You cannot make a contribution other than a rollover contribution to your IRA
for the year in which you reach age 70 1/2 or thereafter.
E. SEP 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.
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<PAGE> 101
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.
If the actual distribution from your Contract is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. ROTH IRAS
1. If your Contract is a special type of individual retirement plan known as a
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to an "IRA"
are to an "individual retirement plan," within the meaning of Section
7701(a)(37) of the Code, other than a Roth IRA.) Roth IRAs are treated the same
as other IRAs, except as described here. However, the provisions of the Code
governing Roth IRAs may be modified by pending legislation. We will notify you
of any such changes.
2. The IRS is not presently accepting submissions for opinion letters approving
annuities as Roth IRAs, but will issue in the future procedures for requesting
such opinion letters. We will apply for approval as soon as possible after the
IRS issues its procedures on this matter. Such approval will be a determination
only as to the form of the annuity, and will not represent a determination of
the merits of the annuity.
3. If your Contract is a Roth IRA, we will send you a Roth IRA endorsement to be
attached to, and to amend, your Contract after we obtain approval of the
endorsement from the IRS and your state insurance department. The Company
reserves the right to amend the Contract as necessary or advisable from time to
time to comply with future changes in the Internal Revenue Code, regulations or
other requirements imposed by the IRS to obtain or maintain its approval of the
annuity as a Roth IRA.
4. Earnings in your Roth IRA are not taxed until they are distributed to you,
and will not be taxed if they are paid as a "qualified distribution," as
described to you in section L, below.
J. ELIGIBILITY AND CONTRIBUTIONS FOR ROTH IRAS
1. Generally, you are eligible to establish or make a contribution to your Roth
IRA 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.
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<PAGE> 102
K. ROLLOVERS, TRANSFERS AND CONVERSIONS TO ROTH IRAS
1. Rollovers and Transfers--A rollover may be made to a Roth IRA only if it is a
"qualified rollover contribution." A "qualified rollover contribution" is a
rollover to a Roth IRA from another Roth IRA or from an IRA, but only if such
rollover contribution also meets the rollover requirements for IRAs under
Section 408(d)(3). In addition, a transfer may be made to a Roth IRA directly
from another Roth IRA or from an IRA.
You may not make a qualified rollover contribution or transfer in a taxable year
from an IRA to a Roth IRA
if (a) your adjusted gross income for the taxable year exceeds $100,000 or (b)
you are married and file a
separate return.
The rollover requirements of Section 408(d)(3) are complex and should be
carefully considered before you make a rollover. One of the requirements is that
the amount received be paid into another IRA (or Roth IRA) within 60 days after
receipt of the distribution. In addition, a rollover contribution from a Roth
IRA may be made by you only once a year. The one-year period begins on the date
you receive the Roth IRA distribution, not on the date you roll it over
(reinvest it) into another Roth IRA. If you withdraw assets from a Roth IRA, you
may roll over part of the withdrawal tax free into another Roth IRA and keep the
rest of it. A portion of the amount you keep may be included in your gross
income.
2. Taxation of Rollovers and Transfers to Roth IRAs--A qualified rollover
contribution or transfer from a Roth IRA maintained for your benefit to another
Roth IRA maintained for your benefit which meets the rollover requirements for
IRAs under Section 408(d)(3) is tax-free.
In the case of a qualified rollover contribution or a transfer from an IRA
maintained for your benefit to a Roth IRA maintained for your benefit, any
portion of the amount rolled over or transferred which would be includible in
your gross income were it not part of a qualified rollover contribution or a
nontaxable transfer will be includible in your gross income. However, 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 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
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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 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 higher education expenses, certain medical expenses, or by an
unemployed individual to pay health insurance premiums.
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O. EXCISE TAX REPORTING
Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA, SIMPLE IRA or Roth IRA excise taxes,
you do not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
P. BORROWING
If you borrow money against your Contract or use it as security for a loan, the
Contract will lose its classification as an IRA, Roth IRA, or SIMPLE IRA,
whichever is applicable, and you must include in gross income the fair market
value of the Contract as of the first day of your tax year. In addition, you may
be subject to the tax on premature distributions described above. (Note: This
Contract does not allow borrowings against it, nor may it be assigned or pledged
as collateral for a loan.)
Q. REPORTING
We will provide you with any reports required by the Internal Revenue Service.
R. ESTATE TAX
Generally, the value of your IRA, including your Roth IRA, is included in your
gross estate for federal estate
tax purposes.
S. FINANCIAL DISCLOSURE
1. If contributions to the Contract are made by other than rollover
contributions and direct transfers, the following information based on the
charts shown on the next pages, which assumes you were to make a level
contribution to the fixed account at the beginning of each year of $1,000 must
be completed prior to your signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- - ------------------------------------------------------------------------------------------------------
2 65
- - ------------------------------------------------------------------------------------------------------
3 70
- - ------------------------------------------------------------------------------------------------------
4
- - ------------------------------------------------------------------------------------------------------
5
- - ------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
2. If contributions to the Contract are made by rollover contributions and/or
direct transfers, the following information, based on the charts shown on the
next page, and all of which assumes you make one contribution to the fixed
account of $1,000 at the beginning of this year, must be completed prior to your
signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- - ------------------------------------------------------------------------------------------------------
2 65
- - ------------------------------------------------------------------------------------------------------
3 70
- - ------------------------------------------------------------------------------------------------------
4
- - ------------------------------------------------------------------------------------------------------
5
- - ------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 105
* Includes applicable withdrawal charges as described in Item O below.
T. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT
(VARIABLE ACCOUNT)
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.40% per annum. If you elected the Guaranteed Retirement Income
Benefit option, an additional charge of .25% of the Contract Value will be
assessed against the Separate Account, Fixed Account and Guarantee Periods on a
pro-rata basis.
2. An annual records maintenance charge of $30.00 will be assessed ratably each
quarter against the Separate Account, Fixed Account and Guarantee Periods.
3. Withdrawal (early annuitization) charges will be assessed based on the years
elapsed since the Purchase Payments (in a given Contract Year) were received by
KILICO; under 1 year, 7%; over 1 to 2 years, 6%; over 2 to 3 years, 5%; over 3
to 4 years, 5%; over 4 to 5 years, 4%; over 5 to 6 years, 3%; over 6 to 7 years,
2%; over 7 years and thereafter, 0%.
4. The method used to compute and allocate the annual earnings is contained in
the Prospectus under the heading "Accumulation Unit Value."
5. The growth in value of your Contract is neither guaranteed nor projected but
is based on the investment experience of the Separate Account.
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<PAGE> 106
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 937.00 14 $16,798.32 27 $40,421.63 40 $ 75,113.26
2 1,913.00 15 18,310.91 28 42,642.92 41 78,375.30
3 2,928.90 16 19,868.88 29 44,930.85 42 81,735.20
4 3,976.63 17 21,473.59 30 47,287.42 43 85,195.89
5 5,066.14 18 23,126.44 31 49,714.68 44 88,760.41
6 6,198.41 19 24,828.87 32 52,214.76 45 92,431.86
7 7,374.46 20 26,582.37 33 54,789.84 46 96,213.46
8 8,604.34 21 28,388.49 34 57,442.18 47 100,108.50
9 9,871.11 22 30,248.78 35 60,174.08 48 104,120.40
10 11,175.88 23 32,164.88 36 62,987.94 49 108,252.65
11 12,519.80 24 34,138.47 37 65,886.22 50 112,508.87
12 13,904.03 25 36,171.26 38 68,871.45
13 15,329.79 26 38,265.04 39 71,946.23
</TABLE>
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<PAGE> 107
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 937 14 $1,000 27 $1,000 40 $1,000
2 946 15 1,000 28 1,000 41 1,000
3 955 16 1,000 29 1,000 42 1,000
4 955 17 1,000 30 1,000 43 1,000
5 964 18 1,000 31 1,000 44 1,000
6 973 19 1,000 32 1,000 45 1,000
7 982 20 1,000 33 1,000 46 1,000
8 1,000 21 1,000 34 1,000 47 1,000
9 1,000 22 1,000 35 1,000 48 1,000
10 1,000 23 1,000 36 1,000 49 1,000
11 1,000 24 1,000 37 1,000 50 1,000
12 1,000 25 1,000 38 1,000
13 1,000 26 1,000 39 1,000
</TABLE>
* Includes applicable withdrawal charges.
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<PAGE> 108
PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
- - --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET
VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS
- - --------------------------------------------------------------------------------
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
This Prospectus describes Variable, Fixed and Market Value Adjusted Deferred
Annuity Contracts (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 Contracts 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 twelve investment options, each of which is a
Subaccount of KILICO Variable Annuity Separate Account. Currently, you may
choose among the following Portfolios:
- - - KEMPER VARIABLE SERIES:
- Kemper Government Securities
- Kemper High Yield
- Kemper Small Cap Growth
- KVS Dreman High Return Equity (formerly Kemper-Dreman High Return Equity)
- - - SCUDDER VARIABLE LIFE INVESTMENT FUND:
- Scudder VLIF Money Market
- Scudder VLIF Growth and Income
(Class A Shares)
- Scudder VLIF International (Class A Shares)
- Scudder VLIF Bond (Class A Shares)
- - - JANUS ASPEN SERIES:
- Janus Aspen Capital Appreciation
- - - PIMCO VARIABLE INSURANCE TRUST:
- PIMCO Low Duration Bond
- PIMCO Foreign Bond
- - -FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST*:
- Templeton Developing Markets Securities Fund (formerly Templeton
Developing Markets Fund) (Class 2 Shares)
*Effective May 1, 2000, the funds of Templeton Variable Products Series Fund
merged into similar corresponding funds of Franklin Templeton Variable
Insurance Products Trust.
Subaccounts and Portfolios may be added or deleted in the future. Contract
values allocated to any of the Subaccounts vary, reflecting the investment
experience of the selected Subaccounts. Contract values allocated to the Fixed
Account or one or more Guarantee Periods of the Market Value Adjustment Option
accumulate on a fixed basis.
THE CONTRACTS ARE NOT INSURED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND ARE NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR
SAVINGS INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE CONTRACTS THAT YOU
SHOULD KNOW BEFORE INVESTING. YOU SHOULD READ IT BEFORE INVESTING AND KEEP IT
FOR FUTURE REFERENCE. WE HAVE FILED A STATEMENT OF ADDITIONAL INFORMATION
("SAI") WITH THE SECURITIES AND EXCHANGE COMMISSION. THE CURRENT SAI HAS THE
SAME DATE AS THIS PROSPECTUS AND IS INCORPORATED BY REFERENCE IN THIS
PROSPECTUS. YOU MAY OBTAIN A FREE COPY BY WRITING US OR CALLING (847) 550-5500.
A TABLE OF CONTENTS FOR THE SAI APPEARS ON PAGE 59. 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> 109
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 3
SUMMARY OF EXPENSES......................................... 5
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 9
FIXED ACCOUNT OPTION........................................ 14
THE CONTRACTS............................................... 14
CONTRACT CHARGES AND EXPENSES............................... 22
THE ANNUITY PERIOD.......................................... 24
FEDERAL INCOME TAXES........................................ 28
DISTRIBUTION OF CONTRACTS................................... 34
VOTING RIGHTS............................................... 34
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 34
DOLLAR COST AVERAGING....................................... 34
SYSTEMATIC WITHDRAWAL PLAN.................................. 35
EXPERTS..................................................... 35
LEGAL MATTERS............................................... 35
SPECIAL CONSIDERATIONS...................................... 36
AVAILABLE INFORMATION....................................... 36
BUSINESS.................................................... 37
PROPERTIES.................................................. 42
LEGAL PROCEEDINGS........................................... 42
SELECTED FINANCIAL DATA..................................... 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 44
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS................... 56
EXECUTIVE COMPENSATION...................................... 58
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 59
FINANCIAL STATEMENTS........................................ 59
</TABLE>
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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.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments and upon the continuation of whose life annuity payments
involving life contingencies depend.
ANNUITY DATE--The date on which annuity payments are to commence.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person designated to receive any benefits under a Contract
upon the death of the Annuitant or the Owner prior to the Annuity Period.
COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.
CONTRACT--A Variable, Fixed and Market Value Adjusted Annuity Contract
offered 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 Separate Account Contract
Value, Accumulated Guarantee Period Value and Fixed Account Contract Value.
CONTRACT YEAR--Period between anniversaries of the Contract's Date of
Issue.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Contract's
Date of Issue.
CONTRIBUTION YEAR--Each one year period following the date a Purchase
Payment is made.
DATE OF ISSUE--The date on which the first Contract Year commences.
FIXED ACCOUNT--The General Account of KILICO to which you may allocate all
or a portion of Purchase Payments or Contract Value. We guarantee a minimum
rate of interest on Purchase Payments allocated to the Fixed Account.
FIXED ACCOUNT CONTRACT VALUE--The value of your Contract interest in the
Fixed Account.
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 OR FUNDS--Kemper Variable Series, Scudder Variable Life Investment
Fund, Janus Aspen Series PIMCO Variable Insurance Trust and Franklin
Templeton Variable Insurance Products Trust including any Portfolios
thereunder.
GENERAL ACCOUNT--All our assets other than those allocated to any separate
account.
GUARANTEED INTEREST RATE--The rate of interest we establish for a given
Guarantee Period.
GUARANTEE PERIOD--The time when an amount is credited with a Guaranteed
Interest Rate. Guarantee Period options may range from one to ten years, at
our option.
GUARANTEE PERIOD VALUE--The Guarantee Period Value is the sum of 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
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<PAGE> 111
Guarantee Period commenced. The adjustment is computed using the market
value adjustment formula stated in the Contract.
NON-QUALIFIED PLAN CONTRACT--A Contract which does not receive favorable
tax treatment under Sections 401, 403, 408, 408A or 457 of the Internal
Revenue Code.
OWNER ("YOU, YOUR, YOURS")--The person designated in the Contract as having
the privileges of ownership defined in the Contract.
PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to herein as a
Fund.
PURCHASE PAYMENTS--Amounts paid to us by you or on your behalf.
QUALIFIED PLAN CONTRACT--A Contract issued in connection with a retirement
plan which receives favorable tax treatment under Sections 401, 403, 408,
408A or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT CONTRACT VALUE--The sum of your Subaccount Values.
SUBACCOUNTS--The thirteen subdivisions of the Separate Account, the assets
of which consist solely of shares of the corresponding Portfolios.
SUBACCOUNT VALUE--The value of your interest in each Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which you have an
interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Contract Value in the first seven Contribution Years
after a Purchase Payment is made or against certain annuitizations of
Contract Value in the first seven Contribution Years after a Purchase
Payment is made.
WITHDRAWAL VALUE--Contract Value, plus or minus any applicable Market Value
Adjustment, less any premium tax payable if the Contract is being
annuitized, minus any Withdrawal Charge applicable to that Contract.
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SUMMARY
Because this is a summary; it does not contain all of the information that may
be important. Read the entire Prospectus and Statement of Additional Information
before deciding to invest.
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified Plan and Qualified Plan Contracts are described in
this Prospectus.
The minimum initial Purchase Payment is $1,000. Subject to certain exceptions,
the minimum subsequent payment is $500. An allocation to a Subaccount, Fixed
Account or Guarantee Period must be at least $500. Our prior approval is
required for Purchase Payments over $1,000,000. (See "The Contracts," page 14.)
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 Government Securities
- - - Kemper High Yield
- - - Kemper Small Cap Growth
- - - KVS Dreman High Return Equity (formerly Kemper-Dreman High Return Equity)
- - - Scudder VLIF Money Market
- - - Scudder VLIF Growth and Income (A-Shares)
- - - Scudder VLIF International (A-Shares)
- - - Scudder VLIF Bond (A-Shares)
- - - Janus Aspen Capital Appreciation Portfolio
- - - PIMCO Low Duration Bond
- - - PIMCO Foreign Bond
- - - Templeton Developing Markets Securities Fund (formerly Templeton Developing
Markets Fund) (Class 2 Shares)
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccounts.
The Fixed Account has fixed accumulations and benefits. We guarantee that
Purchase Payments allocated to the Fixed Account earn a minimum fixed interest
rate of 3%. In our discretion, we may credit interest in excess of 3%. (See
"Fixed Account Option," page 14.)
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 three (3). We credit interest daily to amounts allocated to
the MVA Option. We declare the rate at our sole discretion. We guarantee amounts
allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee
Periods 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 9.)
You bear the investment risk under the Contracts, unless Contract Values are
allocated to:
- the MVA Option and are guaranteed to receive the Guaranteed Interest
Rate, or
- the Fixed Option and are guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization,
subject to certain limitations. A transfer from a Guarantee Period is subject to
a Market Value Adjustment unless effected within 30 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 17 and 26, respectively.)
You may withdraw Contract Value subject to Withdrawal Charges, any applicable
Market Value Adjustment and other specified conditions. (See "Withdrawal During
Accumulation Period," page 18.)
We do not deduct sales charges from Purchase Payments. Each Contract Year, you
may withdraw or surrender the Contract, without Withdrawal Charge, up to the
greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, or
3
<PAGE> 113
- 10% of Contract Value. If you withdraw a larger amount, the excess
Purchase Payments withdrawn are subject to a Withdrawal Charge.
The Withdrawal Charge is:
- 7% in the first Contribution Year,
- 6% in the second Contribution Year,
- 5% in the third and fourth Contribution Years,
- 4% in the fifth Contribution Year,
- 3% in the sixth Contribution Year,
- 2% in the seventh Contribution Year, and
- 0% thereafter.
(See "Withdrawal Charge," page 22.) The Withdrawal Charge also applies at the
annuitization of Accumulation Units in their seventh Contribution Year or
earlier, except as set forth under "Withdrawal Charge." Withdrawals may be
subject to income tax, a 10% penalty tax, and other tax consequences.
Withdrawals from Qualified Plan Contracts may be limited by the Internal Revenue
Code (the "Code"). (See "Federal Income Taxes," page 28.)
Contract charges include:
- mortality and expense risk,
- administrative expenses,
- records maintenance,
- applicable premium taxes, and
- Guaranteed Retirement Income Benefit.
(See "Charges Against the Separate Account," page 22.) In addition, the
investment advisers to the Funds deduct varying charges against the assets of
the Funds for which they provide investment advisory services. (See the Funds'
prospectuses for such information.)
The Contract may be purchased in connection with retirement plans qualifying
either under Section 401 or 403(b) of the Code or as individual retirement
annuities including Roth IRAs. The Contract is also available in connection with
State and Municipal deferred compensation plans and non-qualified deferred
compensation plans. (See "Taxation of Annuities in General," page 28 and
"Qualified Plans," page 31.)
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 14.) 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
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SUMMARY OF EXPENSES
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CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments).............................. None
Contingent Deferred Sales Load (as a percentage of amount surrendered)(1)
Year of Withdrawal After Purchase
First year......................................... 7%
Second year........................................ 6%
Third year......................................... 5%
Fourth year........................................ 5%
Fifth year......................................... 4%
Sixth year......................................... 3%
Seventh year....................................... 2%
Eighth year and following.......................... 0%
Surrender Fees...................................................................................... None
Exchange Fee(2)..................................................................................... $25
ANNUAL CONTRACT FEE (Records Maintenance Charge)(3)................................................. $30
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense Risk.............. 1.25%
Administration.......................... .15%
Account Fees and Expenses............... 0%
---------
Total Separate Account Annual
Expenses.............................. 1.40%
=========
GUARANTEED RETIREMENT INCOME BENEFIT
CHARGE
Annual Expense (as a percentage of
Contract Value)....................... .25%
</TABLE>
FUND ANNUAL EXPENSES (After Fee Waivers and
Expense Reductions)
(as percentage of each Portfolio's average net
assets for the period ended December 31, 1999)
<TABLE>
<CAPTION>
TOTAL
RULE PORTFOLIO
MANAGEMENT 12B-1 OTHER ANNUAL
FEES FEES EXPENSES EXPENSES
---------- ----- -------- ---------
<S> <C> <C> <C> <C>
Kemper
Government
Securities... .55% -- .08% .63%
Kemper
High
Yield... .60 -- .07 .67
Kemper
Small
Cap
Growth... .65 -- .06 .71
KVS
Dreman
High
Return
Equity(10)... .75 -- .11 .86
Scudder
VLIF
Money
Market... .37 -- .06 .43
Scudder
VLIF
Growth
and
Income... .47 -- .08 .55
Scudder
VLIF
International... .85 -- .18 1.03
Scudder
VLIF
Bond... .48 -- .09 .57
Janus
Aspen
Capital
Appreciation(11)... .65 -- .04 .69
PIMCO
Low
Duration
Bond(4)(6)... .40 -- .25 .65
PIMCO
Foreign
Bond(5)(6)(7)... .60 -- .50 1.10
Templeton
Developing
Markets
Securities
Fund(8)(9)... 1.25 .25 .31 1.81
</TABLE>
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(1) A Contract Owner may withdraw up to the greater of (i) the excess of
Contract Value over total Purchase Payments subject to Withdrawal Charges
less prior withdrawals that were previously assessed a Withdrawal Charge,
and (ii) 10% of the Contract Value in any Contract Year without assessment
of any charge. In certain circumstances We may reduce or waive the
contingent deferred sales charge.
(2) We reserve the right to charge a fee of $25 for each transfer of Contract
Value in excess of 12 transfers per calendar year.
(3) Applies to Contracts with a Contract Value less than $50,000 on the date of
assessment. In certain circumstances We may reduce or waive the annual
Records Maintenance Charge.
(4) "Other Expenses" reflects a 0.25% administrative fee and 0.13% representing
the Portfolio's organizational expenses and pro rata Trustees' fees.
(5) "Other Expenses" reflects a 0.30% administrative fee, 0.20% interest
expense and 0.15% representing the Portfolio's organizational expenses and
pro rata Trustees' fees.
(6) Pacific Investment Management Company ("PIMCO") has contractually agreed to
reduce total annual portfolio operating expenses to the extent they would
exceed, due to the payment of organizational expenses and Trustees' fees,
0.65% and 0.90%, respectively, of average daily net assets for the PIMCO
Low Duration Bond and Foreign Bond Portfolios. Without such reductions,
Management Fees, Other Expenses and Total Portfolio Annual Expenses for the
fiscal year ended December 31, 1999 would have been: for the PIMCO Low
Duration Bond Portfolio, .40%, .38% and .78%, respectively; and for the
PIMCO Foreign Bond Portfolio, .60%, .65% and 1.25%, respectively. Under the
Expense Limitation Agreement, PIMCO may recoup these waivers and
reimbursements in future periods, not exceeding three years, provided total
expenses, including such recoupment, do not exceed the annual expense
limit.
(7) Ratio of net expenses to average net assets excluding interest expense is
0.90%.
(8) The Fund's class 2 distribution plan or "Rule 12b-1 Plan" is described in
the Fund's prospectus.
(9) On February 8, 2000, Portfolio shareholders approved a merger and
reorganization that combined the Portfolio with the Templeton Developing
Markets Equity Fund, effective May 1, 2000. The shareholders of that Fund
had approved new management fees, which apply to the combined fund
effective May 1, 2000. The table shows restated total expenses based on the
new fees and the assets of the Portfolio as of December 31, 1999, and not
the assets of the combined fund. However, if the table reflected both the
new fees and the combined assets, the Portfolio's expenses after May 1,
2000 would be estimated as: Management Fees 1.25%, Rule 12b-1 Fees .25%,
Other Expenses .29%, and Total Portfolio Annual Expenses 1.79%.
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<PAGE> 115
(10) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on May 1, 2000, to limit their respective fees and to
reimburse other expenses to the extent necessary to limit total operating
expenses of the KVS Dreman High Return Equity Portfolio to .87%. The amount
set forth in the table above reflects actual expenses for the past fiscal
year, which were at or lower than this expense limit.
(11) Expenses are based upon expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fee for Janus Aspen
Capital Appreciation Portfolio. Expenses are shown without the effect of
any expense offset arrangements.
6
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EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your Contract at the
end of the periods shown, you would pay
the following expenses on a $1,000
investment, assuming 5% annual return on
assets:
Kemper Government Securities $ 93 $120 $158 $240
Kemper High Yield 93 121 160 245
Kemper Small Cap Growth 94 122 162 249
KVS Dreman High Return Equity 95 126 169 264
Scudder VLIF Money Market #1(1) 91 114 148 219
Scudder VLIF Growth and Income 92 117 154 232
Scudder VLIF International 97 131 178 282
Scudder VLIF Bond 93 118 155 234
Janus Aspen Capital Appreciation 94 121 161 247
PIMCO Low Duration Bond 93 120 159 243
PIMCO Foreign Bond 98 133 181 289
Templeton Developing Markets Securities 104 154 215 358
If you do not surrender your Contract,
you would pay the following expenses on
a $1,000 investment, assuming 5% annual
return on assets:
Kemper Government Securities 21 65 112 240
Kemper High Yield 21 66 114 245
Kemper Small Cap Growth 22 68 116 249
KVS Dreman High Return Equity 23 72 124 264
Scudder VLIF Money Market#1(1) 19 59 101 219
Scudder VLIF Growth and Income 20 63 108 232
Scudder VLIF International 25 77 132 282
Scudder VLIF Bond 20 63 109 234
Janus Aspen Capital Appreciation 22 67 115 247
PIMCO Low Duration Bond 21 66 113 243
PIMCO Foreign Bond 26 80 136 289
Templeton Developing Markets Securities 33 101 172 358
</TABLE>
The purpose of the preceding table which includes the "SUMMARY OF EXPENSES" on
the prior page, is to assist Contract Owners in understanding the various costs
and expenses that a Contract Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH
MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. "Management Fees", "Rule 12b-1 Fees" and "Other Expenses"
in the "SUMMARY OF EXPENSES" for the Portfolios have been provided by Scudder
Kemper Investments, Inc., Janus Capital Corporation, Pacific Investment
Management Company and Templeton Asset Management Ltd., as applicable, and have
not been independently verified. The Example assumes a 5% annual rate of return
pursuant to requirements of the Securities and Exchange Commission. This
hypothetical rate of return is not intended to be representative of past or
future performance of any Subaccount. The Records Maintenance Charge is a single
charge, it is not a separate charge for each Subaccount. In addition, the effect
of the Records Maintenance Charge has been reflected in the Example by applying
the percentage derived by dividing the total amounts of annual Records
Maintenance Charge collected by the total net assets of all the Subaccounts in
the Separate Account. See "Contract Charges and Expenses" for more information
regarding the various costs and expenses.
(1) Scudder VLIF Money Market Subaccount #2 is not shown because it is available
only for dollar cost averaging that will deplete an Owner's subaccount value
entirely at least by the end of the first Contribution Year.
7
<PAGE> 117
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
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD* ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kemper Government Securities Subaccount $ --
Kemper High Yield Subaccount --
Kemper Small Cap Growth Subaccount --
KVS Dreman High Return Equity Subaccount --
Scudder VLIF Money Market #1 Subaccount --
Scudder VLIF Money Market #2 Subaccount --
Scudder VLIF Growth and Income Subaccount --
Scudder VLIF International Subaccount --
Scudder VLIF Bond Subaccount --
Janus Aspen Capital Appreciation Subaccount --
PIMCO Low Duration Bond Subaccount --
PIMCO Foreign Bond Subaccount --
Templeton Developing Markets Securities
Subaccount --
<CAPTION>
1999
ACCUMULATION UNIT VALUE AT END OF PERIOD ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kemper Government Securities Subaccount $ 9.924
Kemper High Yield Subaccount 10.185
Kemper Small Cap Growth Subaccount 15.122
KVS Dreman High Return Equity Subaccount 9.043
Scudder VLIF Money Market #1 Subaccount 10.042
Scudder VLIF Money Market #2 Subaccount 10.065
Scudder VLIF Growth and Income Subaccount 10.293
Scudder VLIF International Subaccount 15.038
Scudder VLIF Bond Subaccount 9.763
Janus Aspen Capital Appreciation Subaccount 13.573
PIMCO Low Duration Bond Subaccount 10.111
PIMCO Foreign Bond Subaccount 9.790
Templeton Developing Markets Securities
Subaccount 14.585
<CAPTION>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF 1999
PERIOD (000'S OMITTED) ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kemper Government Securities Subaccount 22
Kemper High Yield Subaccount 0
Kemper Small Cap Growth Subaccount 5
KVS Dreman High Return Equity Subaccount 25
Scudder VLIF Money Market #1 Subaccount 0
Scudder VLIF Money Market #2 Subaccount 0
Scudder VLIF Growth and Income Subaccount 29
Scudder VLIF International Subaccount 1
Scudder VLIF Bond Subaccount 3
Janus Aspen Capital Appreciation Subaccount 55
PIMCO Low Duration Bond Subaccount 2
PIMCO Foreign Bond Subaccount 25
Templeton Developing Markets Securities Subaccount 0
</TABLE>
* Commencement of Offering on March 12, 1999.
8
<PAGE> 118
KILICO, THE MVA OPTION,
THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
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--4. Establishment of Guaranteed Interest Rates.")
Our investment strategy for the non-unitized separate account is generally to
match Guarantee Period liabilities with assets, such as debt instruments. We
expect to invest in debt instruments such as:
- securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the
United States Government;
- debt securities which have an investment grade, at the time of purchase,
within the four (4) highest grades assigned by Moody's Investors
Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other
nationally recognized rating service;
- other debt instruments including issues of or guaranteed by banks or bank
holding companies and corporations, which obligations, although not rated
by Moody's or Standard & Poor's, are deemed by our management to have an
investment quality comparable to securities which may be otherwise
purchased; and
- options and futures transactions on fixed income securities.
Our invested assets portfolio at December 31, 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.")
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<PAGE> 119
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.
Thirteen Subaccounts of the Separate Account are currently available. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios.
We may add or delete Subaccounts in the future. Not all Subaccounts may be
available in all jurisdictions or under all Contracts.
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges and to transfer assets from one Subaccount to another as 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 FUNDS
The Separate Account invests in shares of the following open-end, management
investment companies:
- Kemper Variable Series
- Scudder Variable Life Investment Fund
- Janus Aspen Series
- PIMCO Variable Insurance Trust
- Franklin Templeton Variable Insurance Products Trust*
*Effective May 1, 2000, the funds of Templeton Variable Products Series Fund
merged into similar corresponding funds of Franklin Templeton Variable Insurance
Products Trust.
The Funds provide investment vehicles for variable life insurance and variable
annuity contracts and, in the case of Janus Aspen Series and PIMCO Variable
Insurance Trust, certain qualified retirement plans. Shares of the Funds are
sold only to insurance company separate accounts and qualified retirement plans.
Shares of the Funds may be sold to separate accounts of other insurance
companies, whether or not affiliated with us. It is conceivable that in the
future it may be disadvantageous for variable life insurance separate accounts
and variable annuity separate accounts of companies unaffiliated with us, or for
variable life insurance separate accounts, variable annuity separate accounts
and qualified retirement plans to invest simultaneously in the Funds. Currently,
we do not foresee disadvantages to variable life insurance owners, variable
annuity owners or qualified retirement plans. The Funds monitor events for
material conflicts between owners and determine what action, if any, should be
taken. In addition, if we believe that a Fund's response to any of those events
or conflicts insufficiently protects Owners, we will take appropriate action.
A Fund may consist of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio.
The twelve Portfolios are summarized below:
KEMPER VARIABLE SERIES
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
10
<PAGE> 120
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
KVS DREMAN HIGH RETURN EQUITY (FORMERLY KEMPER-DREMAN HIGH RETURN EQUITY)
PORTFOLIO seeks to achieve a high rate of total return.
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF MONEY MARKET PORTFOLIO seeks to maintain stability of capital and,
consistent therewith, to maintain the liquidity of capital and to provide
current income.
SCUDDER VLIF GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital,
current income and growth of income.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments.
SCUDDER VLIF BOND PORTFOLIO seeks to provide a high level of income consistent
with a high quality portfolio of debt securities.
JANUS ASPEN SERIES
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO seeks long-term growth of capital.
PIMCO VARIABLE INSURANCE TRUST
PIMCO LOW DURATION BOND PORTFOLIO seeks to maximize total return, consistent
with preservation of capital and prudent investment management.
PIMCO FOREIGN BOND PORTFOLIO seeks to maximize total return, consistent with
preservation of capital and prudent investment management.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
TEMPLETON DEVELOPING MARKETS SECURITIES FUND (FORMERLY TEMPLETON DEVELOPING
MARKETS FUND) seeks long-term capital appreciation. The Fund primarily invests
in emerging market equity securities.
The Portfolios may not achieve their stated objective. More detailed
information, including a description of risks involved in investing in the
Portfolios is found in the Funds' prospectuses accompanying this Prospectus and
Statements of Additional Information, available from us upon request.
Scudder Kemper Investments, Inc. ("SKI") is the investment manager for the four
available Portfolios of Kemper Variable Series and the four available Portfolios
of Scudder Variable Life Investment Fund. Dreman Value Management L.L.C. ("DVM")
serves as sub-adviser for the KVS Dreman High Return Equity Portfolio. Under the
terms of the sub-advisory agreement between SKI and DVM manages the investment
and reinvestment of that Portfolio's assets in accordance with the investment
objectives, policies and limitations and subject to the supervision of SKI and
the Board of Trustees. Janus Capital Corporation is the investment adviser for
the available Portfolio of the Janus Aspen Series. Pacific Investment Management
Company is the investment adviser for the two available Portfolios of the PIMCO
Variable Insurance Trust. Templeton Asset Management Ltd. is the investment
manager for the available portfolio of the Templeton Developing Markets
Securities Fund. The investment advisers are paid fees for their services by the
Funds they manage. We may receive compensation from the Funds or the investment
advisers of the Funds for services related to the Funds. Such compensation will
be consistent with the services rendered or the cost savings resulting from the
arrangement.
For their services to the Portfolios, the managers receive compensation at the
following rates:
KEMPER VARIABLE SERIES
For its services, SKI is paid a management fee based upon the average daily net
assets of each Portfolio, as follows: Kemper Government Securities (.55 of 1%),
Kemper High Yield (.60 of 1%), Kemper Small Cap Growth (.65 of 1%), and KVS
Dreman High Return Equity (.75% for the first $250 million, .72% for the next
$750 million, .70% for the next $1.5 billion, .68% for the next $2.5 billion,
.65% for the next $2.5 billion, .64% for the next $2.5 billion, .63% for the
next $2.5 billion and .62% over $12.5 billion). SKI pays DVM for its services as
sub-adviser for the KVS Dreman High Return Equity Portfolio a sub-advisory fee,
payable monthly, at the annual rate
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of .24% of the first $250 million of the Portfolio's average daily net assets,
.23% of the average daily net assets between $250 million and $1 billion, .224%
of average daily net assets between $1 billion and $2.5 billion, .218% of
average daily net assets between $2.5 billion and $5 billion, .208% of average
daily net assets between $5 billion and $7.5 billion, .205% of average daily net
assets between $7.5 billion and $10 billion, .202% of average daily net assets
between $10 billion and $12.5 billion and .198% of each Portfolio's average
daily net assets over $12 billion.
SCUDDER VARIABLE LIFE INVESTMENT FUND
For its investment management services to the Portfolios, SKI receives
compensation monthly at the following annual rate for each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF THE AVERAGE
DAILY NET ASSET VALUES
PORTFOLIO OF EACH PORTFOLIO
--------- ----------------------
<S> <C>
Scudder VLIF Money Market................................... .370%
Scudder VLIF Growth and Income.............................. .475%
Scudder VLIF International
First $500,000,000........................................ .875%
Over $500,000,000......................................... .725%
Scudder VLIF Bond........................................... .475%
</TABLE>
JANUS ASPEN SERIES
Janus Capital Corporation receives a monthly advisory fee at an annual rate of
.65% of average daily net assets for the Janus Aspen Capital Appreciation
Portfolio.
PIMCO VARIABLE INSURANCE TRUST
The PIMCO Low Duration Bond and PIMCO Foreign Bond Portfolios feature fixed
advisory and administrative fee rates. Pacific Investment Management Company
receives monthly advisory fees and administrative fees from each Portfolio at an
annual rate based on the average daily net assets of the Portfolio, as follows:
PIMCO Low Duration Bond .40% and .25%, respectively, and PIMCO Foreign Bond .60%
and .30%, respectively. The administrative fee covers most of the expenses of
the Portfolios, including legal, audit, custody, transfer agency and certain
other services, and is responsible for the costs of registration of PIMCO
Variable Insurance Trust shares and the printing of prospectuses and shareholder
reports for current shareholders or other appropriate parties. The Portfolios
are responsible for bearing certain expenses associated with their operations
that are not provided or procured by Pacific Investment Management Company.
While it is expected that these expenses generally will not have a material
effect on the Portfolio expense ratios, they may have a material effect in
certain circumstances, such as when the average net assets of a Portfolio are
lower than anticipated.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Templeton Asset Management Ltd. receives in management fees 1.25% of the average
daily net assets of the Class 2 shares of the Templeton Developing Markets
Securities Fund (formerly Templeton Developing Markets Fund).
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We may eliminate the shares of any of the Portfolios and to substitute
shares of another Portfolio or of another investment company, if the shares of a
Portfolio are no longer available for investment, or if in our judgment further
investment in any Portfolio becomes inappropriate in view of the purposes of the
Separate Account. We will not substitute any shares attributable to 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 permit a conversion between series or classes of
policies on the basis of requests made by Owners.
We may establish additional subaccounts of the Separate Account, each of which
would invest in a new portfolio of the Funds, or in shares of another investment
company. New subaccounts may be established when, in our
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discretion, marketing needs or investment conditions warrant. New subaccounts
may be made available to existing Owners as we determine. We may also eliminate
or combine one or more subaccounts, transfer assets, or substitute one
subaccount for another subaccount, if, in our discretion, marketing, tax, or
investment conditions warrant. We will notify all Owners of any such changes.
If we deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be: (a) operated as a management company
under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with our other separate
accounts. To the extent permitted by law, we may transfer the assets of the
Separate Account to another separate account or to the General Account.
PERFORMANCE INFORMATION
The Separate Account may advertise several types of performance information for
the Subaccounts. All Subaccounts may advertise standardized "average annual
total return" and nonstandardized "total return." The Kemper High Yield
Subaccount, Kemper Government Securities Subaccount, Scudder VLIF Bond
Subaccount, PIMCO Low Duration Bond Subaccount and PIMCO Foreign Bond Subaccount
may also advertise "yield". The Scudder VLIF Money Market Subaccount may
advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of a Subaccount's
future performance.
Standardized average annual total return and nonstandardized total return
calculations measure a Subaccount's net income plus the effect of any realized
or unrealized appreciation or depreciation of the Subaccount's underlying
investments. Standardized average annual total return and nonstandardized total
return will be quoted for periods of at least one year, three years, five years
and ten years, if applicable. In addition, we will show standardized average
annual total return for the life of the Subaccount, meaning the time the
underlying Portfolio has been held in the Subaccount. We will show
nonstandardized total return for the life of the Portfolio, meaning the time the
underlying Portfolio has been in existence. Standardized average annual total
return will be current to the most recent calendar quarter. Nonstandardized
total return will be current to the most recent calendar month. Standardized
average annual total return figures are annualized and, therefore, represent the
average annual percentage change in the value of a Subaccount investment over
the applicable period. Nonstandardized total return may include annualized and
nonannualized (cumulative) figures. Nonannualized figures represent the actual
percentage change over the applicable period.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for the Scudder VLIF Money
Market Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period, compounded on a semi-annual basis. The effective yield for the
Scudder VLIF Money Market Subaccount is calculated similarly, but includes the
effect of assumed compounding calculated under rules prescribed by the SEC. The
Scudder VLIF Money Market Subaccount's effective yield will be slightly higher
than its yield due to this compounding effect.
The Subaccounts' units are sold at Accumulation Unit value. The Subaccounts'
performance figures and Accumulation Unit values fluctuate. You may redeem
Subaccount units at Accumulation Unit value, which may be more or less than
original cost. The standardized performance figures reflect the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first seven years may be subject to a Withdrawal
Charge that ranges from 7% the first year to 0% after seven years. Yield,
effective yield and nonstandardized total return figures do not include the
effect of any Withdrawal Charge that may be imposed upon the redemption of
units. In addition, nonstandardized total return figures do not include the
effect of the Records Maintenance Charge. Thus yield, effective yield and
nonstandardized total return figures may be higher than if such charges were
deducted. Standardized average annual total return figures include the effect of
the applicable Withdrawal Charge that may be imposed at the end of the period.
The Subaccounts may be compared to relevant indices and performance data from
independent sources, 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
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investments measured by the indexes. In particular, it should be noted that the
comparative information with regard to the indexes will not reflect the
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.
FIXED ACCOUNT OPTION
Amounts allocated or transferred to the Fixed Account are part of our General
Account, supporting insurance and annuity obligations. Interests in the Fixed
Account are not registered under the Securities Act of 1933 ("1933 Act"), and
the Fixed Account is not registered as an investment company under the
Investment Company Act of 1940 ("1940 Act"). Accordingly, neither the Fixed
Account nor any interests therein generally are subject to the provisions of the
1933 or 1940 Acts. We have been advised that the staff of the SEC has not
reviewed the disclosures in this Prospectus relating to the Fixed Account.
Disclosures regarding the Fixed Account, however, may be subject to the general
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
Under the Fixed Account Option, we pay a fixed interest rate for stated periods.
This Prospectus describes only the aspects of the Contract involving the
Separate Account, unless we refer to fixed accumulation and annuity elements.
We guarantee that payments allocated to the Fixed Account earn a minimum fixed
interest rate of 3%. At our discretion, we may credit interest in excess of 3%.
We reserve the right to change the rate of excess interest credited. We also
reserve the right to declare different rates of excess interest depending on
when amounts are allocated or transferred to the Fixed Account. As a result,
amounts at any designated time may be credited with a different rate of excess
interest than the rate previously credited to such amounts and to amounts
allocated or transferred at any other designated time.
THE CONTRACTS
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $1,000, and the minimum subsequent
payment is $500. The minimum subsequent payment is $100 if you authorize us to
draw on an account via check or electronic debit. Cumulative Purchase Payments
in excess of $1,000,000 require our prior approval. The Internal Revenue Code
may also limit the maximum annual amount of Purchase Payments. An allocation to
a Subaccount, the Fixed Account or a Guarantee Period must be at least $500.
We may, at any time, amend the Contract in accordance with changes in the law,
including applicable tax laws, regulations or rulings, and for other purposes.
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
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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 die, and no designated
Beneficiary or contingent beneficiary is alive at that time, we will pay your or
the Annuitant's estate.
Under a Qualified Plan Contract, the provisions of the applicable plan may
prohibit a change of Beneficiary. Generally, an interest in a Qualified Plan
Contract may not be assigned.
B. THE ACCUMULATION PERIOD.
1. APPLICATION OF PURCHASE PAYMENTS.
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 and Guaranteed Retirement Income Benefit Charge. The
number of Accumulation Units is reduced when the Records Maintenance Charge and
Guaranteed Retirement Income Benefit Charge are assessed.
If we are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, we will promptly request the
necessary information. If the requested information is not furnished within five
(5) business days after we receive the initial Purchase Payment, or if we
determine that we cannot issue the Contract within the five (5) day period, we
will return the initial Purchase Payment to you, unless you consent to our
retaining the Purchase Payment until the application is completed.
We will issue a Contract without a signed application if:
- a dealer provides us with application information, electronically or in
writing,
- we receive the initial Purchase Payment, and
- you confirm in writing, after the Contract is delivered, that all
information in the Contract is correct.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units purchased is based on
the Subaccount's Accumulation Unit value at the end of the current Valuation
Period. When amounts are transferred out of or deducted from a Subaccount, units
are redeemed in a similar manner.
The Accumulation Unit value for each subsequent Valuation Period is the
investment experience factor for that Valuation Period times the Accumulation
Unit value for the preceding Valuation Period. Each Valuation Period has a
single Accumulation Unit value which applies to each day in the Valuation
Period.
Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
Valuation Period.
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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.
3. 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 THE OWNER MAKES WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET
VALUE ADJUSTMENTS AND WITHDRAWAL CHARGES APPLY.
THE HYPOTHETICAL INTEREST RATE IS NOT INTENDED TO PREDICT FUTURE GUARANTEED
INTEREST RATES. ACTUAL GUARANTEED INTEREST RATES FOR ANY GUARANTEE PERIOD MAY BE
MORE OR LESS THAN THOSE SHOWN.
At the end of any Guarantee Period, we send written notice of the beginning of a
new Guarantee Period. A new Guarantee Period for the same duration starts unless
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 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, at 1 Kemper Drive, Long Grove, Illinois 60049 for the
new Guaranteed Interest Rates.
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4. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
We declare the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate. Once
established, rates are guaranteed for the respective Guarantee Periods. We
advise 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.
5. CONTRACT VALUE.
On any Valuation Date, Contract Value equals the total of:
- the number of Accumulation Units credited to each Subaccount, times
- the value of a corresponding Accumulation Unit for each Subaccount, plus
- your Accumulated Guarantee Period Value in the MVA Option, plus
- your interest in the Fixed Account.
6. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, you may transfer the Contract Value among the
Subaccounts, the Guarantee Periods and the Fixed Account subject to the
following provisions:
- the amount transferred must be at least $100 unless the total Contract
Value attributable to a Subaccount, Guarantee Period or Fixed Account is
transferred;
- the Contract Value remaining in a Subaccount, Guarantee Period or Fixed
Account must be at least $500 unless the total value is transferred;
- transfers may not be made from any Subaccount to the Fixed Account over
the six months following any transfer from the Fixed Account into one or
more Subaccounts; and
- transfers from the Fixed Account may be made one time during the Contract
Year during the thirty days following an anniversary of a Contract Year.
We may charge a $25 fee for each transfer in excess of 12 transfers per calendar
year. However, transfers made pursuant to the Asset Allocation and Dollar Cost
Averaging programs do not count toward these 12 transfers. In addition,
transfers of Guarantee Period Value are subject to Market Value Adjustment
unless the transfer is made within thirty days of the end of the Guarantee
Period. Because a transfer before the end of a Guarantee Period is subject to a
Market Value Adjustment, the amount transferred from the Guarantee Period may be
more or less than the requested dollar amount.
We make transfers pursuant to written or telephone instructions specifying in
detail the requested changes. Transfers involving a Subaccount are based upon
the Accumulation Unit values, as calculated after we receive transfer
instructions. We may suspend, modify or terminate the transfer provision. We
disclaim all liability if we follow in good faith instructions given in
accordance with our procedures, including requests for personal identifying
information, that are designed to limit unauthorized use of the privilege.
Therefore, you bear the risk of loss in the event of a fraudulent telephone
transfer.
If you authorize a third party to transact transfers on your behalf, we will
reallocate the Contract Value pursuant to the authorized asset allocation
program. However, we do not offer or participate in any asset allocation program
and we take no responsibility for any third party asset allocation program. We
may suspend or cancel acceptance of a third party's instructions at any time and
may restrict the investment options available for transfer under third party
authorizations.
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You may elect to have transfers made automatically among the Subaccounts on an
annual, semiannual or quarterly basis so that Contract Value is reallocated to
match the percentage allocations in your predefined allocation elections.
Transfers under this program are not be subject to the $100 minimum transfer
limitation. An election to participate in the automatic asset reallocation
program must be in writing on our form and returned to us.
7. WITHDRAWAL DURING ACCUMULATION PERIOD.
You may redeem some or all of the Contract Value and previous withdrawals, plus
or minus any applicable Market Value Adjustment and minus any Withdrawal Charge.
Withdrawals will have tax consequences. (See "Federal Tax Matters.") A
withdrawal of the entire Contract Value is called a surrender.
Partial withdrawals and surrenders are subject to the following:
In any Contract Year, you may withdraw or surrender the Contract, without
Withdrawal Charge, up to the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, or
- 10% of the Contract Value.
See "Contract Charges and Expenses--Withdrawal Charge" for a discussion of
charges applicable to partial withdrawals and surrenders.
If Contract Value is allocated to more than one investment option, 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:
- Partial withdrawals are not permitted from the Fixed Account in the first
Contract Year.
- The minimum withdrawal is $100 (before any Market Value Adjustment), or
your entire interest in the investment option(s) from which withdrawal is
requested.
- You must leave at least $500 in each investment option from which the
withdrawal is requested, unless the total value is withdrawn.
Election to withdraw shall be made in writing to us at Suite 102, 1290 Silas
Deane Highway, Wethersfield, CT 06109 and should be accompanied by the Contract
if surrender is requested. Withdrawal requests are processed only on days when
the New York Stock Exchange is open. The Withdrawal Value attributable to the
Subaccounts is determined on the basis of the Accumulation Unit values, as
calculated after we receive the request. The Withdrawal Value attributable to
the Subaccounts is paid within seven (7) days after we receive the request.
However, we may suspend withdrawals or delay payment:
- during any period when the New York Stock Exchange is closed,
- when trading in a Portfolio is restricted or the SEC determines that an
emergency exists, or
- as the SEC by order may permit.
For withdrawal requests from the MVA Option and the Fixed Account, we may defer
any payment for up to six months, as permitted by state law. During the deferral
period, we will continue to credit interest at the current Guaranteed Interest
Rate for the same Guarantee Period.
Withdrawals are permitted from Contracts issued in connection with Section
403(b) Qualified Plans only under limited circumstances. (See "Federal Income
Taxes.")
A participant in the Texas Optional Retirement Program ("ORP") must obtain a
certificate of termination from the participant's employer before a Contract can
be redeemed. The Attorney General of Texas has ruled that participants in the
ORP may redeem their interest in a Contract issued pursuant to the ORP only upon
termination of employment in Texas public institutions of higher education, or
upon retirement, death or total disability. In those states adopting similar
requirements for optional retirement programs, we will follow similar
procedures.
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8. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected during the "free look" period or within 30 days after a Guarantee
Period ends, may be adjusted up or down by a Market Value Adjustment. The Market
Value Adjustment applies before deduction of a Withdrawal Charge.
The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, the Market Value Adjustment
reduces Market Adjusted Value and results in a lower payment. Thus, if interest
rates increase, the withdrawal could be less than the original Purchase Payment
or the original amount allocated to a Guarantee Period. Conversely, if the
Guaranteed Interest Rate is higher than the applicable Current Interest Rate,
the Market Value Adjustment increases Market Adjusted Value and results in a
higher payment.
The Market Value Adjustment (MVA) uses this formula:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MVA (1 + I)
= GPV X [ [ ------- ] (t/365) -1 ]
(1 + J)
Where:
</TABLE>
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.
For an illustration showing an upward and a downward adjustment, see Appendix A.
9. GUARANTEED DEATH BENEFIT.
We pay a death benefit is paid to the Beneficiary if any of the following occurs
during the Accumulation Period:
- the Owner, or a joint owner, dies,
- the Annuitant dies with no living contingent annuitant, or
- the contingent annuitant dies after the Annuitant.
The amount of the death benefit depends on the age of the deceased Owner or
Annuitant when the death benefit becomes payable. If the deceased Owner or
Annuitant dies before age 91, We will pay the Beneficiary the greatest of the
following:
- Contract Value,
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the deceased's age 80 or the date of
death, plus Purchase Payments minus all withdrawals from age 80 to the
date of death, or
- the greatest anniversary value before death.
The greatest anniversary value equals:
- the Contract Values on each Contract anniversary prior to the deceased's
age 81, plus the dollar amount of any Purchase Payments made since that
anniversary, minus
- withdrawals since that anniversary.
We pay Contract Value to the Beneficiary if the Owner or Annuitant dies after
age 91. The Owner or Beneficiary, as appropriate, may elect to have all or a
part of the death proceeds paid to the Beneficiary under one of the Annuity
Options described under "Annuity Options" below.
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For Non-Qualified Plan Contracts, if the Beneficiary is the Owner's surviving
spouse, the surviving spouse may elect to continue the Contract in lieu of
taking a Death Benefit distribution. The spouse will become the successor Owner
of the Contract subject to the following:
- The Contract Value will be increased to reflect the amount of the Death
Benefit. The difference will be credited to the Scudder VLIF Money Market
Subaccount.
- No withdrawal charges will apply on existing values in the Contract.
However, Purchase Payments made after the spouse elects to continue the
Contract are subject to withdrawal charges.
- If the Guaranteed Retirement Income Benefit (GRIB) has been elected, the
GRIB base is calculated from the time the election to continue the
Contract is made. GRIB may not be exercised prior to the seventh Contract
Year anniversary date following the spouse's election to continue the
Contract. However, we will waive all other age restrictions that would
apply to exercising GRIB. The spouse may also elect to discontinue GRIB
at the time the election to continue the Contract is made. All other
rights and benefits under the Contract will continue.
The above option is subject to availability of this feature in your state.
As an alternative to the above election, the surviving spouse may elect to
continue a Non-Qualified Plan Contract without receiving the increase in Cash
Value attributable to the Death Benefit. In this case, all rights, benefits and
charges under the Contract will continue including the right to exercise GRIB
based on the existing exercise period and any applicable withdrawal charges.
10. GUARANTEED RETIREMENT INCOME BENEFIT.
Guaranteed Retirement Income Benefit (GRIB) is an optional Contract benefit.
GRIB provides a minimum fixed annuity guaranteed lifetime income to the
Annuitant as described below. You must elect GRIB on the initial Contract
application. GRIB may be discontinued after the seventh Contract anniversary by
written notice to us. Once discontinued, GRIB may not be elected again.
GRIB may be exercised only within thirty days after the seventh or later
Contract anniversary. In addition, GRIB must be exercised between the
Annuitant's 60th and 91st birthdays. However, if the Annuitant is age 44 or
younger on the Date of Issue, GRIB may be exercised after the Contract's 15th
Anniversary, even though the Annuitant is not yet 60 years old. GRIB may not be
appropriate for Annuitants age 80 and older.
Annuity payments are based on the greater of:
- the income provided by applying the GRIB base to the guaranteed annuity
factors, and
- the income provided by applying the Contract Value to the current annuity
factors.
The GRIB base is the greatest of:
- Contract Value,
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the Annuitant's age 80 or the GRIB
exercise date plus Purchase Payments minus all withdrawals from age 80 to
the GRIB exercise date, and
- the greatest anniversary value before the exercise date.
The greatest anniversary value equals:
- the highest of the Contract Values on each Contract anniversary prior to
the Annuitant's age 81, plus
- the dollar amount of any Purchase Payments made since that anniversary,
minus
- withdrawals since that anniversary.
The guaranteed annuity factors are based on the 1983a table projected using
projection scale G, with interest at 2.5% (the "Annuity 2000" table). However,
if GRIB is exercised on or after the 10th Contract anniversary, interest at
3.50% is assumed. Contracts issued in the state of Montana or in connection with
certain employer sponsored employee benefit plans are required to use unisex
annuity factors. In such cases, the guaranteed annuity factors will be based on
unisex rates.
Because GRIB is based on conservative actuarial factors, the income guaranteed
may often be less than the income provided under the regular provisions of the
Contract. If the regular annuitization provisions would provide a greater
benefit than GRIB, the greater amount will be paid.
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GRIB is paid for the life of a single Annuitant or the lifetimes of two
Annuitants. If paid for the life of a single Annuitant, GRIB is paid in the
amount determined above. If paid for the lifetimes of two Annuitants, GRIB is
paid in the amount determined above, but the age of the older Annuitant is used
to determine the GRIB base.
If you elect GRIB payable for the life of a single Annuitant, you may elect a
period certain of 5, 10, 15, or 20 years. If the Annuitant dies before GRIB has
been paid for the period elected, the remaining GRIB payments are paid as they
fall due to the Beneficiary, if the Beneficiary is a natural person. If the
Beneficiary is not a natural person, the remaining payments may be commuted at a
minimum 2.50% interest rate and paid in a lump sum.
If you elect GRIB payable for the lifetimes of two Annuitants, the period
certain is 25 years. The full GRIB is payable as long as at least one of the two
Annuitants is alive, but for no less than 25 years. If both Annuitants die
before GRIB has been paid for 25 years, the remaining GRIB payments are paid as
they fall due to the Beneficiary, if the Beneficiary is a natural person. If the
Beneficiary is not a natural person, the remaining payments may be commuted at a
minimum 2.50% interest rate and paid in a lump sum.
GRIB payments are also available on a quarterly, semi-annual or annual basis. We
may make other annuity options available.
If you purchased your Contract on or after May 1, 2000, and you exercise the
GRIB option to receive guaranteed benefits, you may elect to have payments made
under a commutable annuitization option. Under the commutable annuitization
option, partial lump sum payments are permitted, subject to the following
requirements:
- At the time you exercise the GRIB option, you must elect the commutable
annuitization option in order to be eligible for the lump sum payments.
- Lump sum payments are available only during the period certain applicable
under the payout option you elected; for example, lump sum payments can
be elected only during the 5, 10, 15, 20 or 25 year certain period that
applies to the payout.
- Lump sum payments are available once in each calendar year and may not be
elected until one year after annuitization has started.
- The Annuitant may elect to receive a partial lump sum payment of the
present value of the remaining payments in the period certain subject to
the restrictions described below. If a partial lump sum payment is
elected, the remaining payments in the period certain will be reduced
based on the ratio of the amount of the partial withdrawal to the amount
of the present value of the remaining installments in the period certain
prior to the withdrawal. If the Annuitant is still living after the
period certain is over, the Annuitant will begin receiving the original
annuitization payment amount again.
- Each time that a partial lump sum payment is made, we will determine the
percentage that the payment represents of the present value of the
remaining installments in the period certain. For Non-Qualified Plan
Contracts, the sum of these percentages over the life of the Contract
cannot exceed 75%. For Qualified Plan Contracts, partial lump sum
payments of up to 100% of the present value of the remaining installments
in the period certain may be made.
- In determining the amount of the lump sum payment that is available, the
present value of the remaining installments in the period certain will be
calculated based on an interest rate equal to the GRIB annuity factor
interest rate (3.5% if GRIB was exercised on or after the 10th Contract
anniversary; 2.5% if exercised before that date) plus an interest rate
adjustment. The interest rate adjustment is equal to the following:
<TABLE>
<CAPTION>
NUMBER OF YEARS REMAINING INTEREST RATE
IN THE PERIOD CERTAIN ADJUSTMENT
------------------------- -------------
<S> <C>
15 or more years............................................ 1.00%
10 - 14 years............................................... 1.50%
less than 10 years.......................................... 2.00%
</TABLE>
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CONTRACT CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk,
- administrative expenses,
- Records Maintenance Charge,
- Withdrawal Charge, and
- Guaranteed Retirement Income Benefit charge, if elected.
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 1.25% per annum. Variable Annuity payments reflect the investment
experience of each Subaccount but are not affected by changes in actual
mortality experience or by actual expenses we incur.
The mortality risk we assume arises from two contractual obligations. First, if
you or Annuitant die before age 91 and before the Annuity Date, we may, in some
cases, pay more than Contract Value. (See "Guaranteed 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 a particular Contract.
3. RECORDS MAINTENANCE CHARGE.
We deduct an annual Records Maintenance Charge of $30 during the Accumulation
Period. The charge is assessed:
- at the end of each Contract Year,
- on Contract surrender, and
- upon annuitization.
However, we do not deduct the Records Maintenance Charge for Contracts with
Contract Value of at least $50,000 on the assessment date.
This charge reimburses us for the expenses of establishing and maintaining
Contract records. The Records Maintenance Charge reduces the net assets of each
Subaccount, Guarantee Period and the Fixed Account.
The Records Maintenance Charge is assessed equally among all investment options
in which you have an interest.
4. WITHDRAWAL CHARGE.
We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal
Charge covers Contract sales expenses, including commissions and other promotion
and acquisition expenses.
Each Contract Year, you may withdraw or surrender the Contract, without
Withdrawal Charge, up to the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, or
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- 10% of the Contract Value.
If you withdraw a larger amount, the excess Purchase Payments withdrawn are
subject to a Withdrawal Charge. The Withdrawal Charge applies in the first seven
Contribution Years following each Purchase Payment as follows:
<TABLE>
<CAPTION>
CONTRIBUTION WITHDRAWAL
YEAR CHARGE
------------ ----------
<S> <C>
First...................................................... 7%
Second..................................................... 6%
Third...................................................... 5%
Fourth..................................................... 5%
Fifth...................................................... 4%
Sixth...................................................... 3%
Seventh.................................................... 2%
Eighth and following....................................... 0%
</TABLE>
Purchase Payments are deemed surrendered in the order in which they were
received.
When a withdrawal is requested, 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;
- within thirty days following your discharge from a hospital or skilled
health care facility after a confinement of at least thirty days; or
- if you or Annuitant become disabled after the Contract is issued and
before age 65.
Restrictions and provisions related to the nursing care or hospitalization
disability waivers are described in Contract endorsements.
The Withdrawal Charge compensates us for Contract distribution expense.
Currently, we anticipate Withdrawal Charges will not fully cover distribution
expenses. Unrecovered distribution expenses may be recovered from our general
assets. Those assets may include proceeds from the mortality and expense risk
charge.
The Withdrawal Charge also applies at annuitization to amounts attributable to
Purchase Payments in their seventh Contribution Year or earlier. No Withdrawal
Charge applies upon annuitization if 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.
5. GUARANTEED RETIREMENT INCOME BENEFIT CHARGE.
The annual charge for GRIB is 0.25% of Contract Value. We deduct a pro rata
portion of the charge on each Contract Quarter anniversary. The quarterly charge
is deducted pro rata from the investment options in which you have an interest.
We no longer charge for GRIB after the Annuitant's 91st birthday.
6. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deduction of investment management
fees and certain general operating expenses. Subject to limitations, 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 Funds' Statements of Additional Information.
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7. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If we pay state premium taxes, we may charge the amount
paid against Contract Value upon annuitization. See "Appendix--State Premium Tax
Chart" in the Statement of Additional Information.
8. EXCEPTIONS.
We may decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, we guarantee
that they will not increase. We bear the risk that such charges will not cover
our costs. On the other hand, should such charges exceed our costs, we will not
refund any charges. Any profit is available for corporate purposes including,
among other things, payment of distribution expenses.
We may also reduce or waive fees and charges, including but not limited to, the
Records Maintenance Charge, the Withdrawal Charge, and mortality and expense
risk and administrative charges, for certain sales that may result in cost
savings, such as those where we 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 procedure. We may
also reduce or waive fees and charges and/or credit additional amounts on
Contracts issued to:
- employees and registered representatives (and their families) of
broker-dealers (or their affiliated financial institutions) that have
entered into selling group agreements with IBS, and
- officers, directors and employees (and their families) of KILICO and
Kemper Variable Series ("KVS"), KVS investment advisers and principal
underwriters or certain affiliated companies, or to any trust, pension,
profit-sharing or other benefit plan for such persons.
Reductions in these fees and charges will not unfairly discriminate against any
Owner.
THE ANNUITY PERIOD
In addition to GRIB, Contracts may be annuitized under one of several Annuity
Options. Annuity payments begin on the Annuity Date and under the selected
Annuity Option. The Annuity Date must be at least one year after the Date of
Issue. Subject to state variation, the Annuity Date may not be deferred beyond
the later of the Annuitant's 91st birthday (100th birthday if the Contract is
part of a Charitable Remainder Trust) or ten (10) years after the Date of Issue.
However, annuitization is delayed beyond the Annuity Date if we are making
systematic withdrawals based on your life expectancy. In this case,
annuitization begins when life expectancy withdrawals are stopped.
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
- the selected Annuity Option, and
- the investment performance of the selected Subaccount(s) (if variable
annuitization is elected).
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly. Annuity payments may be subject to a Withdrawal Charge. (For
additional details, see "Withdrawal Charge.")
2. ANNUITY OPTIONS.
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 before the Annuitant's 91st birthday
(100th birthday if the Contract is part of a Charitable Remainder Trust) or
within ten (10) years after the Date of Issue, whichever is later. 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 ten (10) year period certain. Generally, annuity payments are made in
monthly installments. However, we may make a lump sum payment if the net
proceeds available to apply under an Annuity Option are less than $2,000. In
addition, if the first monthly payment is less than $25, we may change the
frequency of payments to quarterly, semiannual or annual intervals so that the
initial payment is at least $25.
The amount of periodic annuity payments may depend upon:
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- the Annuity Option selected;
- the age and sex of the payee; and
- the investment experience of the selected Subaccount(s).
For example:
- if Option 1, income for a specified period, is selected, shorter
periods result in fewer payments with higher values.
- if Option 2, life income, is selected, it is likely that each payment
will be smaller than would result if income for a short period were
specified.
- if Option 3, life income with installments guaranteed, is selected,
each payment will probably be smaller than would result if the life
income option were selected.
- if Option 4, the joint and survivor annuity, is selected, each payment
is smaller than those measured by an individual life income option.
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. The sex of the payee influences the amount of periodic payments
because females live longer than males, resulting in smaller payments. Finally,
if you participate in a Subaccount with higher investment performance, it is
likely you will receive a higher periodic payment.
If you die before the Annuity Date, available Annuity Options are limited.
Unless you have imposed restrictions, the Annuity Options available are:
- Option 2, or
- Option 1 or 3 for a period no longer than the life expectancy of the
Beneficiary (but not less than 5 years from your death).
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.
OPTION 1--INCOME FOR SPECIFIED PERIOD.
Option 1 provides an annuity payable monthly for a selected number of years
ranging from five to thirty. Upon the payee's death, if the Beneficiary is an
individual, we automatically continue payments to the Beneficiary for the
remainder of the period specified. If the Beneficiary is not an individual
(e.g., an estate or trust), we pay the discounted value of the remaining
payments in the specified period. Although there is no life contingency risk
associated with Option 1, we continue to deduct the daily asset charges for
mortality and expense risks and administrative costs.
Payees may elect to cancel all or part of the remaining payments due under
Option 1. We will then pay the discounted value of the remaining payments.
OPTION 2--LIFE INCOME.
Option 2 provides an annuity over the lifetime of the payee. If Option 2 is
elected, annuity payments terminate automatically and immediately on the payee's
death without regard to the number or total amount of payments made. Thus, it is
possible for an individual to receive only one payment if death occurred prior
to the date the second payment was due.
OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.
Option 3 provides an annuity payable monthly during the payee's lifetime.
However, Option 3 also provides for the automatic continuation of payments for
the remainder of the specified period if the Beneficiary is an individual and
payments have been made for less than the specified period. The period specified
may be five, ten, fifteen or twenty years. If the Beneficiary is not an
individual, we pay the discounted value of the remaining payments in the
specified period.
OPTION 4--JOINT AND SURVIVOR ANNUITY.
Option 4 provides an annuity payable monthly while both payees are living. Upon
either payee's death, the monthly income payable continues over the life of the
surviving payee at a percentage specified when Option 4 is elected. Annuity
payments terminate automatically and immediately upon the surviving payee's
death without regard to the number or total amount of payments received.
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3. ALLOCATION OF ANNUITY.
You may elect payments on a fixed or variable basis, or a combination. Any Fixed
Account Contract Value or Guarantee Period Value is annuitized on a fixed basis.
Any Separate Account Contract Value is annuitized on a variable basis. The MVA
Option is not available during the Annuity Period. 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 seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the date we receive the notice.
- If we receive notice of transfer to a Subaccount less than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the annuity payment date.
- Transfers to the Fixed Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least thirty (30) days
prior to the anniversary.
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
5. ANNUITY UNIT VALUE.
Annuity Unit value is determined independently for each Subaccount.
Annuity Unit value for any Valuation Period is:
- Annuity Unit value for the preceding Valuation Period, times
- the net investment factor for the current Valuation Period, times
- an interest factor which offsets the 2.5% per annum rate of investment
earnings assumed by the Contract's annuity tables.
The net investment factor for a Subaccount for any Valuation Period is:
- the Subaccount's Accumulation Unit value at the end of the current
Valuation Period, plus or minus the per share charge or credit for taxes
reserved; divided by
- 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 2.5% per annum rate of investment earnings is assumed by the Contract's
annuity tables. If the actual net investment earnings rate exceeds 2.5% per
annum, payments increase accordingly. Conversely, if the actual rate is less
than 2.5% per annum, annuity payments decrease.
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7. SUBSEQUENT PERIODIC PAYMENTS UNDER VARIABLE ANNUITY.
Subsequent annuity payments are determined by multiplying the number of Annuity
Units by the Annuity Unit value at the Valuation Period before each annuity
payment is due. The first annuity payment is divided by the Annuity Unit value
as of the Annuity Date to establish the number of Annuity Units representing
each annuity payment. This number does not change.
8. FIXED ANNUITY PAYMENTS.
Each Fixed Annuity payment is determined from tables we prepare. These tables
show the monthly payment for each $1,000 of Contract Value allocated to a Fixed
Annuity. Payment is based on the Contract Value at the date before the annuity
payment is due. Fixed Annuity payments do not change regardless of investment,
mortality or expense experience.
9. DEATH PROCEEDS.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, depend upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
10. COMMUTABLE ANNUITIZATION OPTION
If you purchased your Contract on or after May 1, 2000, you are eligible for the
Guaranteed Retirement Income Benefit (GRIB) and you elect to annuitize your
Contract at a time when the regular annuitization options under the Contract
provide a greater benefit than GRIB, then the following provisions will apply:
- If Option 3 is elected, you may elect a commutable annuitization option
which allows partial lump sum payments during the annuity period.
- The payout option you elect must correspond to one of the options
available under GRIB.
- Lump sum payments are available only during the period certain applicable
under the payout option you elected; for example, lump sum payments can
be elected only during the 5, 10, 15, 20 or 25 year certain period that
applies to the payout.
- Lump sum payments are available once in each calendar year and may not be
elected until one year after annuitization has started.
- The Annuitant may elect to receive a partial lump sum payment of the
present value of the remaining payments in the period certain subject to
the restrictions described below. If a partial lump sum payment is
elected, the remaining payments in the period certain will be reduced
based on the ratio of the amount of the partial withdrawal to the amount
of the present value of the remaining installments in the period certain
prior to the withdrawal. If the Annuitant is still living after the
period certain is over, the Annuitant will begin receiving the original
annuitization payment amount again.
- Each time that a partial lump sum payment is made, we will determine the
percentage that the payment represents of the present value of the
remaining installments in the period certain. For Non-Qualified Plan
Contracts, the sum of these percentages over the life of the Contract
cannot exceed 75%. For Qualified Plan Contracts, partial lump sum
payments of up to 100% of the present value of the remaining installments
in the period certain may be made.
- In determining the amount of the lump sum payment that is available, the
present value of the remaining installments in the period certain will be
calculated based on an interest rate equal to the annuity factor interest
rate used at the time of annuitization to determine the amount of the
annuity payments plus an interest rate adjustment. The interest rate
adjustment is equal to the following:
<TABLE>
<CAPTION>
NUMBER OF YEARS REMAINING INTEREST RATE
IN THE PERIOD CERTAIN ADJUSTMENT
------------------------- -------------
<S> <C>
15 or more years........................................... 1.00%
10-14 years................................................ 1.50%
less than 10 years......................................... 2.00%
</TABLE>
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FEDERAL INCOME TAXES
A. INTRODUCTION
This discussion is not exhaustive and is not intended as tax advice. A qualified
tax adviser should always be consulted with regard to the application of the law
to individual circumstances. This discussion is based on the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Department regulations, and
interpretations existing on the date of this Prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and
judicial decisions.
This discussion does not address state or local tax consequences, 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 Plan Contract are generally not taxable to you or Annuitant until
received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
- the Contract must be owned by an individual,
- Separate Account investments must be "adequately diversified",
- we, rather than 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 natural person if the
nominal owner is a trust or other entity holding the contract as an agent for a
natural person. However, this special exception does not apply to an employer
who is the nominal owner of a contract under a non-qualified deferred
compensation plan for its employees.
Additional exceptions to this rule include:
- contracts acquired by a decedent's estate,
- certain Qualified Plan Contracts,
- 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.
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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. Then, 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 Plan 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 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.
If the Policy includes the Guaranteed Retirement Income Benefit Endorsement (the
"GRIB Endorsement"), and the Guaranteed Retirement Income Benefit Base is
greater than the Contract Value, it is possible that the income on the contract
could be a greater amount than would otherwise be the case. This could result in
a larger amount being included in your income in connection with a partial
withdrawal, assignment, pledge or other transfer. There is also some uncertainty
regarding the treatment of the market value adjustment for purposes of
determining the income on the contract. This uncertainty could result in the
income on the contract being a greater (or lesser) amount.
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
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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.
With respect to a Contract issued with the GRIB Endorsement, the Annuitant may
elect to receive a lump sum payment after the Annuity Date. In the case of a
Non-Qualified Plan Contract, the Company will treat a portion of such a lump sum
payment as includible in income, and will determine the taxable portion of
subsequent periodic payments by applying an exclusion ratio to the periodic
payments. However, the federal income tax treatment of such a lump sum payment,
and of the periodic payments made thereafter, is uncertain. It is possible the
IRS could take a position that greater amounts are includible in income than the
Company currently believes is the case. Prior to electing a lump sum payment
after the Annuity Date, you should consult a tax adviser about the tax
implications of making such an election.
4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon your or Annuitant's death. Before the Annuity
Date, death benefits are includible in income and:
- if distributed in a lump sum are taxed like a full withdrawal, or
- if distributed under an annuity option are taxed like annuity payments.
After the Annuity Date, where a guaranteed period exists and the Annuitant dies
before the end of that period, payments made to the Beneficiary for the
remainder of that period are includible in income and:
- if received in a lump sum are includible in income if they exceed the
unrecovered investment, or
- if distributed in accordance with the selected annuity option are fully
excludable from income until the remaining investment in the contract is
deemed to be recovered.
Thereafter, all annuity payments are fully includible in income.
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
A 10% penalty tax applies to a taxable payment from a Non-Qualified Plan
Contract unless:
- received on or after 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 Plan
Contract may be determined by combining some or all of the Non-Qualified Plan
Contracts owned by an individual. For example, if a person purchases a Contract
and also purchases 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
a person purchases two or more deferred annuity contracts from the same company
(or its affiliates) during any calendar year, these contracts are treated as one
contract. The effects of this aggregation are not always clear.
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<PAGE> 140
However, it could affect the taxable amount of an annuity payment or withdrawal
and the amount which might be subject to the 10% penalty tax.
7. LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
For Contracts issued after June 8, 1997 to a non-natural owner, 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
The Contracts are also designed for use in connection with retirement plans
which receive favorable treatment under sections 401, 403, 408, 408A or 457 of
the Code ("Qualified Plans"). Such contracts are referred to as "Qualified
Contracts." Numerous special tax rules apply to the participants in Qualified
Plans and to Qualified Plan Contracts. We make no attempt in this Prospectus to
provide more than general information about use of the Contract with the various
types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of plan
and the terms and conditions of the plan. For example, for both withdrawals and
annuity payments under certain Qualified Contracts, there may be no "investment
in the contract" and the total amount received may be taxable. Also, loans from
Qualified Contracts, where allowed, are subject to a variety of limitations,
including restrictions as to the amount that may be borrowed, the duration of
the loan, the number of allowable loans and the manner in which the loan must be
repaid. (Owners should always consult their tax advisers and retirement plan
fiduciaries prior to exercising their loan privileges.) Both the amount of the
contribution that may be made, and the tax deduction or exclusion that the Owner
may claim for such contribution, are limited under Qualified Plans. If this
Contract is used with a Qualified Plan, the Owner and Annuitant generally are
the same individual. If a joint Annuitant is named, all distributions made while
the Annuitant is alive must be made to the Annuitant. Also, if a joint Annuitant
is named who is not the Annuitant's spouse, the annuity options which are
available may be limited, depending on the difference in their ages.
Furthermore, the length of any Guarantee Period may be limited in some
circumstances to satisfy certain minimum distribution requirements under the
Code.
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" ("IRAs"), 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 failure to comply with the minimum distribution requirements. This excise
tax generally equals 50% of the amount by which a minimum required distribution
exceeds the actual distribution from the Qualified Plan.
If you purchase a Qualified Contract with a GRIB Endorsement and elect to
receive a lump sum payment of a portion of the annuity income payments, it is
possible that the remaining annuity income payments will not satisfy the minimum
distribution requirements. You should consult a tax adviser about the
implications under the minimum distribution requirements of taking a lump sum
payment under the GRIB Endorsement.
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 taken after
December 31, 1997 used for qualified first time home purchases or for higher
education expenses. Special conditions must be met to qualify for these
exceptions. If you wish to take a distribution for these purposes you should
consult your tax adviser. Other exceptions may apply.
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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."
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 in connection 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 other 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. An individual 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.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT-SHARING
PLANS. The Code permits corporate employers to establish various types of
tax-favored retirement plans for employees. The Self-Employed Individuals' Tax
Retirement Act of 1962, as amended, commonly referred to as "H.R. 10" or
"Keogh", permits self-employed individuals also to establish such tax-favored
retirement plans for themselves and their employees. Such retirement plans may
permit the purchase of the Contracts in order to provide benefits under the
plans. The Contract provides a death benefit that in certain circumstances may
exceed the greater of the Purchase Payments and the Contract Value. It is
possible that such death benefit could be characterized as an incidental death
benefit. There are limitations on the amount of incidental benefits that may be
provided under pension and profit sharing
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plans. In addition, the provision of such benefits may result in current taxable
income to participants. Employers intending to use the Contract in connection
with such plans should seek competent advice.
TAX-SHELTERED ANNUITIES. Code Section 403(b) permits public school employees
and employees of certain types of charitable, educational and scientific
organizations to have their employers purchase annuity contracts for them and,
subject to certain limitations, to exclude the amount of purchase payments from
taxable gross income. These annuity contracts are commonly referred to as
"tax-sheltered annuities". 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 purchasers. In
addition, there are limitations on the amount of incidental benefits that may be
provided under a tax-sheltered annuity. Even if the death benefit under the
Contract were characterized as an incidental death benefit, it is unlikely to
violate those limits unless 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
- contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988,
- earnings on those contributions, and
- earnings after December 31, 1988 on amounts attributable to salary
reduction contributions held as of December 31, 1998. These amounts can
be paid only if 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.)
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. The Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. Generally, a Contract purchased by a state or local
government or a tax-exempt organization will not be treated as an annuity
contract for federal income tax purposes. Those who intend to use the Contracts
in connection with such plans should seek competent advice.
2. DIRECT ROLLOVERS
If the Contract is used in connection with a retirement plan that is qualified
under sections 401(a), 403(a), or 403(b) of the Code, any "eligible rollover
distribution" from the Contract will be subject to "direct rollover" and
mandatory withholding requirements. An eligible rollover distribution generally
is any taxable distribution from such a qualified retirement plan, excluding
certain amounts such as
- minimum distributions required under section 401(a)(9) of the Code, and
- certain distributions for life, life expectancy, or for 10 years or more
which are part of a "series of substantially equal periodic payments."
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, 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
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of non-periodic payments (including withdrawals prior to the maturity date and
conversions of, or rollovers from, non-Roth IRAs to Roth IRAs) is 10%. The
withholding rate for eligible rollover distributions is 20%.
DISTRIBUTION OF CONTRACTS
The Contracts are sold by licensed insurance agents in those states where the
Contract may be lawfully sold. The agents are also registered representatives of
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc. Sales commissions may vary, but are not expected to
exceed 6.25% of Purchase Payments. In addition to commissions, we may pay
additional promotional incentives, in the form of cash or other compensation, to
selling broker-dealers. These incentives may be offered to certain licensed
broker-dealers that sell or are expected to sell certain minimum amounts during
specified time periods. The Contracts are distributed through the principal
underwriter for the Separate Account:
Investors Brokerage Services, Inc. ("IBS")
1 Kemper Drive
Long Grove, Illinois, 60049
IBS is our wholly-owned subsidiary. IBS enters into selling group agreements
with affiliated and unaffiliated broker-dealers. All of the investment options
are not available to all Owners. The investment options are available only under
Contracts that are sold or serviced by broker-dealers having a selling group
agreement with IBS authorizing the sale of Contracts with the investment options
specified in this Prospectus. Other distributors may sell and service contracts
with different investment options.
VOTING RIGHTS
Proxy materials in connection with any Fund shareholder meeting are delivered to
each Owner with Subaccount interests invested in the Fund as of the record date.
Proxy materials include a voting instruction form. We vote all Fund shares
proportionately in accordance with instructions received from Owners. We will
also vote any Fund shares attributed to amounts we have accumulated in the
Subaccounts in the same proportion that Owners vote. A Fund is not required to
hold annual shareholders' meetings. Funds hold special meetings as required or
deemed desirable for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement.
Owners have voting rights in a Portfolio based upon the Owner's proportionate
interest in the corresponding Subaccount as measured by units. Owners have
voting rights before surrender, the Annuity Date or the death of the Annuitant.
Thereafter, the payee entitled to receive Variable Annuity payments has voting
rights. During the Annuity Period, Annuitants' voting rights decrease as Annuity
Units decrease.
REPORTS TO CONTRACT OWNERS AND INQUIRIES
After each Contract anniversary, we send you a statement showing amounts
credited to each Subaccount and to the Fixed Account Option. 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
Under our Dollar Cost Averaging program, a predesignated portion of Subaccount
Value is automatically transferred monthly, quarterly, semiannually or annually
for a specified duration to other Subaccounts, Guarantee Periods and the Fixed
Account. The Dollar Cost Averaging program is available only during the
Accumulation Period. You may also elect transfers from the Fixed Account on a
monthly or quarterly basis for a minimum duration of one year. You may enroll
any time by completing our Dollar Cost Averaging form. Transfers are made based
on the date you specify. We must receive the enrollment form at least five (5)
business days before the transfer date.
34
<PAGE> 144
If you participate in the Dollar Cost Averaging program, you may allocate all or
a portion of the initial Purchase Payment to the Scudder VLIF Money Market
Subaccount #2. This is the only Subaccount with no deduction for the 1.40%
charge for mortality and expense risks and administrative costs. You must
transfer all Subaccount Value out of Scudder VLIF Money Market Subaccount #2
within one year from the initial Purchase Payment. If you terminate Dollar Cost
Averaging or do not deplete all Subaccount Value in Scudder VLIF Money Market
Subaccount #2 within one year, we automatically transfer any remaining
Subaccount Value to Scudder VLIF Money Market Subaccount #1.
The minimum transfer amount is $100 per Subaccount, Guarantee Period or Fixed
Account. The total Contract Value in an account at the time Dollar Cost
Averaging is elected must be at least equal to the amount designated to be
transferred on each transfer date times the duration selected.
Dollar Cost Averaging ends if:
- the number of designated monthly transfers has been completed,
- Contract Value in the transferring account is insufficient to complete
the next transfer; the remaining amount is transferred,
- we receive your written termination at least five (5) business days
before the next transfer date, or
- the Contract is surrendered or annuitized.
If the Fixed Account balance is at least $10,000, you may elect automatic
calendar quarter transfers of interest accrued in the Fixed Account to one or
more of the Subaccounts or Guarantee Periods. You may enroll in this program any
time by completing our Dollar Cost Averaging form. Transfers are made within
five business days of the end of the calendar quarter. We must receive the
enrollment form at least ten (10) days before the end of the calendar quarter.
Dollar Cost Averaging is not available during the Annuity Period.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing you to pre-authorize
periodic withdrawals during the Accumulation Period. You instruct us to withdraw
selected amounts, or amounts based on your life expectancy, from the Fixed
Account, or from any of the Subaccounts or Guarantee Periods on a monthly,
quarterly, semi-annual or annual basis. The SWP is available 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 30
days after the Guarantee Period ends. SWP withdrawals from the Fixed Account are
not available in the first Contract Year and are limited to the amount not
subject to Withdrawal Charges. If the amounts distributed under the SWP from the
Subaccounts or Guarantee Periods exceed the free withdrawal amount, the
Withdrawal Charge is applied on any amounts exceeding the free withdrawal
amount. WITHDRAWALS TAKEN UNDER THE SWP MAY BE SUBJECT TO THE 10% TAX PENALTY ON
EARLY WITHDRAWALS AND TO INCOME TAXES AND WITHHOLDING. 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 Frank
Julian, our Associate General Counsel. Jorden Burt Boros Cicchetti Berenson &
Johnson, Washington, D.C., has advised us on certain legal matters concerning
federal securities laws applicable to the issue and sale of the Contracts.
35
<PAGE> 145
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. 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.
36
<PAGE> 146
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.
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<PAGE> 147
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
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<PAGE> 148
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.
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<PAGE> 149
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.
40
<PAGE> 150
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
41
<PAGE> 151
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.
42
<PAGE> 152
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.
43
<PAGE> 153
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
44
<PAGE> 154
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.
45
<PAGE> 155
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
46
<PAGE> 156
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
47
<PAGE> 157
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.
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<PAGE> 158
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
49
<PAGE> 159
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>
50
<PAGE> 160
<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.
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<PAGE> 161
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.
52
<PAGE> 162
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
53
<PAGE> 163
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
54
<PAGE> 164
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.
55
<PAGE> 165
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>
56
<PAGE> 166
<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 January ZLICA and ZD since March 1995. Chairman of the Board of FKLA
1996 to June 1999 and since April and FLA from January 1996 to June 1999 and since April 2000.
2000. Director since January 1996. Chairman of the Board of ZLICA and ZD from March 1995 to
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>
57
<PAGE> 167
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.
58
<PAGE> 168
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements. Please read the Statement of Additional
Information in conjunction with this Prospectus.
FINANCIAL STATEMENTS
Our included financial statements should be considered primarily as bearing on
our ability to meet our obligations under the Contracts. The Contracts are not
entitled to participate in earnings, dividends or surplus of KILICO.
59
<PAGE> 169
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
60
<PAGE> 170
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.
61
<PAGE> 171
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.
62
<PAGE> 172
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.
63
<PAGE> 173
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.
64
<PAGE> 174
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.
65
<PAGE> 175
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
66
<PAGE> 176
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
67
<PAGE> 177
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.
68
<PAGE> 178
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
69
<PAGE> 179
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
70
<PAGE> 180
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
71
<PAGE> 181
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%).
72
<PAGE> 182
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>
73
<PAGE> 183
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.
74
<PAGE> 184
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.
75
<PAGE> 185
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
76
<PAGE> 186
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
77
<PAGE> 187
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
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with
78
<PAGE> 188
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
79
<PAGE> 189
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.
80
<PAGE> 190
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.
81
<PAGE> 191
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>
82
<PAGE> 192
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>
83
<PAGE> 193
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>
84
<PAGE> 194
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
85
<PAGE> 195
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a 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>
<S> <C> <C> <C> <C> <C> <C> <C>
-.0551589* = [ (1 + .05) ] (4) -1
----------
(1 + .065)
</TABLE>
The Market Value Adjustment is a reduction of $2,316.67 from the Guarantee
Period Value:
- 2,316.67 = -.0551589 X 42,000.00
The Market Adjusted Value would be:
$39,683.33 = $42,000.00 - $2,316.67
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 10% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$2,142.90 = $39,683.33 X .90 X .06
Thus, the amount payable on a full withdrawal would be:
$37,540.43 = $39,683.33 - $2,142.90
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,158.34 = -.0551589 X $21,000.00
The Market Adjusted Value would be:
$19,841.66 = $21,000.00 - $1,158.34
- - ---------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
* Actual calculation utilizes 10 decimal places.
</TABLE>
86
<PAGE> 196
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$952.39 = ($19,841.46 - .10 X $39,683.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$18.889.07 = $19,841.46 -$952.39
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and we are then crediting 4% for a four-year Guarantee Period. Upon a full
withdrawal, the market value adjustment factor would be:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
+.0390198 = [ (1 + .05) ] (4) -1
----------
(1 + .04)
</TABLE>
The Market Value Adjustment is an increase of $1638.83 to the Guarantee Period
Value:
$1,638.83 = $42,000.00 X .0390198
The Market Adjusted Value would be:
$43,638.33 = $42,000.00 +$1,638.83
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,356.47 = $43,638.33 X .90 X .06
Thus, the amount payable on withdrawal would be:
$41,281.85 = $43,638.33 - $2,356.47
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$819.42 = $21,000.00 X .0390198
The Market Adjusted Value of $21,000.00 would be:
$21,819.42 = $21,000.00 + $819.42
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$1,047.34 = ($21,819.42 - .1 X $43,638.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$20,772.08 = $21,819.42 - $1,047.34
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
87
<PAGE> 197
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
88
<PAGE> 198
Individual Retirement Account under Section 408(p) of the Code. An individual
can make a tax-free rollover to an IRA from a SIMPLE IRA after a two-year period
has expired since the individual first participated in a SIMPLE plan.
2. You must complete the transfer by the 60th day after the day you receive the
distribution from your IRA or other qualified employee benefit plan or SIMPLE
IRA.
3. A rollover distribution may be made to you only once a year. The one-year
period begins on the date you receive the rollover distribution, not on the date
you roll it over (reinvest it).
4. A direct transfer to an IRA of funds in an IRA from one trustee or insurance
company to another is not a rollover. It is a transfer that is not affected by
the one-year waiting period.
5. All or a part of the premium for this Contract used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or
tax-sheltered annuity, or from a direct transfer from another IRA. All or part
of the premium for this Contract used as a SIMPLE IRA may be paid from a
rollover from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the
extent permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE
Individual Retirement Account.
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 no 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.
89
<PAGE> 199
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.
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If the actual distribution from your Contract is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. ROTH IRAS
1. If your Contract is a special type of individual retirement plan known as a
Roth IRA, it will be administered in accordance with the requirements of Section
408A of the Code. (Except as otherwise indicated, references herein to an "IRA"
are to an "individual retirement plan," within the meaning of Section
7701(a)(37) of the Code, other than a Roth IRA.) Roth IRAs are treated the same
as other IRAs, except as described here. However, the provisions of the Code
governing Roth IRAs may be modified by pending legislation. We will notify you
of any such changes.
2. The IRS is not presently accepting submissions for opinion letters approving
annuities as Roth IRAs, but will issue in the future procedures for requesting
such opinion letters. We will apply for approval as soon as possible after the
IRS issues its procedures on this matter. Such approval will be a determination
only as to the form of the annuity, and will not represent a determination of
the merits of the annuity.
3. If your Contract is a Roth IRA, We will send you a Roth IRA endorsement to be
attached to, and to amend, your Contract after We obtain approval of the
endorsement from the IRS and your state insurance department. The Company
reserves the right to amend the Contract as necessary or advisable from time to
time to comply with future changes in the Internal Revenue Code, regulations or
other requirements imposed by the IRS to obtain or maintain its approval of the
annuity as a Roth IRA.
4. Earnings in your Roth IRA are not taxed until they are distributed to you,
and will not be taxed if they are paid as a "qualified distribution," as
described to you in section L, below.
J. ELIGIBILITY AND CONTRIBUTIONS FOR ROTH IRAS
1. Generally, you are eligible to establish or make a contribution to your Roth
IRA 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.
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K. ROLLOVERS, TRANSFERS AND CONVERSIONS TO ROTH IRAS
1. Rollovers and Transfers--A rollover may be made to a Roth IRA only if it is a
"qualified rollover contribution." A "qualified rollover contribution" is a
rollover to a Roth IRA from another Roth IRA or from an IRA, but only if such
rollover contribution also meets the rollover requirements for IRAs under
Section 408(d)(3). In addition, a transfer may be made to a Roth IRA directly
from another Roth IRA or from an IRA.
You may not make a qualified rollover contribution or transfer in a taxable year
from an IRA to a Roth IRA if (a) your adjusted gross income for the taxable year
exceeds $100,000 or (b) you are married and file a separate return.
The rollover requirements of Section 408(d)(3) are complex and should be
carefully considered before you make a rollover. One of the requirements is that
the amount received be paid into another IRA (or Roth IRA) within 60 days after
receipt of the distribution. In addition, a rollover contribution from a Roth
IRA may be made by you only once a year. The one-year period begins on the date
you receive the Roth IRA distribution, not on the date you roll it over
(reinvest it) into another Roth IRA. If you withdraw assets from a Roth IRA, you
may roll over part of the withdrawal tax free into another Roth IRA and keep the
rest of it. A portion of the amount you keep may be included in your gross
income.
2. Taxation of Rollovers and Transfers to Roth IRAs--A qualified rollover
contribution or transfer from a Roth IRA maintained for your benefit to another
Roth IRA maintained for your benefit which meets the rollover requirements for
IRAs under Section 408(d)(3) is tax-free.
In the case of a qualified rollover contribution or a transfer from an IRA
maintained for your benefit to a Roth IRA maintained for your benefit, any
portion of the amount rolled over or transferred which would be includible in
your gross income were it not part of a qualified rollover contribution or a
nontaxable transfer will be includible in your gross income. However, 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 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
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your tax adviser if you intend to contribute rollover, transfer, or conversion
amounts to your Contract, or 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 higher education expenses, certain medical expenses, or by an
unemployed individual to pay health insurance premiums.
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<PAGE> 203
O. EXCISE TAX REPORTING
Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA, SIMPLE IRA or Roth IRA excise taxes,
you do not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
P. BORROWING
If you borrow money against your Contract or use it as security for a loan, the
Contract will lose its classification as an IRA, Roth IRA, or SIMPLE IRA,
whichever is applicable, and you must include in gross income the fair market
value of the Contract as of the first day of your tax year. In addition, you may
be subject to the tax on premature distributions described above. (Note: This
Contract does not allow borrowings against it, nor may it be assigned or pledged
as collateral for a loan.)
Q. REPORTING
We will provide you with any reports required by the Internal Revenue Service.
R. ESTATE TAX
Generally, the value of your IRA, including your Roth IRA, is included in your
gross estate for federal estate tax purposes.
S. FINANCIAL DISCLOSURE
1. If contributions to the Contract are made by other than rollover
contributions and direct transfers, the following information based on the
charts shown on the next pages, which assumes you were to make a level
contribution to the fixed account at the beginning of each year of $1,000 must
be completed prior to your signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- - ------------------------------------------------------------------------------------------------------
2 65
- - ------------------------------------------------------------------------------------------------------
3 70
- - ------------------------------------------------------------------------------------------------------
4
- - ------------------------------------------------------------------------------------------------------
5
- - ------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
2. If contributions to the Contract are made by rollover contributions and/or
direct transfers, the following information, based on the charts shown on the
next page, and all of which assumes you make one contribution to the fixed
account of $1,000 at the beginning of this year, must be completed prior to your
signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- - ------------------------------------------------------------------------------------------------------
2 65
- - ------------------------------------------------------------------------------------------------------
3 70
- - ------------------------------------------------------------------------------------------------------
4
- - ------------------------------------------------------------------------------------------------------
5
- - ------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
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<PAGE> 204
T. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.40% per annum. If you elected the Guaranteed Retirement Income
Benefit option, an additional charge of .25% of the Contract Value will be
assessed against the Separate Account, Fixed Account and Guarantee Periods on a
pro-rata basis.
2. An annual records maintenance charge of $30.00 will be assessed ratably each
quarter against the Separate Account, Fixed Account and Guarantee Periods.
3. Withdrawal (early annuitization) charges will be assessed based on the years
elapsed since the Purchase Payments (in a given Contract Year) were received by
KILICO; under 1 year, 7%; over 1 to 2 years, 6%; over 2 to 3 years, 5%; over 3
to 4 years, 5%; over 4 to 5 years, 4%; over 5 to 6 years, 3%; over 6 to 7 years,
2%; over 7 years and thereafter, 0%.
4. The method used to compute and allocate the annual earnings is contained in
the Prospectus under the heading "Accumulation Unit Value."
5. The growth in value of your Contract is neither guaranteed nor projected but
is based on the investment experience of the Separate Account.
95
<PAGE> 205
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 937.00 14 $16,798.32 27 $40,421.63 40 $ 75,113.26
2 1,913.00 15 18,310.91 28 42,642.92 41 78,375.30
3 2,928.90 16 19,868.88 29 44,930.85 42 81,735.20
4 3,976.63 17 21,473.59 30 47,287.42 43 85,195.89
5 5,066.14 18 23,126.44 31 49,714.68 44 88,760.41
6 6,198.41 19 24,828.87 32 52,214.76 45 92,431.86
7 7,374.46 20 26,582.37 33 54,789.84 46 96,213.46
8 8,604.34 21 28,388.49 34 57,442.18 47 100,108.50
9 9,871.11 22 30,248.78 35 60,174.08 48 104,120.40
10 11,175.88 23 32,164.88 36 62,987.94 49 108,252.65
11 12,519.80 24 34,138.47 37 65,886.22 50 112,508.87
12 13,904.03 25 36,171.26 38 68,871.45
13 15,329.79 26 38,265.04 39 71,946.23
</TABLE>
96
<PAGE> 206
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 937 14 $1,000 27 $1,000 40 $1,000
2 946 15 1,000 28 1,000 41 1,000
3 955 16 1,000 29 1,000 42 1,000
4 955 17 1,000 30 1,000 43 1,000
5 964 18 1,000 31 1,000 44 1,000
6 973 19 1,000 32 1,000 45 1,000
7 982 20 1,000 33 1,000 46 1,000
8 1,000 21 1,000 34 1,000 47 1,000
9 1,000 22 1,000 35 1,000 48 1,000
10 1,000 23 1,000 36 1,000 49 1,000
11 1,000 24 1,000 37 1,000 50 1,000
12 1,000 25 1,000 38 1,000
13 1,000 26 1,000 39 1,000
</TABLE>
* Includes applicable withdrawal charges.
97
<PAGE> 207
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
- - --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- - --------------------------------------------------------------------------------
KEMPER DESTINATIONS
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 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-13
Experts..................................................... B-13
Financial Statements........................................ B-14
</TABLE>
<PAGE> 208
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Fund by
each of the Subaccounts. All expenses incurred in the operations of the Separate
Account, except the charge for mortality and expense risk and administrative
expenses, and records maintenance charge (as described in the Prospectus) are
borne by KILICO.
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the years ended December 31, 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 affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six and one-quarter percent (6 1/4%)
of Purchase Payments. During 1999 and 1998, KILICO incurred gross commissions
payable of approximately $30.4 and $2.4 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, the Kemper Investment Grade Bond Subaccount and the Kemper
Government Securities Subaccount; and "yield" and "effective yield" information
may be provided in the case of the Kemper Money Market Subaccount. These various
measures of performance are described below.
A Subaccount's standardized average annual total return quotation is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a
Subaccount for a specific period is found by first taking a hypothetical $1,000
investment in each of the Subaccount's units on the first day of the period at
the maximum offering price, which is the Accumulation Unit value per unit
("initial investment") and computing the ending redeemable value ("redeemable
value") of that investment at the end of the period. The redeemable value
reflects the effect of the applicable Withdrawal Charge that may be imposed at
the end of the period as well as all other recurring charges and fees applicable
under the Contract to all Contract Owner accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. Standardized average annual total return figures
are annualized and, therefore, represent the average annual percentage change in
the value of a Subaccount over the applicable period.
No standard formula has been prescribed for calculating nonstandardized total
return performance. Nonstandardized total return performance for a specific
period is calculated by first taking an investment (assumed to be $40,000 below)
in each Subaccount's units on the first day of the period at the maximum
offering price, which is the Accumulation Unit value per unit ("initial
investment") and computing the ending value ("ending value") of that investment
at the end of the period. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period or the
effect of the Records Maintenance Charge, and thus may be higher than if such
charges were deducted. Premium taxes are not included in the term charges. The
nonstandardized total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. An assumed
investment of $40,000 was chosen because that approximates the size of a typical
account. Both annualized and nonannualized (cumulative) nonstandardized total
return figures may be provided. Annualized nonstandardized total return figures
represent the average annual percentage charge in the value of a
B-1
<PAGE> 209
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 may cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper Money Market Subaccount, Kemper Total Return Subaccount and
Kemper High Yield Subaccount, and for periods from December 9, 1983 (inception)
for the Kemper Growth Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount, the Kemper Investment Grade Bond
Subaccount, the Kemper Government Securities Subaccount and the Kemper Strategic
Income (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
Investment Grade Bond Subaccount, the Kemper Government Securities Subaccount
and the Kemper Strategic Income (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 Subaccount's yield is computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit value during
the period is divided by the Accumulation Unit value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Separate Account's portfolio are not included in the
calculation. The Kemper Money Market #1 and #2 Subaccounts' yields for the
seven-day period ended March 31, 2000 were 4.14% and 5.49%, respectively, and
average portfolio maturity was days.
The Kemper Money Market Subaccount's effective yield is determined by taking the
base period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period return
+1) (365) / (7) - 1. The Kemper Money Market #1 and #2 Subaccounts' effective
yields for the seven-day period ended March 31, 2000 were 4.23% and 5.65%,
respectively.
B-2
<PAGE> 210
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The standardized performance figures include the deduction
of all expenses and fees, including a prorated portion of the Records
Maintenance Charge. Redemptions within the first seven years after purchase may
be subject to a Withdrawal Charge that ranges from 7% the first year to 0% after
seven years. Yield, effective yield and nonstandardized total return do not
reflect the effect of the Withdrawal Charge or premium taxes that may be imposed
upon the redemption of units. In addition, nonstandardized total return figures
do not include the effect of the Records Maintenance Charge. Thus, yield,
effective yield and nonstandardized total return figures may be higher than if
these charges were deducted. Standardized average annual total return reflects
the effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the period in question.
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes 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 following tables include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1999.
B-3
<PAGE> 211
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(STANDARDIZED AND NON-STANDARDIZED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT..................... -11.45%
Life of Subaccount (from 05/01/96)................... $ 62,335 55.84% 12.86% 11.43%
Life of Portfolio (from 05/01/96).................... 62,335 55.84 12.86 11.43
Three Years.......................................... 53,589 33.97 10.24 8.54
One Year............................................. 35,419 -11.45 -11.45 -17.05
KEMPER VALUE+GROWTH SUBACCOUNT......................... 14.91
Life of Subaccount (from 05/01/96)................... 76,588 91.47 19.37 18.11
Life of Portfolio (from 05/01/96).................... 76,588 91.47 19.37 18.11
Three Years.......................................... 67,428 68.57 19.01 17.27
One Year............................................. 45,962 14.91 14.91 7.65
KEMPER HORIZON 20+ SUBACCOUNT.......................... 7.75
Life of Subaccount (from 05/01/96)................... 65,292 63.23 14.29 12.87
Life of Portfolio (from 05/01/96).................... 65,292 63.23 14.29 12.87
Three Years.......................................... 57,101 42.75 12.60 10.87
One Year............................................. 43,098 7.75 7.75 0.94
JANUS ASPEN GROWTH SUBACCOUNT.......................... 42.00
Life of Subaccount (from 09/15/95)................... 109,929 174.82 26.50 25.70
Life of Portfolio (from 09/13/93).................... 142,716 256.79 22.38 N/A
Five Years........................................... 136,618 241.55 27.85 N/A
Three Years.......................................... 91,106 127.77 31.57 30.15
One Year............................................. 56,799 42.00 42.00 34.73
KEMPER MONEY MARKET SUBACCOUNT #1(7)................... 3.39
Life of Subaccount (from 04/06/82)................... 97,369 143.42 5.14 5.13
Life of Portfolio (from 04/06/82).................... 97,369 143.42 5.14 5.13
Ten Years............................................ 56,932 42.33 3.59 3.58
Five Years........................................... 48,064 20.16 3.74 2.97
Three Years.......................................... 44,525 11.31 3.64 2.04
One Year............................................. 41,356 3.39 3.39 -3.14
KEMPER HIGH YIELD SUBACCOUNT(6)........................ 0.74
Life of Subaccount (from 04/06/82)................... 243,489 508.72 10.73 10.72
Life of Portfolio (from 04/06/82).................... 243,489 508.72 10.73 10.72
Ten Years............................................ 96,061 140.15 9.16 9.15
Five Years........................................... 57,803 44.51 7.64 6.84
Three Years.......................................... 44,385 10.96 3.53 1.93
One Year............................................. 40,297 0.74 0.74 -5.62
KEMPER GOVERNMENT SECURITIES SUBACCOUNT................ -0.71
Life of Subaccount (from 11/03/89)................... 70,285 75.71 5.71 5.70
Life of Portfolio (from 09/03/87).................... 79,983 99.96 5.78 N/A
Ten Years............................................ 69,436 73.59 5.67 5.66
Five Years........................................... 53,591 33.98 6.02 5.23
Three Years.......................................... 45,052 12.63 4.04 2.44
One Year............................................. 39,717 -0.71 -0.71 -6.98
KEMPER INVESTMENT GRADE BOND SUBACCOUNT................ -3.41
Life of Subaccount (from 05/01/96)................... 45,388 13.47 3.50 2.20
Life of Portfolio (from 05/01/96).................... 45,388 13.47 3.50 2.20
Three Years.......................................... 44,226 10.57 3.41 1.81
One Year............................................. 38,635 -3.41 -3.41 -9.52
</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-9 for additional information.
B-4
<PAGE> 212
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER GROWTH SUBACCOUNT............................... 35.23%
Life of Subaccount (from 12/09/83)................... $374,670 836.68% 14.95% 14.94%
Life of Portfolio (from 12/09/83).................... 374,670 836.68 14.95 14.94
Ten Years............................................ 198,272 395.68 17.36 17.36
Five Years........................................... 116,981 192.45 23.94 23.31
Three Years.......................................... 73,504 83.76 22.49 20.84
One Year............................................. 54,092 35.23 35.23 27.96
KEMPER BLUE CHIP SUBACCOUNT............................ 23.51
Life of Subaccount (from 05/01/97)................... 61,313 53.28 17.36 15.33
Life of Portfolio (from 05/01/97).................... 61,313 53.28 17.36 15.33
One Year............................................. 49,403 23.51 23.51 16.24
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT................. 33.37
Life of Subaccount (from 06/01/98)................... 56,001 40.00 22.35 18.49
Life of Portfolio (from 07/16/85).................... 340,708 751.77 15.96 N/A
Ten Years............................................ 182,626 356.57 16.40 N/A
Five Years........................................... 130,458 226.15 26.67 N/A
Three Years.......................................... 86,798 117.00 29.46 N/A
One Year............................................. 53,347 33.37 33.37 26.10
WARBURG PINCUS POST-VENTURE CAPITAL SUBACCOUNT......... 61.24
Life of Subaccount (from 06/01/98)................... 58,083 45.21 25.05 21.25
Life of Portfolio (from 09/30/96).................... 73,647 84.12 20.65 N/A
Three Years.......................................... 75,723 89.31 23.71 N/A
One Year............................................. 64,497 61.24 61.24 53.97
KEMPER-DREMAN HIGH RETURN EQUITY SUBACCOUNT............ -12.38
Life of Subaccount (from 06/01/98)................... 36,777 -8.06 -5.17 -9.00
Life of Portfolio (from 05/01/98).................... 35,717 -10.71 -6.59 N/A
One Year............................................. 35,046 -12.38 -12.38 -17.92
KEMPER-DREMAN FINANCIAL SERVICES SUBACCOUNT............ -6.37
Life of Subaccount (from 06/01/98)................... 37,265 -6.84 -4.37 -6.92
Life of Portfolio (from 05/01/98).................... 36,291 -9.27 -5.69 N/A
One Year............................................. 37,453 -6.37 -6.37 -12.28
KEMPER SMALL CAP GROWTH SUBACCOUNT..................... 32.71
Life of Subaccount (from 05/02/94)................... 137,129 242.82 24.28 23.80
Life of Portfolio (from 05/02/94).................... 137,129 242.82 24.28 23.80
Five Years........................................... 133,090 232.73 27.15 26.58
Three Years.......................................... 82,047 105.12 27.06 25.53
One Year............................................. 53,083 32.71 32.71 25.44
KEMPER SMALL CAP VALUE SUBACCOUNT...................... 1.38
Life of Subaccount (from 05/01/96)................... 43,018 7.55 2.00 0.71
Life of Portfolio (from 05/01/96).................... 43,018 7.55 2.00 0.71
Three Years.......................................... 42,621 6.55 2.14 0.56
One Year............................................. 40,550 1.38 1.38 -5.03
</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-9 for additional information.
B-5
<PAGE> 213
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER INTERNATIONAL SUBACCOUNT(5)..................... 43.70%
Life of Subaccount (from 01/06/92)................... $105,294 163.24% 12.88% 12.61%
Life of Portfolio (from 01/06/92).................... 105,294 163.24 12.88 12.61
Five Years........................................... 86,202 115.51 16.60 15.79
Three Years.......................................... 67,344 68.36 18.96 17.22
One Year............................................. 57,480 43.70 43.70 36.43
KEMPER GLOBAL INCOME SUBACCOUNT........................ -7.15
Life of Subaccount (from 05/01/97)................... 41,434 3.59 1.33 -0.42
Life of Portfolio (from 05/01/97).................... 41,434 3.59 1.33 -0.42
One Year............................................. 37,140 -7.15 -7.15 -13.02
SCUDDER VLIF GLOBAL DISCOVERY SUBACCOUNT............... 63.60
Life of Subaccount (from 06/01/98)................... 63,031 57.58 31.33 27.66
Life of Portfolio (from 05/01/96).................... 87,058 117.65 23.61 N/A
Three Years.......................................... 83,290 108.23 27.70 N/A
One Year............................................. 65,440 63.60 63.60 56.33
SCUDDER VLIF INTERNATIONAL SUBACCOUNT.................. 52.38
Life of Subaccount (from 06/01/98)................... 60,849 52.12 28.59 24.86
Life of Portfolio (from 05/01/87).................... 167,372 318.43 11.95 N/A
Ten Years............................................ 120,806 202.02 11.69 N/A
Five Years........................................... 95,021 137.55 18.89 N/A
Three Years.......................................... 76,609 91.52 24.19 N/A
One Year............................................. 60,953 52.38 52.38 45.11
KEMPER INTERNATIONAL GROWTH AND INCOME SUBACCOUNT(5)... 12.52
Life of Subaccount (from 06/01/98)................... 41,242 3.11 1.95 -2.17
Life of Portfolio (from 05/01/98).................... 40,658 1.65 0.99 N/A
One Year............................................. 45,007 12.52 12.52 5.41
KEMPER GLOBAL BLUE CHIP SUBACCOUNT..................... 24.96
Life of Subaccount (from 06/01/98)................... 50,549 26.37 15.93 11.67
Life of Portfolio (from 05/01/98).................... 48,485 21.21 12.31 N/A
One Year............................................. 49,982 24.96 24.96 17.69
WARBURG PINCUS EMERGING MARKETS SUBACCOUNT............. 78.90
Life of Subaccount (from 06/01/98)................... 48,941 22.35 12.85 8.78
Life of Portfolio (from 12/31/97).................... 58,362 45.91 20.79 N/A
One Year............................................. 71,561 78.90 78.90 71.63
KEMPER TOTAL RETURN SUBACCOUNT(16)..................... 13.23
Life of Subaccount (from 04/06/82)................... 318,469 696.17 12.42 12.41
Life of Portfolio (from 04/06/82).................... 318,469 696.17 12.42 12.41
Ten Years............................................ 121,973 204.93 11.79 11.79
Five Years........................................... 87,575 118.94 16.97 16.17
Three Years.......................................... 60,860 52.15 15.02 13.25
One Year............................................. 45,290 13.23 13.23 6.07
</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-9 for additional information.
B-6
<PAGE> 214
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER HORIZON 10+ SUBACCOUNT.......................... 6.89%
Life of Subaccount (from 05/01/96)................... $ 59,681 49.20% 11.52% 10.12%
Life of Portfolio (from 05/01/96).................... 59,681 49.20 11.52 10.12
Three Years.......................................... 54,072 35.18 10.57 8.87
One Year............................................. 42,754 6.89 6.89 0.13
KEMPER HORIZON 5 SUBACCOUNT............................ 3.41
Life of Subaccount (from 05/01/96)................... 54,052 35.13 8.55 7.18
Life of Portfolio (from 05/01/96).................... 54,052 35.13 8.55 7.18
Three Years.......................................... 49,771 24.43 7.56 5.90
One Year............................................. 41,364 3.41 3.41 -3.12
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT.............. 4.62
Life of Subaccount (from 06/01/98)................... 39,265 -1.84 -1.10 -4.91
Life of Portfolio (from 05/02/94).................... 92,351 130.88 15.91 N/A
Five Years........................................... 88,845 122.11 17.28 N/A
Three Years.......................................... 56,764 41.91 12.38 N/A
One Year............................................. 41,846 4.62 4.62 -1.99
JANUS ASPEN GROWTH AND INCOME SUBACCOUNT............... 71.64
Life of Subaccount (from 06/01/98)................... 83,422 108.56 59.07 55.54
Life of Portfolio (from 05/01/98).................... 81,490 103.73 53.19 N/A
One Year............................................. 68,655 71.64 71.64 64.37
ALGER AMERICAN LEVERAGED ALLCAP SUBACCOUNT............. 75.61
Life of Subaccount (from 11/01/99)................... N/A N/A N/A N/A
Life of Portfolio (from 01/24/95).................... 245,315 513.29 44.39 N/A
Three Years.......................................... 129,045 222.61 47.76 N/A
One Year............................................. 70,243 75.61 75.61 N/A
ALGER AMERICAN BALANCED SUBACCOUNT..................... 27.43
Life of Subaccount (from 11/01/99)................... N/A N/A N/A N/A
Life of Portfolio (from 09/05/89).................... 111,184 177.96 10.41 N/A
Ten Years............................................ 111,172 177.93 10.76 N/A
Five Years........................................... 107,650 169.13 21.90 N/A
Three Years.......................................... 78,117 95.29 25.00 N/A
One Year............................................. 50,972 27.43 27.43 N/A
DREYFUS SOCIALLY RESPONSIBLE GROWTH SUBACCOUNT......... 28.31
Life of Subaccount (from 05/03/99)................... N/A N/A N/A N/A
Life of Portfolio (from 10/07/93).................... 141,634 254.09 22.48 N/A
Five Years........................................... 132,107 230.27 26.99 N/A
Three Years.......................................... 83,076 107.69 27.59 N/A
One Year............................................. 51,323 28.31 28.31 N/A
DREYFUS MIDCAP STOCK SUBACCOUNT........................ 9.29
Life of Subaccount (from 11/01/99)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/98).................... 42,111 5.28 3.13 N/A
One Year............................................. 43,715 9.29 9.29 N/A
KEMPER AGGRESSIVE GROWTH SUBACCOUNT.................... 38.61
Life of Subaccount (from 05/03/99)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/99).................... 55,443 38.61 N/A N/A
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. See page B-9 for additional information.
B-7
<PAGE> 215
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER TECHNOLOGY GROWTH SUBACCOUNT.................... 76.07%
Life of Subaccount (from 05/03/99)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/99).................... $ 70,429 76.07% N/A N/A
KEMPER INDEX 500 SUBACCOUNT............................ 9.05
Life of Subaccount (from 09/10/99)................... N/A N/A N/A N/A
Life of Portfolio (from 09/01/99).................... 43,620 9.05 N/A N/A
KVS FOCUSED LARGE CAP GROWTH SUBACCOUNT................ 27.47
Life of Subaccount (from 10/29/99)................... N/A N/A N/A N/A
Life of Portfolio (from 10/29/99).................... 50,988 27.47 N/A N/A
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. See page B-8 for additional information.
B-8
<PAGE> 216
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Non-Standardized Total Return figures quoted are based on a
hypothetical $40,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract except for the
Withdrawal Charge and any charge for applicable premium taxes which may be
imposed in certain states.
(2) The Standardized Average Annual Total Return figures quoted are based on a
hypothetical $1,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract including the
applicable Withdrawal Charge that may be imposed at the end of the quoted
period. Premium taxes are not reflected.
(3) The Year to Date percentage return figures quoted are based on the change
in unit values.
(4) The Ending Values quoted are based on a $40,000 initial investment and
assumes the deduction of all recurring charges and fees applicable under
the Contract except for the Withdrawal Charge and any charge for applicable
premium taxes which may be imposed in certain states.
(5) 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 first
Contribution Year.
B-9
<PAGE> 217
The following tables illustrate an assumed $40,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from the inception date of each Portfolio to December 31, 1999.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER MONEY MARKET SUBACCOUNT #1
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1982 ............................... $43,058
1983 ............................... 46,405
1984 ............................... 50,672
1985 ............................... 54,097
1986 ............................... 56,930
1987 ............................... 59,890
1988 ............................... 63,522
1989 ............................... 68,411
1990 ............................... 73,006
1991 ............................... 76,284
1992 ............................... 77,837
1993 ............................... 78,986
1994 ............................... 81,032
1995 ............................... 84,457
1996 ............................... 87,474
1997 ............................... 90,808
1998 ............................... 94,176
1999 ............................... 97,369
</TABLE>
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1987 ............................... $40,113
1988 ............................... 40,802
1989 ............................... 46,076
1990 ............................... 49,932
1991 ............................... 56,791
1992 ............................... 59,338
1993 ............................... 62,337
1994 ............................... 59,698
1995 ............................... 70,167
1996 ............................... 71,013
1997 ............................... 76,314
1998 ............................... 80,552
1999 ............................... 79,983
</TABLE>
<TABLE>
<CAPTION>
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1996 ............................... $41,050
1997 ............................... 44,146
1998 ............................... 46,992
1999 ............................... 45,388
</TABLE>
<TABLE>
<CAPTION>
KEMPER GLOBAL INCOME SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1997 ............................... $40,770
1998 ............................... 44,625
1999 ............................... 41,434
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 5 SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1996 ............................... $43,440
1997 ............................... 48,290
1998 ............................... 52,269
1999 ............................... 54,052
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1982 .............................. $ 49,485
1983 .............................. 56,063
1984 .............................. 62,318
1985 .............................. 74,896
1986 .............................. 87,063
1987 .............................. 91,000
1988 .............................. 104,083
1989 .............................. 101,388
1990 .............................. 84,543
1991 .............................. 126,809
1992 .............................. 147,400
1993 .............................. 174,590
1994 .............................. 168,495
1995 .............................. 195,244
1996 .............................. 219,431
1997 .............................. 241,567
1998 .............................. 241,694
1999 .............................. 243,489
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 10+ SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1996 ............................... $44,149
1997 ............................... 50,854
1998 ............................... 55,836
1999 ............................... 59,681
</TABLE>
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1982 .............................. $ 49,392
1983 .............................. 57,378
1984 .............................. 53,853
1985 .............................. 68,340
1986 .............................. 77,673
1987 .............................. 77,145
1988 .............................. 85,304
1989 .............................. 104,439
1990 .............................. 108,263
1991 .............................. 147,457
1992 .............................. 147,945
1993 .............................. 163,715
1994 .............................. 145,460
1995 .............................. 182,305
1996 .............................. 209,311
1997 .............................. 247,690
1998 .............................. 281,266
1999 .............................. 318,469
</TABLE>
B-10
<PAGE> 218
<TABLE>
<CAPTION>
KEMPER HORIZON 20+ SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1996 ............................... $45,738
1997 ............................... 54,357
1998 ............................... 60,598
1999 ............................... 65,292
</TABLE>
<TABLE>
<CAPTION>
KEMPER INDEX 500 SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1999 ............................... $43,620
</TABLE>
<TABLE>
<CAPTION>
KEMPER VALUE+GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1996 ............................... $45,433
1997 ............................... 56,237
1998 ............................... 66,652
1999 ............................... 76,588
</TABLE>
<TABLE>
<CAPTION>
KEMPER BLUE CHIP SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1997 ............................... $44,215
1998 ............................... 49,643
1999 ............................... 61,313
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1992 ............................... $39,188
1993 ............................... 51,394
1994 ............................... 48,859
1995 ............................... 54,742
1996 ............................... 62,541
1997 ............................... 67,528
1998 ............................... 73,273
1999 ............................... 105,294
</TABLE>
<TABLE>
<CAPTION>
KEMPER CONTRARIAN VALUE SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1996 ............................... $46,528
1997 ............................... 59,851
1998 ............................... 70,398
1999 ............................... 62,335
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1996 ............................... $40,372
1997 ............................... 48,482
1998 ............................... 42,434
1999 ............................... 43,018
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1994 ............................... $41,214
1995 ............................... 52,896
1996 ............................... 66,854
1997 ............................... 88,516
1998 ............................... 103,332
1999 ............................... 137,129
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1983 .............................. $ 41,162
1984 .............................. 45,032
1985 .............................. 55,641
1986 .............................. 60,009
1987 .............................. 60,236
1988 .............................. 59,691
1989 .............................. 75,587
1990 .............................. 75,040
1991 .............................. 118,218
1992 .............................. 120,823
1993 .............................. 136,694
1994 .............................. 128,113
1995 .............................. 170,566
1996 .............................. 203,889
1997 .............................. 244,064
1998 .............................. 277,058
1999 .............................. 374,670
</TABLE>
<TABLE>
<CAPTION>
KEMPER AGGRESSIVE GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1999 ............................... $55,443
</TABLE>
<TABLE>
<CAPTION>
KEMPER TECHNOLOGY GROWTH
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1999 ............................... $70,429
</TABLE>
<TABLE>
<CAPTION>
KEMPER GLOBAL BLUE CHIP SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1998 ............................... $38,802
1999 ............................... 48,485
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL GROWTH AND
INCOME SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1998 ............................... $36,135
1999 ............................... 40,658
</TABLE>
<TABLE>
<CAPTION>
KEMPER-DREMAN HIGH RETURN
EQUITY SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1998 ............................... $40,766
1999 ............................... 35,717
</TABLE>
<TABLE>
<CAPTION>
KEMPER-DREMAN FINANCIAL SERVICES
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1998 ............................... $38,758
1999 ............................... 36,291
</TABLE>
B-11
<PAGE> 219
<TABLE>
<CAPTION>
KVS FOCUSED LARGE CAP GROWTH
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1999 .............................. $ 50,988
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF GLOBAL
DISCOVERY SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1996 ............................... $41,810
1997 ............................... 46,339
1998 ............................... 53,214
1999 ............................... 87,058
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF GROWTH AND INCOME
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1994 ............................... $41,578
1995 ............................... 54,021
1996 ............................... 65,077
1997 ............................... 83,736
1998 ............................... 88,276
1999 ............................... 92,351
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1987 .............................. $ 35,409
1988 .............................. 40,769
1989 .............................. 55,419
1990 .............................. 50,462
1991 .............................. 55,468
1992 .............................. 53,012
1993 .............................. 72,052
1994 .............................. 70,457
1995 .............................. 77,210
1996 .............................. 87,390
1997 .............................. 93,997
1998 .............................. 109,837
1999 .............................. 167,372
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF CAPITAL GROWTH
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1985 .............................. $ 43,878
1986 .............................. 52,927
1987 .............................. 51,190
1988 .............................. 61,634
1989 .............................. 74,624
1990 .............................. 68,087
1991 .............................. 93,734
1992 .............................. 98,364
1993 .............................. 117,263
1994 .............................. 104,465
1995 .............................. 132,542
1996 .............................. 157,011
1997 .............................. 210,213
1998 .............................. 255,462
1999 .............................. 340,708
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1993 .............................. $ 41,230
1994 .............................. 41,785
1995 .............................. 53,645
1996 .............................. 62,659
1997 .............................. 75,123
1998 .............................. 100,505
1999 .............................. 142,716
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN GROWTH AND INCOME
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1998 ............................... $47,478
1999 ............................... 81,490
</TABLE>
<TABLE>
<CAPTION>
WARBURG PINCUS EMERGING MARKETS
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1998 ............................... $32,622
1999 ............................... 58,362
</TABLE>
<TABLE>
<CAPTION>
WARBURG PINCUS POST-VENTURE CAPITAL
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1996 ............................... $38,903
1997 ............................... 43,483
1998 ............................... 45,675
1999 ............................... 73,647
</TABLE>
<TABLE>
<CAPTION>
DREYFUS SOCIALLY RESPONSIBLE GROWTH
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1993 .............................. $ 42,817
1994 .............................. 42,884
1995 .............................. 56,987
1996 .............................. 68,194
1997 .............................. 86,456
1998 .............................. 110,385
1999 .............................. 141,634
</TABLE>
<TABLE>
<CAPTION>
DREYFUS MIDCAP STOCK SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1998 ............................... $38,533
1999 ............................... 42,111
</TABLE>
<TABLE>
<CAPTION>
ALGER AMERICAN LEVERAGED ALLCAP
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1995 .............................. $ 68,826
1996 .............................. 76,040
1997 .............................. 89,748
1998 .............................. 139,696
1999 .............................. 245,315
</TABLE>
B-12
<PAGE> 220
<TABLE>
<CAPTION>
ALGER AMERICAN BALANCED SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1989 .............................. $ 40,004
1990 .............................. 39,331
1991 .............................. 38,834
1992 .............................. 41,163
1993 .............................. 43,758
1994 .............................. 41,313
1995 .............................. 52,407
1996 .............................. 56,932
1997 .............................. 67,272
1998 .............................. 87,252
1999 .............................. 111,184
</TABLE>
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED
ANNUITY CONVENTIONAL
AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- CONTRIBUTIONS
TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------
<S> <C> <C> <C>
10 Years.......................................... $107,946 $ 86,448 $ 81,693
20 Years.......................................... 233,048 165,137 133,476
30 Years.......................................... 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts. Income on
Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10% tax
penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following annuity charges and
expenses: 1.25% mortality and expense risk; .10% administration charges; 7%
maximum deferred withdrawal charge; and $30 annual records maintenance charge.
The tax-deferred accumulation would be reduced if these charges were reflected.
No implication is intended by the use of these assumptions that the return shown
is guaranteed in any way or that the return shown represents an average or
expected rate of return over the period of the Contracts. [IMPORTANT--THIS IS
NOT AN ILLUSTRATION OF YIELD OR RETURN].
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
EXPERTS
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1999 and the related statement of operations
for the year then ended and the statements of changes in contract
B-13
<PAGE> 221
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
assets attributable to other variable annuity contracts offered by KILICO
through the Separate Account.
B-14
<PAGE> 222
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 Government
Securities Subaccount, Kemper Investment Grade Bond Subaccount, Kemper Global
Income Subaccount, Kemper Horizon 5 Subaccount, Kemper High Yield Subaccount,
Kemper Horizon 10+ Subaccount, Kemper Total Return Subaccount, Kemper Horizon
20+ Subaccount, Kemper Value+Growth Subaccount, Kemper Blue Chip Subaccount,
Kemper International Subaccount, Kemper Contrarian Value Subaccount, Kemper
Small Cap Value Subaccount, Kemper Small Cap Growth Subaccount, Kemper Growth
Subaccount, Kemper Aggressive Growth Subaccount, Kemper Technology Growth
Subaccount, Kemper Global Blue Chip Subaccount, Kemper International Growth and
Income Subaccount, Kemper-Dreman High Return Equity Subaccount, Kemper-Dreman
Financial Services Subaccount, Kemper Index 500 Subaccount, KVS Focused Large
Cap Growth Subaccount (investment options within the Kemper Variable Series,
formerly Investors Fund Series), Scudder VLIF Global Discovery Subaccount,
Scudder VLIF Growth and Income Subaccount, Scudder VLIF International
Subaccount, Scudder VLIF Capital Growth Subaccount (investment options within
the Scudder Variable Life Investment Fund), Alger American Leveraged AllCap
Subaccount, Alger American Balanced Subaccount (investment options within The
Alger American Fund), Dreyfus MidCap Stock Subaccount (investment option within
the Dreyfus Investment Portfolios), Dreyfus Socially Responsible Growth
Subaccount (investment option within The Dreyfus Socially Responsible Growth
Fund, Inc.), Janus Aspen Growth Subaccount, Janus Aspen Growth and Income
Subaccount (investment options within the Janus Aspen Series), Warburg Pincus
Emerging Markets Subaccount, and Warburg Pincus Post-Venture Capital Subaccount
(investment options within the Warburg Pincus Trust) thereof at December 31,
1999, and the changes in their contract owners' equity for each of the two years
then ended and for each of the periods presented, except for the Kemper
Aggressive Growth Subaccount, Kemper Technology Growth Subaccount and Dreyfus
Socially Responsible Growth Subaccount as to which the period is May 3, 1999
(commencement of operations) to December 31, 1999, the Kemper Index 500
Subaccount as to which the period is September 10, 1999 (commencement of
operations) to December 31, 1999, the KVS Focused Large Cap Growth Subaccount as
to which the period is October 29, 1999 (commencement of operations) to December
31, 1999, the Alger American Leveraged AllCap Subaccount, the Alger American
Balanced Subaccount, and the Dreyfus MidCap Stock Subaccount as to which the
period is November 1, 1999 (commencement of operations) to December 31, 1999, 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-15
<PAGE> 223
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 KEMPER
MONEY MONEY GOVERNMENT INVESTMENT GLOBAL KEMPER
MARKET MARKET SECURITIES GRADE BOND INCOME HORIZON 5
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 71,783 18,607 1,513 9,194
Dividends and other
receivables................ 432 11 -- 290 -- --
-------- ----- ------ ------ ----- -----
Total assets.......... 137,798 2,690 71,783 18,897 1,513 9,194
-------- ----- ------ ------ ----- -----
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 120 -- 68 11 -- 6
Other payables............. 1 -- 6 6 -- --
-------- ----- ------ ------ ----- -----
Total liabilities..... 121 -- 74 17 -- 6
-------- ----- ------ ------ ----- -----
Contract owners' equity...... $137,677 2,690 71,709 18,880 1,513 9,188
======== ===== ====== ====== ===== =====
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess (deficiency) of
proceeds from units sold
over payments for units
redeemed................... $ 60,415 1,091 34,942 18,577 1,496 7,948
Accumulated net investment
income (loss).............. 77,262 1,599 37,352 312 105 96
Accumulated net realized gain
(loss) on sales of
investments................ -- -- 346 368 (34) 537
Unrealized appreciation
(depreciation) of
investments................ -- -- (931) (377) (54) 607
-------- ----- ------ ------ ----- -----
Contract owners' equity...... $137,677 2,690 71,709 18,880 1,513 9,188
======== ===== ====== ====== ===== =====
<CAPTION>
KEMPER VARIABLE SERIES*
------------------------
KEMPER
HIGH KEMPER
YIELD HORIZON 10+
SUBACCOUNT SUBACCOUNT
---------- -----------
<S> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... 218,357 15,416
Dividends and other
receivables................ 31 --
------- ------
Total assets.......... 218,388 15,416
------- ------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 225 12
Other payables............. 445 --
------- ------
Total liabilities..... 670 12
------- ------
Contract owners' equity...... 217,718 15,404
======= ======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess (deficiency) of
proceeds from units sold
over payments for units
redeemed................... 1,825 11,824
Accumulated net investment
income (loss).............. 220,219 195
Accumulated net realized gain
(loss) on sales of
investments................ 3,970 1,727
Unrealized appreciation
(depreciation) of
investments................ (8,296) 1,658
------- ------
Contract owners' equity...... 217,718 15,404
======= ======
</TABLE>
- - ---------------
*Formerly Investors Fund Series
See accompanying notes to financial statements.
B-16
<PAGE> 224
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
- - --------------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
TOTAL KEMPER VALUE+ KEMPER KEMPER CONTRARIAN SMALL CAP SMALL CAP KEMPER
RETURN HORIZON 20+ GROWTH BLUE CHIP INTERNATIONAL VALUE VALUE GROWTH GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ----------- ---------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
716,720.. 10,321 48,370 36,190 159,793 92,226 31,631 166,144 574,900
36...... -- -- 1 1 134 5 67 1
------- ------ ------ ------ ------- ------ ------ ------- -------
716,756 10,321 48,370 36,191 159,794 92,360 31,636 166,211 574,901
------- ------ ------ ------ ------- ------ ------ ------- -------
731 10 44 14 156 82 28 155 586
217 -- 2 4 86 4 4 -- 282
------- ------ ------ ------ ------- ------ ------ ------- -------
948 10 46 18 242 86 32 155 868
------- ------ ------ ------ ------- ------ ------ ------- -------
715,808 10,311 48,324 36,173 159,552 92,274 31,604 166,056 574,033
======= ====== ====== ====== ======= ====== ====== ======= =======
)
(6,653 7,600 32,016 30,602 42,661 77,678 31,478 65,173 9,349
466,966 119 763 (217) 29,318 7,165 79 23,953 275,309
138,146 1,033 6,973 974 39,837 15,069 1,825 25,083 100,375
117,349 1,559 8,572 4,814 47,736 (7,638) (1,778) 51,847 189,000
------- ------ ------ ------ ------- ------ ------ ------- -------
715,808 10,311 48,324 36,173 159,552 92,274 31,604 166,056 574,033
======= ====== ====== ====== ======= ====== ====== ======= =======
</TABLE>
B-17
<PAGE> 225
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
-------------------------------------------------------------------------------
KEMPER KEMPER- KEMPER-
KEMPER KEMPER KEMPER INTERNATIONAL DREMAN HIGH DREMAN
AGGRESSIVE TECHNOLOGY GLOBAL GROWTH AND RETURN FINANCIAL
GROWTH GROWTH BLUE CHIP INCOME EQUITY SERVICES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... $1,236 19,583 3,883 1,226 31,371 5,645
Dividends and other
receivables................ -- -- -- -- 3 --
------ ------ ----- ----- ------ ------
Total assets............... 1,236 19,583 3,883 1,226 31,374 5,645
------ ------ ----- ----- ------ ------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. -- -- -- -- -- --
Other payables............. -- -- -- -- -- --
------ ------ ----- ----- ------ ------
Total liabilities........ -- -- -- -- -- --
------ ------ ----- ----- ------ ------
Contract owners' equity...... $1,236 19,583 3,883 1,226 31,374 5,645
====== ====== ===== ===== ====== ======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. $1,101 15,263 3,328 1,077 34,783 6,029
Accumulated net investment
income (loss).............. (1) 12 (18) 19 (83) (48)
Accumulated net realized gain
on sales of investments.... 2 111 26 2 2 48
Unrealized appreciation
(depreciation) of
investments................ 134 4,197 547 128 (3,328) (384)
------ ------ ----- ----- ------ ------
Contract owners' equity...... $1,236 19,583 3,883 1,226 31,374 5,645
====== ====== ===== ===== ====== ======
<CAPTION>
KEMPER VARIABLE SERIES*
------------------------
KEMPER KVS FOCUSED
INDEX LARGE CAP
500 GROWTH
SUBACCOUNT SUBACCOUNT
---------- -----------
<S> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... 6,793 55
Dividends and other
receivables................ -- --
----- --
Total assets............... 6,793 55
----- --
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. -- --
Other payables............. -- --
----- --
Total liabilities........ -- --
----- --
Contract owners' equity...... 6,793 55
===== ==
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. 6,413 54
Accumulated net investment
income (loss).............. (10) --
Accumulated net realized gain
on sales of investments.... 7 --
Unrealized appreciation
(depreciation) of
investments................ 383 1
----- --
Contract owners' equity...... 6,793 55
===== ==
</TABLE>
- - ---------------
*Formerly Investors Fund Series
See accompanying notes to financial statements.
B-18
<PAGE> 226
<TABLE>
<CAPTION>
THE DREYFUS
DREYFUS SOCIALLY
THE ALGER INVESTMENT RESPONSIBLE
SCUDDER VARIABLE LIFE INVESTMENT FUND AMERICAN FUND PORTFOLIOS GROWTH FUND, INC.
---------------------------------------------------------- ----------------------- ---------- -----------------
ALGER
SCUDDER VLIF SCUDDER VLIF SCUDDER VLIF AMERICAN ALGER DREYFUS
GLOBAL GROWTH AND SCUDDER VLIF CAPITAL LEVERAGED AMERICAN MIDCAP DREYFUS SOCIALLY
DISCOVERY INCOME INTERNATIONAL GROWTH ALLCAP BALANCED STOCK RESPONSIBLE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT GROWTH SUBACCOUNT
------------ ------------ ------------- ------------ ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
8,358 11,140 27,586 13,725 644 216 123 2,809
-- -- 1 -- -- -- -- 61
----- ------ ------ ------ --- --- --- -----
8,358 11,140 27,587 13,725 644 216 123 2,870
----- ------ ------ ------ --- --- --- -----
-- -- 3 -- -- -- -- 3
-- -- 2 -- -- -- -- --
----- ------ ------ ------ --- --- --- -----
-- -- 5 -- -- -- -- 3
----- ------ ------ ------ --- --- --- -----
8,358 11,140 27,582 13,725 644 216 123 2,867
===== ====== ====== ====== === === === =====
6,031 10,927 21,253 11,279 596 212 118 2,481
)
(19 228 728 188 -- -- (1) 87
39 19 2,930 36 2 -- 5 31
2,307 (34) 2,671 2,222 46 4 1 268
----- ------ ------ ------ --- --- --- -----
8,358 11,140 27,582 13,725 644 216 123 2,867
===== ====== ====== ====== === === === =====
</TABLE>
B-19
<PAGE> 227
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES WARBURG PINCUS TRUST
------------------------- -------------------------------
JANUS ASPEN WARBURG PINCUS WARBURG PINCUS
JANUS ASPEN GROWTH AND EMERGING POST-VENTURE
GROWTH INCOME MARKETS CAPITAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio funds, at current
values.................................................. $240,663 67,155 3,042 2,013
Dividends and other Receivables........................... 23 -- 3 --
-------- ------ ----- -----
Total assets............................................ 240,686 67,155 3,045 2,013
-------- ------ ----- -----
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk and administrative charges... 159 -- -- --
Other payables.......................................... 28 -- -- --
-------- ------ ----- -----
Total liabilities..................................... 187 -- -- --
-------- ------ ----- -----
Contract owners' equity................................... $240,499 67,155 3,045 2,013
======== ====== ===== =====
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of proceeds from units sold over payments for units
redeemed................................................ $167,597 49,385 2,414 1,420
Accumulated net investment income (loss).................. 1,903 (174) 93 (10)
Accumulated net realized gain on sales of investments..... 6,108 430 64 55
Unrealized appreciation of investments.................... 64,891 17,514 474 548
-------- ------ ----- -----
Contract owners' equity................................... $240,499 67,155 3,045 2,013
======== ====== ===== =====
</TABLE>
- - ---------------
See accompanying notes to financial statements.
B-20
<PAGE> 228
(This page intentionally left blank)
B-21
<PAGE> 229
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 KEMPER
MONEY MONEY GOVERNMENT INVESTMENT GLOBAL KEMPER
MARKET MARKET SECURITIES GRADE BOND INCOME HORIZON 5
SUBACCOUNT #1 SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Dividends and capital
gains distributions... $5,645 161 3,826 465 103 168
EXPENSES
Mortality and expense
risk and
administrative
charges............... 1,424 2 1,011 214 26 128
------ --- ------ ---- ---- ---
Net investment income
(loss).................. 4,221 159 2,815 251 77 40
------ --- ------ ---- ---- ---
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss)
on sales of
investments........... -- -- (611) (16) (91) 203
Change in unrealized
appreciation
(depreciation) of
investments........... -- -- (2,754) (733) (115) 47
------ --- ------ ---- ---- ---
Net realized and
unrealized gain (loss)
on investments.......... -- -- (3,365) (749) (206) 250
------ --- ------ ---- ---- ---
Net increase (decrease) in
contract owners' equity
resulting from
operations.............. $4,221 159 (550) (498) (129) 290
====== === ====== ==== ==== ===
<CAPTION>
KEMPER VARIABLE SERIES*
------------------------
KEMPER
HIGH KEMPER
YIELD HORIZON 10+
SUBACCOUNT SUBACCOUNT
---------- -----------
<S> <C> <C>
REVENUE
Dividends and capital
gains distributions... 24,402 321
EXPENSES
Mortality and expense
risk and
administrative
charges............... 3,256 200
------- -----
Net investment income
(loss).................. 21,146 121
------- -----
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss)
on sales of
investments........... (6,838) 1,175
Change in unrealized
appreciation
(depreciation) of
investments........... (10,902) (258)
------- -----
Net realized and
unrealized gain (loss)
on investments.......... (17,740) 917
------- -----
Net increase (decrease) in
contract owners' equity
resulting from
operations.............. 3,406 1,038
======= =====
</TABLE>
- - ---------------
*Formerly Investors Fund Series
See accompanying notes to financial statements.
B-22
<PAGE> 230
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
----------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
TOTAL KEMPER VALUE+ KEMPER KEMPER CONTRARIAN SMALL CAP SMALL CAP KEMPER
RETURN HORIZON 20+ GROWTH BLUE CHIP INTERNATIONAL VALUE VALUE GROWTH GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ----------- ---------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
186 1,163 74 17,715 7,006 279 -- --
60,683
124 580 247 1,859 1,206 423 1,739 7,131
9,543
------ --- ----- ----- ------ ------- ---- ------ -------
62 583 (173) 15,856 5,800 (144) (1,739) (7,131)
51,140
------ --- ----- ----- ------ ------- ---- ------ -------
459 4,628 845 9,865 6,046 (229) 9,762 30,772
29,197
215 1,178 4,171 24,305 (24,707) 497 32,251 134,497
8,683
------ --- ----- ----- ------ ------- ---- ------ -------
674 5,806 5,016 34,170 (18,661) 268 42,013 165,269
37,880
------ --- ----- ----- ------ ------- ---- ------ -------
736 6,389 4,843 50,026 (12,861) 124 40,274 158,138
89,020
====== === ===== ===== ====== ======= ==== ====== =======
</TABLE>
B-23
<PAGE> 231
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
---------------------------------------------------------------------------------------
KEMPER KEMPER- KEMPER-
KEMPER KEMPER KEMPER INTERNATIONAL DREMAN HIGH DREMAN
AGGRESSIVE TECHNOLOGY GLOBAL GROWTH AND RETURN FINANCIAL
GROWTH GROWTH BLUE CHIP INCOME EQUITY SERVICES
SUBACCOUNT (A) SUBACCOUNT (A) SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------------- -------------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Dividends and
capital gains
distributions.... $ -- -- 2 31 263 11
EXPENSES
Mortality and
expense risk and
administrative
charges.......... 1 (12) 18 12 325 53
---- ----- --- --- ------ ----
Net investment income
(loss)............. (1) 12 (16) 19 (62) (42)
---- ----- --- --- ------ ----
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net realized gain
on sales of
investments...... 2 111 28 4 12 53
Change in
unrealized
appreciation
(depreciation) of
investments...... 134 4,197 529 119 (3,635) (461)
---- ----- --- --- ------ ----
Net realized and
unrealized gain
(loss) on
investments........ 136 4,308 557 123 (3,623) (408)
---- ----- --- --- ------ ----
Net increase
(decrease) in
contract owners'
equity resulting
from operations.... $135 4,320 541 142 (3,685) (450)
==== ===== === === ====== ====
<CAPTION>
KEMPER VARIABLE SERIES*
-------------------------------
KVS
KEMPER FOCUSED
INDEX LARGE CAP
500 GROWTH
SUBACCOUNT (A) SUBACCOUNT (A)
-------------- --------------
<S> <C> <C>
REVENUE
Dividends and
capital gains
distributions.... -- --
EXPENSES
Mortality and
expense risk and
administrative
charges.......... 10 --
--- --
Net investment income
(loss)............. (10) --
--- --
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net realized gain
on sales of
investments...... 7 --
Change in
unrealized
appreciation
(depreciation) of
investments...... 383 1
--- --
Net realized and
unrealized gain
(loss) on
investments........ 390 1
--- --
Net increase
(decrease) in
contract owners'
equity resulting
from operations.... 380 1
=== ==
</TABLE>
- - ---------------
*Formerly Investors Fund Series
(a) For the period (commencement of operations): May 3, 1999 -- Kemper
Aggressive Growth Subaccount, Dreyfus Socially Responsible Growth Subaccount
and Kemper Technology Growth Subaccount; September 10, 1999 -- Kemper Index
500 Subaccount; October 29, 1999 -- KVS Focused Large Cap Growth Subaccount;
November 1, 1999 -- Alger American Leveraged AllCap Subaccount, Alger
American Balanced Subaccount and Dreyfus MidCap Stock Subaccount; to
December 31, 1999.
See accompanying notes to financial statements.
B-24
<PAGE> 232
<TABLE>
<CAPTION>
DREYFUS
THE ALGER INVESTMENT
SCUDDER VARIABLE LIFE INVESTMENT FUND AMERICAN FUND PORTFOLIOS
------------------------------------------------------------ ------------------------------- --------------
ALGER
SCUDDER VLIF SCUDDER VLIF AMERICAN ALGER DREYFUS
GLOBAL GROWTH AND SCUDDER VLIF SCUDDER VLIF LEVERAGED AMERICAN MIDCAP
DISCOVERY INCOME INTERNATIONAL CAPITAL GROWTH ALLCAP BALANCED STOCK
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT (A) SUBACCOUNT (A) SUBACCOUNT (A)
------------ ------------ ------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
316 737 244 -- -- --
19
84 4 54 -- -- 1
28
----- ---- ----- ----- -- -- --
) 232 733 190 -- -- (1)
(9
----- ---- ----- ----- -- -- --
38 2,937 49 2 -- 5
58
(108) 2,620 2,162 46 4 1
2,210
----- ---- ----- ----- -- -- --
(70) 5,557 2,211 48 4 6
2,268
----- ---- ----- ----- -- -- --
162 6,290 2,401 48 4 5
2,259
===== ==== ===== ===== == == ==
<CAPTION>
THE DREYFUS
SOCIALLY RESPONSIBLE
GROWTH FUND, INC.
---------------------
DREYFUS SOCIALLY
RESPONSIBLE
GROWTH SUBACCOUNT (A)
---------------------
<S> <C>
93
6
---
87
---
31
268
---
299
---
386
===
</TABLE>
B-25
<PAGE> 233
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES WARBURG PINCUS TRUST
-------------------------- ------------------------------
WARBURG
JANUS ASPEN WARBURG PINCUS PINCUS
JANUS ASPEN GROWTH AND EMERGING POST-VENTURE
GROWTH INCOME MARKETS CAPITAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
REVENUE
Dividends and capital gains distributions............... $ 997 105 100 --
EXPENSES
Mortality and expense risk and administrative charges... 1,735 277 7 10
------- ------ --- ---
Net investment income (loss).............................. (738) (172) 93 (10)
------- ------ --- ---
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on sales of investments............... 3,417 430 65 55
Change in unrealized appreciation of investments........ 51,260 17,246 472 544
------- ------ --- ---
Net realized and unrealized gain on investments........... 54,677 17,676 537 599
------- ------ --- ---
Net increase in contract owners' equity resulting from
operations.............................................. $53,939 17,504 630 589
======= ====== === ===
</TABLE>
- - ---------------
See accompanying notes to financial statements.
B-26
<PAGE> 234
(This page intentionally left blank)
B-27
<PAGE> 235
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 KEMPER
MONEY MONEY GOVERNMENT INVESTMENT GLOBAL KEMPER
MARKET MARKET SECURITIES GRADE BOND INCOME HORIZON 5
SUBACCOUNT #1 SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income
(loss)..................... $ 4,221 159 2,815 251 77 40
Net realized gain (loss) on
sales of investments....... -- -- (611) (16) (91) 203
Change in unrealized
appreciation (depreciation)
of investments............. -- -- (2,754) (733) (115) 47
-------- ------ ------- ------ ----- -----
Net increase (decrease) in
contract owners' equity
resulting from
operations............... 4,221 159 (550) (498) (129) 290
-------- ------ ------- ------ ----- -----
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold..... 45,378 2,759 12,331 6,620 1,000 1,504
Net transfers (to) from
affiliate and
subaccounts................ 18,795 (4,779) (4,399) 3,501 (685) 1,348
Payments for units
redeemed................... (37,819) (158) (14,018) (2,364) (100) (771)
-------- ------ ------- ------ ----- -----
Net increase (decrease) in
contract owners' equity
from account unit
transactions............. 26,354 (2,178) (6,086) 7,757 215 2,081
-------- ------ ------- ------ ----- -----
Total increase (decrease) in
contract owners' equity...... 30,575 (2,019) (6,636) 7,259 86 2,371
Beginning of period............ 107,102 4,709 78,345 11,621 1,427 6,817
-------- ------ ------- ------ ----- -----
End of period.................. $137,677 2,690 71,709 18,880 1,513 9,188
======== ====== ======= ====== ===== =====
<CAPTION>
KEMPER VARIABLE SERIES*
------------------------
KEMPER
HIGH KEMPER
YIELD HORIZON 10+
SUBACCOUNT SUBACCOUNT
---------- -----------
<S> <C> <C>
OPERATIONS
Net investment income
(loss)..................... 21,146 121
Net realized gain (loss) on
sales of investments....... (6,838) 1,175
Change in unrealized
appreciation (depreciation)
of investments............. (10,902) (258)
------- ------
Net increase (decrease) in
contract owners' equity
resulting from
operations............... 3,406 1,038
------- ------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold..... 22,709 2,541
Net transfers (to) from
affiliate and
subaccounts................ (27,431) (1,509)
Payments for units
redeemed................... (43,328) (2,105)
------- ------
Net increase (decrease) in
contract owners' equity
from account unit
transactions............. (48,050) (1,073)
------- ------
Total increase (decrease) in
contract owners' equity...... (44,644) (35)
Beginning of period............ 262,362 15,439
------- ------
End of period.................. 217,718 15,404
======= ======
</TABLE>
- - ---------------
*Formerly Investors Fund Series
See accompanying notes to financial statements.
B-28
<PAGE> 236
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
----------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
TOTAL KEMPER VALUE+ KEMPER KEMPER CONTRARIAN SMALL CAP SMALL CAP KEMPER
RETURN HORIZON 20+ GROWTH BLUE CHIP INTERNATIONAL VALUE VALUE GROWTH GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ----------- ---------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
51,140... 62 583 (173) 15,856 5,800 (144) (1,739) (7,131)
29,197... 459 4,628 845 9,865 6,046 (229) 9,762 30,772
8,683.... 215 1,178 4,171 24,305 (24,707) 497 32,251 134,497
-------- ------ ------ ------ ------- ------- ------ ------- --------
89,020... 736 6,389 4,843 50,026 (12,861) 124 40,274 158,138
-------- ------ ------ ------ ------- ------- ------ ------- --------
42,169... 1,140 6,147 13,387 12,302 19,424 4,836 17,628 25,447
)
(49,778 (365) (5,820) 11,996 (27,423) 1,432 (2,966) (22,588) (66,997)
(101,982) (413) (5,397) (2,837) (20,534) (11,571) (3,756) (13,139) (80,300)
-------- ------ ------ ------ ------- ------- ------ ------- --------
)
(109,591 362 (5,070) 22,546 (35,655) 9,285 (1,886) (18,099) (121,850)
-------- ------ ------ ------ ------- ------- ------ ------- --------
)
(20,571 1,098 1,319 27,389 14,371 (3,576) (1,762) 22,175 36,288
736,379.. 9,213 47,005 8,784 145,181 95,850 33,366 143,881 537,745
-------- ------ ------ ------ ------- ------- ------ ------- --------
715,808.. 10,311 48,324 36,173 159,552 92,274 31,604 166,056 574,033
======== ====== ====== ====== ======= ======= ====== ======= ========
</TABLE>
B-29
<PAGE> 237
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
-------------------------------------------------------------------------------------
KEMPER KEMPER- KEMPER-
KEMPER KEMPER KEMPER INTERNATIONAL DREMAN HIGH DREMAN
AGGRESSIVE TECHNOLOGY GLOBAL GROWTH AND RETURN FINANCIAL
GROWTH GROWTH BLUE CHIP INCOME EQUITY SERVICES
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment
income (loss)............. $ (1) 12 (16) 19 (62) (42)
Net realized gain on sales
of investments............ 2 111 28 4 12 53
Change in unrealized
appreciation
(depreciation) of
investments............... 134 4,197 529 119 (3,635) (461)
------ ------ ----- ----- ------ -----
Net increase (decrease)
in contract owners'
equity resulting from
operations.............. 135 4,320 541 142 (3,685) (450)
------ ------ ----- ----- ------ -----
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold.... 578 9,935 1,904 831 18,980 2,922
Net transfers from affiliate
and subaccounts........... 530 5,358 1,247 56 11,471 2,101
Payments for units
redeemed.................. (7) (30) (97) (39) (828) (145)
------ ------ ----- ----- ------ -----
Net increase in contract
owners' equity from
account unit
transactions............ 1,101 15,263 3,054 848 29,623 4,878
------ ------ ----- ----- ------ -----
Total increase in contract
owners' equity.............. 1,236 19,583 3,595 990 25,938 4,428
Beginning of period........... -- -- 288 236 5,436 1,217
------ ------ ----- ----- ------ -----
End of period................. $1,236 19,583 3,883 1,226 31,374 5,645
====== ====== ===== ===== ====== =====
<CAPTION>
KEMPER VARIABLE SERIES*
-----------------------------
KVS FOCUSED
KEMPER INDEX LARGE CAP
500 GROWTH
SUBACCOUNT(A) SUBACCOUNT(A)
------------- -------------
<S> <C> <C>
OPERATIONS
Net investment
income (loss)............. (10) --
Net realized gain on sales
of investments............ 7 --
Change in unrealized
appreciation
(depreciation) of
investments............... 383 1
----- --
Net increase (decrease)
in contract owners'
equity resulting from
operations.............. 380 1
----- --
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold.... 2,840 --
Net transfers from affiliate
and subaccounts........... 3,581 54
Payments for units
redeemed.................. (8) --
----- --
Net increase in contract
owners' equity from
account unit
transactions............ 6,413 54
----- --
Total increase in contract
owners' equity.............. 6,793 55
Beginning of period........... -- --
----- --
End of period................. 6,793 55
===== ==
</TABLE>
- - ---------------
* Formerly Investors Fund Series
(a) For the period (commencement of operations): May 3, 1999 -- Kemper
Aggressive Growth Subaccount, Kemper Technology Growth Subaccount and
Dreyfus Socially Responsible Growth Subaccount; September 10, 1999 -- Kemper
Index 500 Subaccount; October 29, 1999 -- KVS Focused Large Cap Growth
Subaccount; November 1, 1999 -- Alger American Leveraged AllCap Subaccount,
Alger American Balanced Subaccount and Dreyfus MidCap Stock Subaccount; to
December 31, 1999.
See accompanying notes to financial statements.
B-30
<PAGE> 238
<TABLE>
<CAPTION>
THE DREYFUS
DREYFUS SOCIALLY
INVESTMENT RESPONSIBLE GROWTH
SCUDDER VARIABLE LIFE INVESTMENT FUND THE ALGER AMERICAN FUND PORTFOLIOS FUND, INC.
---------------------------------------------------------- ----------------------------- ------------- ------------------
ALGER
SCUDDER VLIF SCUDDER VLIF SCUDDER VLIF AMERICAN ALGER
GLOBAL GROWTH AND SCUDDER VLIF CAPITAL LEVERAGED AMERICAN DREYFUS DREYFUS SOCIALLY
DISCOVERY INCOME INTERNATIONAL GROWTH ALLCAP BALANCED MIDCAP STOCK RESPONSIBLE GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------ ------------ ------------- ------------ ------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(9) 232 733 190 -- -- (1) 87
58 38 2,937 49 2 -- 5 31
2,210 (108) 2,620 2,162 46 4 1 268
----- ------ ------ ------ --- --- --- -----
2,259 162 6,290 2,401 48 4 5 386
----- ------ ------ ------ --- --- --- -----
3,658 5,138 8,107 7,470 487 172 54 1,363
1,744 4,453 12,443 3,461 109 40 64 1,127
(47) (310) (127) (211) -- -- -- (9)
----- ------ ------ ------ --- --- --- -----
5,355 9,281 20,423 10,720 596 212 118 2,481
----- ------ ------ ------ --- --- --- -----
7,614 9,443 26,713 13,121 644 216 123 2,867
744 1,697 869 604 -- -- -- --
----- ------ ------ ------ --- --- --- -----
8,358 11,140 27,582 13,725 644 216 123 2,867
===== ====== ====== ====== === === === =====
</TABLE>
B-31
<PAGE> 239
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES WARBURG PINCUS TRUST
--------------------------------- ---------------------------------------
JANUS ASPEN WARBURG PINCUS WARBURG PINCUS
JANUS ASPEN GROWTH AND EMERGING POST-VENTURE
GROWTH INCOME MARKETS CAPITAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment
income (loss)............... $ (738) (172) 93 (10)
Net realized gain on sales of
investments................. 3,417 430 65 55
Change in unrealized
appreciation
of investments.............. 51,260 17,246 472 544
-------- ------ ----- -----
Net increase
in contract owners'
equity resulting from
operations................ 53,939 17,504 630 589
-------- ------ ----- -----
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold...... 57,097 28,597 1,366 1,171
Net transfers from affiliate
and
subaccounts................. 77,006 19,838 1,000 288
Payments for units redeemed... (7,417) (858) (10) (120)
-------- ------ ----- -----
Net increase in contract
owners' equity from
account
unit transactions......... 126,686 47,577 2,356 1,339
-------- ------ ----- -----
Total increase in contract
owners'
equity........................ 180,625 65,081 2,986 1,928
Beginning of period............. 59,874 2,074 59 85
-------- ------ ----- -----
End of period................... $240,499 67,155 3,045 2,013
======== ====== ===== =====
</TABLE>
- - ---------------
See accompanying notes to financial statements.
B-32
<PAGE> 240
(This page intentionally left blank)
B-33
<PAGE> 241
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
---------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY GOVERNMENT INVESTMENT GLOBAL KEMPER
MARKET MARKET SECURITIES GRADE BOND INCOME HORIZON 5
SUBACCOUNT #1 SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income
(loss)................. $ 3,168 264 3,569 98 35 103
Net realized gain (loss)
on sales of
investments............ -- -- (67) 311 36 236
Change in unrealized
appreciation
(depreciation) of
investments............ -- -- 553 78 56 115
-------- ------ ------- ------ ----- -----
Net increase (decrease)
in contract owners'
equity resulting from
operations........... 3,168 264 4,055 487 127 454
-------- ------ ------- ------ ----- -----
ACCOUNT UNIT TRANSACTIONS
Proceeds from units
sold................... 22,035 6,045 10,692 2,850 47 1,628
Net transfers (to) from
affiliate and
subaccounts............ 29,478 (7,639) 5,342 3,781 933 221
Payments for units
redeemed............... (21,333) (355) (14,565) (955) (6) (384)
-------- ------ ------- ------ ----- -----
Net increase (decrease)
in contract owners'
equity from account
unit transactions.... 30,180 (1,949) 1,469 5,676 974 1,465
-------- ------ ------- ------ ----- -----
Total increase (decrease)
in contract owners'
equity................... 33,348 (1,685) 5,524 6,163 1,101 1,919
Beginning of period........ 73,754 6,394 72,821 5,458 326 4,898
-------- ------ ------- ------ ----- -----
End of period.............. $107,102 4,709 78,345 11,621 1,427 6,817
======== ====== ======= ====== ===== =====
<CAPTION>
KEMPER VARIABLE SERIES*
------------------------
KEMPER
HIGH KEMPER
YIELD HORIZON 10+
SUBACCOUNT SUBACCOUNT
---------- -----------
<S> <C> <C>
OPERATIONS
Net investment income
(loss)................. 17,149 157
Net realized gain (loss)
on sales of
investments............ 4,283 414
Change in unrealized
appreciation
(depreciation) of
investments............ (17,978) 604
------- ------
Net increase (decrease)
in contract owners'
equity resulting from
operations........... 3,454 1,175
------- ------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units
sold................... 27,800 2,644
Net transfers (to) from
affiliate and
subaccounts............ (40,100) 3,301
Payments for units
redeemed............... (34,613) (841)
------- ------
Net increase (decrease)
in contract owners'
equity from account
unit transactions.... (46,913) 5,104
------- ------
Total increase (decrease)
in contract owners'
equity................... (43,459) 6,279
Beginning of period........ 305,821 9,160
------- ------
End of period.............. 262,362 15,439
======= ======
</TABLE>
- - ---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
B-34
<PAGE> 242
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
----------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
TOTAL KEMPER VALUE+ KEMPER KEMPER CONTRARIAN SMALL CAP SMALL CAP KEMPER
RETURN HORIZON 20+ GROWTH BLUE CHIP INTERNATIONAL VALUE VALUE GROWTH GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ----------- ---------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
114,564 143 404 (24) 5,475 1,760 443 18,381 79,715
20,649 397 1,727 102 11,865 6,261 911 4,201 8,570
)
(41,076 309 3,626 589 (3,914) 6,236 (6,089) (2,782) (20,871)
-------- ----- ------ ----- ------- ------ ------ ------- -------
94,137 849 5,757 667 13,426 14,257 (4,735) 19,800 67,414
-------- ----- ------ ----- ------- ------ ------ ------- -------
35,608 2,155 7,814 2,261 8,825 15,517 6,528 17,275 29,595
)
(47,643 116 8,749 4,001 (20,766) (5,407) 1,040 2,566 (26,086)
)
(88,507 (375) (3,236) (223) (16,900) (6,599) (2,717) (8,623) (60,278)
-------- ----- ------ ----- ------- ------ ------ ------- -------
)
(100,542 1,896 13,327 6,039 (28,841) 3,511 4,851 11,218 (56,769)
-------- ----- ------ ----- ------- ------ ------ ------- -------
)
(6,405 2,745 19,084 6,706 (15,415) 17,768 116 31,018 10,645
742,784 6,468 27,921 2,078 160,596 78,082 33,250 112,863 527,100
-------- ----- ------ ----- ------- ------ ------ ------- -------
736,379 9,213 47,005 8,784 145,181 95,850 33,366 143,881 537,745
======== ===== ====== ===== ======= ====== ====== ======= =======
</TABLE>
B-35
<PAGE> 243
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE
KEMPER VARIABLE SERIES* INVESTMENT FUND
------------------------------------------------------------- -----------------------------
KEMPER KEMPER- KEMPER-
KEMPER INTERNATIONAL DREMAN HIGH DREMAN SCUDDER VLIF SCUDDER VLIF
GLOBAL GROWTH AND RETURN FINANCIAL GLOBAL GROWTH AND
BLUE CHIP INCOME EQUITY SERVICES DISCOVERY INCOME
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income
(loss)...................... $ (2) -- (21) (6) (10) (4)
Net realized gain (loss) on
sales of investments........ (2) (2) (10) (5) (19) (19)
Change in unrealized
appreciation of
investments................. 18 9 307 77 97 74
---- --- ----- ----- --- -----
Net increase in contract
owners' equity resulting
from operations........... 14 7 276 66 68 51
---- --- ----- ----- --- -----
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold...... 262 211 4,774 952 555 1,453
Net transfers from affiliate
and subaccounts............. 21 21 524 224 123 278
Payments for units redeemed... (9) (3) (138) (25) (2) (85)
---- --- ----- ----- --- -----
Net increase in contract
owners' equity from
account unit
transactions.............. 274 229 5,160 1,151 676 1,646
---- --- ----- ----- --- -----
Total increase in contract
owners' equity................ 288 236 5,436 1,217 744 1,697
Beginning of period............. -- -- -- -- -- --
---- --- ----- ----- --- -----
End of period................... $288 236 5,436 1,217 744 1,697
==== === ===== ===== === =====
</TABLE>
- - ---------------
* Formerly Investors Fund Series
(a) For the period June 1, 1998 (commencement of operations) to December 31,
1998.
See accompanying notes to financial statements.
B-36
<PAGE> 244
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND JANUS ASPEN SERIES WARBURG PINCUS TRUST
-------------------------------------- ----------------------------- -------------------------------
JANUS ASPEN WARBURG PINCUS WARBURG PINCUS
SCUDDER VLIF SCUDDER VLIF JANUS ASPEN GROWTH AND EMERGING POST-VENTURE
INTERNATIONAL CAPITAL GROWTH GROWTH INCOME MARKETS CAPITAL
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
----------------- ------------------ ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
(5) (2) 1,973 (2) -- --
(7) (13) 1,775 -- (1) --
51 60 9,281 268 2 4
--- --- ------ ----- -- --
39 45 13,029 266 1 4
--- --- ------ ----- -- --
731 559 9,559 1,565 58 79
99 19 10,386 292 -- 2
-- (19) (2,747) (49) -- --
--- --- ------ ----- -- --
830 559 17,198 1,808 58 81
--- --- ------ ----- -- --
869 604 30,227 2,074 59 85
-- -- 29,647 -- -- --
--- --- ------ ----- -- --
869 604 59,874 2,074 59 85
=== === ====== ===== == ==
</TABLE>
B-37
<PAGE> 245
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 an indirect 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-38
<PAGE> 246
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 Government Securities Subaccount..................... 62,065 72,714
Kemper Investment Grade Bond Subaccount..................... 16,897 18,984
Kemper Global Income Subaccount............................. 1,534 1,567
Kemper Horizon 5 Subaccount................................. 6,892 8,587
Kemper High Yield Subaccount................................ 190,485 226,653
Kemper Horizon 10+ Subaccount............................... 10,424 13,758
Kemper Total Return Subaccount.............................. 248,650 599,371
Kemper Horizon 20+ Subaccount............................... 6,393 8,762
Kemper Value+Growth Subaccount.............................. 25,519 39,798
Kemper Blue Chip Subaccount................................. 23,065 31,376
Kemper International Subaccount............................. 74,482 112,057
Kemper Contrarian Value Subaccount.......................... 62,749 99,864
Kemper Small Cap Value Subaccount........................... 29,154 33,409
Kemper Small Cap Growth Subaccount.......................... 62,603 114,297
Kemper Growth Subaccount.................................... 141,800 385,900
Kemper Aggressive Growth Subaccount......................... 884 1,102
Kemper Technology Growth Subaccount......................... 11,020 15,386
Kemper Global Blue Chip Subaccount.......................... 3,138 3,336
Kemper International Growth and Income Subaccount........... 1,185 1,098
Kemper-Dreman High Return Equity Subaccount................. 34,995 34,699
Kemper-Dreman Financial Services Subaccount................. 6,107 6,029
Kemper Index 500 Subaccount................................. 6,201 6,410
KVS Focused Large Cap Growth Subaccount..................... 42 54
SCUDDER VARIABLE LIFE INVESTMENT FUND:
Scudder VLIF Global Discovery Subaccount.................... 634 6,051
Scudder VLIF Growth and Income Subaccount................... 1,016 11,174
Scudder VLIF International Subaccount....................... 1,356 24,915
Scudder VLIF Capital Growth Subaccount...................... 471 11,503
THE ALGER AMERICAN FUND:
Alger American Leveraged AllCap Subaccount.................. 11 598
Alger American Balanced Subaccount.......................... 14 212
DREYFUS INVESTMENT PORTFOLIOS:
Dreyfus MidCap Stock Subaccount............................. 9 122
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
Dreyfus Socially Responsible Growth Subaccount.............. 72 2,541
JANUS ASPEN SERIES :
Janus Aspen Growth Subaccount............................... 7,152 175,772
Janus Aspen Growth and Income Subaccount.................... 3,233 49,641
</TABLE>
B-39
<PAGE> 247
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
WARBURG PINCUS TRUST:
Warburg Pincus Emerging Markets Subaccounts................. 215 $ 2,568
Warburg Pincus Post-Venture Capital Subaccount.............. 105 1,465
----------
TOTAL INVESTMENTS AT COST........................... $2,261,818
==========
</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
Market 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. The Kemper Money Market Subaccount #2 represents funds
all allocated by the owner of a contract to the dollar cost averaging program.
Under the dollar cost averaging ("DCA") program, an owner may pre-designate 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 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 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 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.
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
preservation of capital, with growth of capital as a secondary objective.
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 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 TOTAL RETURN SUBACCOUNT: This subaccount invests in the Kemper Total
Return Portfolio of the Kemper Variable Series. The Portfolio seeks high return,
a combination of income and capital appreciation.
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 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 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 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 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.
B-40
<PAGE> 248
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 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 GROWTH SUBACCOUNT: This subaccount invests in the Kemper Growth Portfolio
of the Kemper Variable Series. The Portfolio seeks maximum appreciation of
capital.
KEMPER AGGRESSIVE GROWTH SUBACCOUNT: This subaccount invests in the Kemper
Aggressive Growth Portfolio of the Kemper Variable Series. The Portfolio seeks
capital appreciation.
KEMPER TECHNOLOGY GROWTH SUBACCOUNT: This subaccount invests in the Kemper
Technology Growth Portfolio of the Kemper Variable Series. The Portfolio seeks
growth of capital.
KEMPER GLOBAL BLUE CHIP SUBACCOUNT: This subaccount invests in the Kemper Global
Blue Chip Portfolio of the Kemper Variable Series. The Portfolio seeks long-term
growth of capital.
KEMPER INTERNATIONAL GROWTH AND INCOME SUBACCOUNT: This subaccount invests in
the Kemper International Growth and Income Portfolio of the Kemper Variable
Series. The Portfolio seeks long-term growth of capital and current income.
KEMPER-DREMAN HIGH RETURN EQUITY SUBACCOUNT: This subaccount invests in the
Kemper-Dreman High Return Equity Portfolio of the Kemper Variable Series. The
Portfolio seeks to achieve a high rate of total return.
KEMPER-DREMAN FINANCIAL SERVICES SUBACCOUNT: This subaccount invests in the
Kemper-Dreman Financial Services Portfolio of the Kemper Variable Series. The
Portfolio seeks long-term capital appreciation.
KEMPER INDEX 500 SUBACCOUNT: This subaccount invests in the Kemper Index 500
Portfolio of the Kemper Variable Series. The Portfolio seeks to match, as
closely as possible, before expenses, the performance of the Standard & Poor's
500 Composite Stock Price Index, which emphasizes stocks of large U.S.
companies.
KVS FOCUSED LARGE CAP GROWTH SUBACCOUNT: This subaccount invests in the KVS
Focused Large Cap Growth Portfolio of the Kemper Variable Series. The Portfolio
seeks growth through long-term capital appreciation.
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF GLOBAL DISCOVERY SUBACCOUNT: This subaccount invests in the Scudder
VLIF Global Discovery Portfolio (Class A Shares) of the Scudder Variable Life
Investment Fund. The Portfolio seeks above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
located throughout the world.
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT: This subaccount invests in the
Scudder VLIF Growth and Income Portfolio (Class A Shares) of the Scudder
Variable Life Investment Fund. The Portfolio seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
SCUDDER VLIF INTERNATIONAL SUBACCOUNT: This subaccount invests in the Scudder
VLIF International Portfolio (Class A Shares) of the Scudder Variable Life
Investment Fund. The Portfolio seeks long-term growth of capital principally
from a diversified portfolio of foreign equity securities.
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT: This subaccount invests in the Scudder
VLIF Capital Growth Portfolio (Class A Shares) of the Scudder Variable Life
Investment Fund. The Portfolio seeks to maximize long-term capital growth from a
portfolio consisting primarily of equity securities.
THE ALGER AMERICAN FUND
ALGER AMERICAN LEVERAGED ALLCAP SUBACCOUNT: This subaccount invests in the Alger
American Leveraged AllCap Portfolio of The Alger American Fund. The Portfolio
seeks long-term capital appreciation.
ALGER AMERICAN BALANCED SUBACCOUNT: This subaccount invests in the Alger
American Balanced Portfolio of The Alger American Fund. The Portfolio seeks
current income and long-term capital appreciation.
DREYFUS INVESTMENT PORTFOLIOS
DREYFUS MIDCAP STOCK SUBACCOUNT: This subaccount invests in the Dreyfus MidCap
Stock Portfolio of the Dreyfus Investment Portfolios. The Portfolio seeks to
provide investment results that are greater than the total return performance of
publicly traded common stocks of medium-size domestic companies in the
aggregate, as represented by the Standard & Poor's MidCap 400(R) Index.
B-41
<PAGE> 249
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
DREYFUS SOCIALLY RESPONSIBLE GROWTH SUBACCOUNT: This subaccount invests in The
Dreyfus Socially Responsible Growth Fund, Inc. The Fund's primary goals is to
provide capital growth through investment in common stocks of companies which
not only meet traditional investment standards, but also conduct their business
in a manner that contributes to the enhancement of the quality of life in
America.
JANUS ASPEN SERIES
JANUS ASPEN GROWTH SUBACCOUNT: This subaccount invests in the Janus Aspen Growth
Portfolio of the Janus Aspen Series. The Portfolio seeks long-term growth of
capital in a manner consistent with the preservation of capital.
JANUS ASPEN GROWTH AND INCOME SUBACCOUNT: This subaccount invests in the Janus
Aspen Growth and Income Portfolio of the Janus Aspen Series. The Portfolio seeks
long-term capital growth and current income.
WARBURG PINCUS TRUST
WARBURG PINCUS EMERGING MARKETS SUBACCOUNT: This subaccount invests in the
Warburg Pincus Emerging Markets Portfolio of the Warburg Pincus Trust. The
Portfolio seeks long-term growth of capital by investing in equity securities of
emerging markets.
WARBURG PINCUS POST-VENTURE CAPITAL SUBACCOUNT: This subaccount invests in the
Warburg Pincus Post-Venture Capital Portfolio of the Warburg Pincus Trust. The
Portfolio seeks long-term growth of capital by investing primarily in equity
securities of U.S. companies considered to be in their post-venture-capital
stage of development.
(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
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
B-42
<PAGE> 250
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 and the Scudder Variable Life Investment
Fund. Investors Brokerage Services, Inc., a wholly-owned subsidiary of KILICO,
is the principal underwriter for the Separate Account.
Fred Alger Management, Inc. is the investment manager of The Alger American
Fund. The Dreyfus Corporation is the investment manager of the Dreyfus
Investment Portfolios and The Dreyfus Socially Responsible Growth Fund, Inc.
Janus Capital is the investment manager of the Janus Aspen Series. Credit Suisse
Asset Management LLC (successor investment manager to Warburg Pincus Asset
Management, Inc.) is the investment manager of the Warburg Pincus Trust. None of
these entities are affiliated with KILICO.
(4) NET TRANSFERS (TO) FROM AFFILIATE AND SUBACCOUNTS
Net transfers (to) from affiliate or subaccounts include transfers of all or
part of the Contract Owner's interest to or from another eligible subaccount or
to the general account of KILICO.
(5) CONTRACT OWNERS' EQUITY
The Contract Owners' equity is affected by the investment results of, and
contract charges to, each subaccount. The accompanying financial statements
include only Contract Owners' payments pertaining to the variable portions of
their contracts and exclude any payments for the market value adjusted or fixed
portions, the latter being included in the general account of KILICO. Contract
Owners may elect to annuitize the contract under one of several annuity options,
as specified in the prospectus.
Contract Owners' equity at December 31, 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
----------
</TABLE>
B-43
<PAGE> 251
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 ADVANTAGE III CONTRACTS (CONTINUED)
KEMPER VARIABLE SERIES (CONTINUED):
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 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
----------
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
----------
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 5.954 25,274
----------
130,665
----------
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 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 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 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 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
----------
</TABLE>
B-44
<PAGE> 252
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
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 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 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
----------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified............................... 1 20.207 24
Flexible Payment, Nonqualified............................ -- 20.207 --
Periodic Payment, Qualified............................... 104 20.167 2,090
Periodic Payment, Nonqualified............................ 34 20.167 681
----------
2,795
----------
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... -- 28.914 --
Flexible Payment, Nonqualified............................ -- 28.914 --
Periodic Payment, Qualified............................... 14 28.882 405
Periodic Payment, Nonqualified............................ 4 28.882 103
----------
508
----------
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
DREYFUS SOCIALLY RESPONSIBLE GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... -- 39.967 --
Flexible Payment, Nonqualified............................ 0 40.163 9
Periodic Payment, Qualified............................... 57 40.084 2,277
Periodic Payment, Nonqualified............................ 8 40.084 328
----------
2,614
----------
JANUS ASPEN SERIES:
JANUS ASPEN GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 12 37.283 440
Flexible Payment, Nonqualified............................ 46 37.283 1,710
Periodic Payment, Qualified............................... 3,541 36.810 130,333
Periodic Payment, Nonqualified............................ 591 36.810 21,769
----------
154,252
----------
TOTAL KEMPER ADVANTAGE III CONTRACT OWNERS'
EQUITY............................................ $1,756,884
==========
</TABLE>
B-45
<PAGE> 253
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
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 GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 3,318 1.429 4,740
Nonqualified.............................................. 11,272 1.429 16,103
----------
20,843
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 1,056 1.141 1,206
Nonqualified.............................................. 3,599 1.141 4,105
----------
5,311
----------
KEMPER GLOBAL INCOME SUBACCOUNT
Qualified................................................. 62 1.040 65
Nonqualified.............................................. 202 1.040 210
----------
275
----------
KEMPER HORIZON 5 SUBACCOUNT
Qualified................................................. 370 1.358 503
Nonqualified.............................................. 2,951 1.358 4,008
----------
4,511
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................. 7,927 1.903 15,088
Nonqualified.............................................. 27,992 1.903 53,278
----------
68,366
----------
KEMPER HORIZON 10+ SUBACCOUNT
Qualified................................................. 1,317 1.499 1,974
Nonqualified.............................................. 3,949 1.499 5,921
----------
7,895
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified................................................. 11,261 2.173 24,475
Nonqualified.............................................. 36,480 2.173 79,286
----------
103,761
----------
KEMPER HORIZON 20+ SUBACCOUNT
Qualified................................................. 1,054 1.640 1,728
Nonqualified.............................................. 2,654 1.640 4,352
----------
6,080
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Qualified................................................. 3,403 1.924 6,546
Nonqualified.............................................. 9,891 1.924 19,028
----------
25,574
----------
KEMPER BLUE CHIP SUBACCOUNT
Qualified................................................. 1,959 1.539 3,013
Nonqualified.............................................. 7,141 1.539 10,986
----------
13,999
----------
KEMPER INTERNATIONAL SUBACCOUNT
Qualified................................................. 4,123 2.655 10,950
Nonqualified.............................................. 15,971 2.655 42,410
----------
53,360
----------
</TABLE>
B-46
<PAGE> 254
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
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 SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 2,345 3.449 8,089
Nonqualified.............................................. 6,735 3.449 23,230
----------
31,319
----------
KEMPER GROWTH SUBACCOUNT
Qualified............................................... 9,649 3.181 30,699
Nonqualified............................................ 27,217 3.181 86,590
----------
117,289
----------
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 GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 263 10.259 2,700
Nonqualified.............................................. 594 10.259 6,090
----------
8,790
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 422 10.062 4,243
Nonqualified.............................................. 518 10.062 5,206
----------
9,449
----------
KEMPER GLOBAL INCOME SUBACCOUNT
Qualified................................................. 69 9.986 689
Nonqualified.............................................. 55 9.986 549
----------
1,238
----------
KEMPER HORIZON 5 SUBACCOUNT
Qualified................................................. 172 10.707 1,840
Nonqualified.............................................. 96 10.707 1,032
----------
2,872
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................. 778 9.717 7,563
Nonqualified.............................................. 1,145 9.717 11,124
----------
18,687
----------
KEMPER HORIZON 10+ SUBACCOUNT
Qualified................................................. 124 10.998 1,361
Nonqualified.............................................. 231 10.998 2,545
----------
3,906
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified................................................. 1,224 11.936 14,608
Nonqualified.............................................. 1,393 11.936 16,627
----------
31,235
----------
</TABLE>
B-47
<PAGE> 255
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 HORIZON 20+ SUBACCOUNT
Qualified................................................. 46 $11.021 $ 510
Nonqualified.............................................. 50 11.021 548
----------
1,058
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Qualified................................................. 231 12.291 2,843
Nonqualified.............................................. 267 12.291 3,286
----------
6,129
----------
KEMPER BLUE CHIP SUBACCOUNT
Qualified................................................. 808 12.827 10,368
Nonqualified.............................................. 920 12.827 11,806
----------
22,174
----------
KEMPER INTERNATIONAL SUBACCOUNT
Qualified................................................. 163 13.549 2,210
Nonqualified.............................................. 188 13.549 2,552
----------
4,762
----------
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 SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 394 14.691 5,793
Nonqualified.............................................. 449 14.691 6,602
----------
12,395
----------
KEMPER GROWTH SUBACCOUNT
Qualified................................................. 407 13.532 5,512
Nonqualified.............................................. 485 13.532 6,564
----------
12,076
----------
KEMPER AGGRESSIVE GROWTH SUBACCOUNT
Qualified................................................. 52 13.859 727
Nonqualified.............................................. 37 13.859 509
----------
1,236
----------
KEMPER TECHNOLOGY GROWTH SUBACCOUNT
Qualified................................................. 576 17.605 10,144
Nonqualified.............................................. 536 17.605 9,439
----------
19,583
----------
KEMPER GLOBAL BLUE CHIP SUBACCOUNT
Qualified................................................. 158 12.624 1,991
Nonqualified.............................................. 150 12.624 1,892
----------
3,883
----------
KEMPER INTERNATIONAL GROWTH AND INCOME SUBACCOUNT
Qualified................................................. 63 10.273 649
Nonqualified.............................................. 56 10.273 577
----------
1,226
----------
KEMPER-DREMAN HIGH RETURN EQUITY SUBACCOUNT
Qualified................................................. 1,744 9.192 16,032
Nonqualified.............................................. 1,645 9.192 15,117
----------
31,149
----------
</TABLE>
B-48
<PAGE> 256
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER-DREMAN FINANCIAL SERVICES SUBACCOUNT
Qualified................................................. 287 $ 9.362 $ 2,691
Nonqualified.............................................. 316 9.362 2,954
----------
5,645
----------
KEMPER INDEX 500 SUBACCOUNT
Qualified................................................. 396 10.735 4,254
Nonqualified.............................................. 237 10.735 2,539
----------
6,793
----------
KVS FOCUSED LARGE CAP GROWTH SUBACCOUNT
Qualified................................................. 4 12.747 47
Nonqualified.............................................. 1 12.747 8
----------
55
----------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER VLIF GLOBAL DISCOVERY SUBACCOUNT
Qualified................................................. 243 16.430 3,993
Nonqualified.............................................. 266 16.430 4,365
----------
8,358
----------
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT
Qualified................................................. 569 10.096 5,749
Nonqualified.............................................. 504 10.096 5,089
----------
10,838
----------
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Qualified................................................. 541 14.990 8,109
Nonqualified.............................................. 1,112 14.990 16,665
----------
24,774
----------
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT
Qualified................................................. 443 14.435 6,394
Nonqualified.............................................. 473 14.435 6,823
----------
13,217
----------
THE ALGER AMERICAN FUND:
ALGER AMERICAN LEVERAGED ALLCAP SUBACCOUNT
Qualified................................................. 36 13.184 477
Nonqualified.............................................. 13 13.184 167
----------
644
----------
ALGER AMERICAN BALANCED SUBACCOUNT
Qualified................................................. 16 11.041 181
Nonqualified.............................................. 3 11.041 35
----------
216
----------
DREYFUS INVESTMENT PORTFOLIOS:
DREYFUS MIDCAP STOCK SUBACCOUNT
Qualified................................................. 3 10.992 28
Nonqualified.............................................. 9 10.992 95
----------
123
----------
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
DREYFUS SOCIALLY RESPONSIBLE GROWTH SUBACCOUNT
Qualified................................................. 21 11.289 241
Nonqualified.............................................. 1 11.289 12
----------
253
----------
JANUS ASPEN SERIES:
JANUS ASPEN GROWTH SUBACCOUNT
Qualified................................................. 2,556 16.958 43,343
Nonqualified.............................................. 2,530 16.958 42,904
----------
86,247
----------
JANUS ASPEN GROWTH AND INCOME SUBACCOUNT
Qualified................................................. 1,678 20.663 34,666
Nonqualified.............................................. 1,572 20.663 32,489
----------
67,155
----------
</TABLE>
B-49
<PAGE> 257
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)
WARBURG PINCUS TRUST:
WARBURG PINCUS EMERGING MARKETS SUBACCOUNT
Qualified................................................. 109 $14.302 $ 1,558
Nonqualified.............................................. 104 14.302 1,487
----------
3,045
----------
WARBURG PINCUS POST-VENTURE CAPITAL SUBACCOUNT
Qualified................................................. 52 15.673 810
Nonqualified.............................................. 77 15.673 1,203
----------
2,013
----------
TOTAL KEMPER DESTINATIONS CONTRACT OWNERS' EQUITY... $ 461,831
==========
FARMERS VARIABLE ANNUITIES I CONTRACTS
KEMPER VARIABLE SERIES:
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
----------
KEMPER-DREMAN HIGH RETURN EQUITY SUBACCOUNT
Qualified................................................. 4 9.043 35
Nonqualified.............................................. 21 9.043 190
----------
225
----------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT
Qualified................................................. 8 10.293 87
Nonqualified.............................................. 21 10.293 215
----------
302
----------
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Qualified................................................. 0 15.038 6
Nonqualified.............................................. 0 15.038 7
----------
13
----------
TOTAL FARMERS VARIABLE ANNUITIES I CONTRACT OWNERS'
EQUITY............................................ $ 837
==========
</TABLE>
B-50
<PAGE> 258
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
------------------------------------
QUALIFIED NON-QUALIFIED
PLANS PLANS
STATE --------- -------------
<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-51
<PAGE> 259
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
- - --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- - --------------------------------------------------------------------------------
FARMERS VARIABLE ANNUITY I
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 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-8
Experts..................................................... B-9
Financial Statements........................................ B-9
</TABLE>
<PAGE> 260
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Fund by
each of the Subaccounts. All expenses incurred in the operations of the Separate
Account, except the charge for mortality and expense risk and administrative
expenses, and records maintenance charge (as described in the Prospectus) are
borne by KILICO.
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the years ended December 31, 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 affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six and one-quarter percent (6 1/4%)
of Purchase Payments. During 1999, KILICO incurred gross commissions payable of
approximately $.1 million to licensed insurance agents.
PERFORMANCE INFORMATION OF SUBACCOUNTS
As described in the Prospectus, a Subaccount's historical performance may be
shown in the form of standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, the Kemper Government Securities Subaccount, Scudder VLIF Bond
Subaccount, PIMCO Low Duration Bond Subaccount and PIMCO Foreign Bond
Subaccount; and "yield" and "effective yield" information may be provided in the
case of the Scudder VLIF Money Market Subaccount. These various measures of
performance are described below.
A Subaccount's standardized average annual total return quotation is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a
Subaccount for a specific period is found by first taking a hypothetical $1,000
investment in each of the Subaccount's units on the first day of the period at
the maximum offering price, which is the Accumulation Unit value per unit
("initial investment") and computing the ending redeemable value ("redeemable
value") of that investment at the end of the period. The redeemable value
reflects the effect of the applicable Withdrawal Charge that may be imposed at
the end of the period as well as all other recurring charges and fees applicable
under the Contract to all Contract Owner accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. Standardized average annual total return figures
are annualized and, therefore, represent the average annual percentage change in
the value of a Subaccount over the applicable period.
No standard formula has been prescribed for calculating nonstandardized total
return performance. Nonstandardized total return performance for a specific
period is calculated by first taking an investment (assumed to be $40,000 below)
in each Subaccount's units on the first day of the period at the maximum
offering price, which is the Accumulation Unit value per unit ("initial
investment") and computing the ending value ("ending value") of that investment
at the end of the period. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period or the
effect of the Records Maintenance Charge, and thus may be higher than if such
charges were deducted. Premium taxes are not included in the term charges. The
nonstandardized total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. An assumed
investment of $40,000 was chosen because that approximates the size of a typical
account. Both annualized and nonannualized (cumulative) nonstandardized total
return figures may be provided. Annualized nonstandardized total return figures
represent the average annual percentage charge in the value of a Subaccount over
the applicable period while nonannualized (cumulative) figures represent the
actual percentage change over the applicable period.
B-1
<PAGE> 261
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover periods of one, three, five and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in a
Subaccount (life of Subaccount). Nonstandardized total return may cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper High Yield Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount and the Kemper Government
Securities Subaccount is computed in accordance with a standard method
prescribed by rules of the Securities and Exchange Commission. The yields for
the Kemper High Yield Subaccount and the Kemper Government Securities
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 Scudder VLIF Money Market Subaccount's yield is computed in accordance with
a standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit value during
the period is divided by the Accumulation Unit value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Separate Account's portfolio are not included in the
calculation. The Scudder VLIF Money Market #1 and #2 Subaccounts' yields for the
seven-day period ended March 31, 2000 were 4.26% and 5.63%, respectively, and
average portfolio maturity was days.
The Scudder VLIF Money Market Subaccount's effective yield is determined by
taking the base period return (computed as described above) and calculating the
effect of assumed compounding. The formula for the effective yield is: (base
period return +1) (365) / (7) - 1. The Scudder VLIF Money Market #1 and #2
Subaccounts' effective yields for the seven day period ended March 31, 2000 were
4.35% and 5.79%, respectively.
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
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
B-2
<PAGE> 262
Accumulation Unit value will fluctuate. Factors affecting a Subaccount's
performance include general market conditions, operating expenses and investment
management. Units of a Subaccount are redeemable at Accumulation Unit value,
which may be more or less than original cost. The standardized performance
figures include the deduction of all expenses and fees, including a prorated
portion of the Records Maintenance Charge. Redemptions within the first seven
years after purchase may be subject to a Withdrawal Charge that ranges from 7%
the first year to 0% after seven years. Yield, effective yield and
nonstandardized total return do not reflect the effect of the Withdrawal Charge
or premium taxes that may be imposed upon the redemption of units. In addition,
nonstandardized total return figures do not include the effect of the Records
Maintenance Charge. Thus, yield, effective yield and nonstandardized total
return figures may be higher than if these charges were deducted. Standardized
average annual total return reflects the effect of the applicable Withdrawal
Charge (but not premium tax) that may be imposed at the end of the period in
question.
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes 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 following tables include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1999.
B-3
<PAGE> 263
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(STANDARDIZED AND NON-STANDARDIZED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
------------------------------- --------------
YEAR TO DATE (%) ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
RETURN(3) VALUE(4) RETURN RETURN RETURN
---------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
SCUDDER VLIF MONEY MARKET SUBACCOUNT....... 3.29%
Life of Subaccount (from 03/12/99)....... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85)........ $71,514 78.79% 4.10% N/A
Ten Years................................ 56,303 40.76 3.48 N/A
Five Years............................... 48,112 20.28 3.76 N/A
Three Years.............................. 44,547 11.37 3.65 N/A
One Year................................. 41,317 3.29 3.29 N/A
SCUDDER VLIF BOND SUBACCOUNT............... -2.32
Life of Subaccount (from 04/07/99)....... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85)........ 95,930 139.83 6.23 N/A
Ten Years................................ 70,905 77.26 5.89 N/A
Five Years............................... 52,221 30.55 5.48 N/A
Three Years.............................. 44,187 10.47 3.37 N/A
One Year................................. 39,073 -2.32 -2.32 N/A
KEMPER HIGH YIELD SUBACCOUNT(5)............ -1.28
Life of Subaccount (from 04/06/82)....... 238,841 497.10 10.61 10.60%
Life of Portfolio (from 04/06/82)........ 238,841 497.10 10.61 10.60
Ten Years................................ 94,190 135.48 8.94 8.93
Five Years............................... 56,658 41.65 7.21 6.41
Three Years.............................. 43,495 8.74 2.83 1.25
One Year................................. 39,486 -1.28 -1.28 -7.52
KEMPER GOVERNMENT SECURITIES SUBACCOUNT.... -0.71
Life of Subaccount (from 11/03/89)....... 70,321 75.80 5.71 5.70
Life of Portfolio (from 09/03/87)........ 80,029 100.07 5.78 N/A
Ten Years................................ 69,471 73.68 5.67 5.66
Five Years............................... 53,607 34.02 6.03 5.24
Three Years.............................. 45,058 12.65 4.05 2.45
One Year................................. 39,717 -0.71 -0.71 -6.98
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. See page B-6 for additional information.
B-4
<PAGE> 264
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT.............. 4.34%
Life of Subaccount (from 06/01/98)................... $ 40,385 0.96% 0.35% -1.67%
Life of Portfolio (from 05/02/94).................... 92,351 130.88 15.91 N/A
Five Years........................................... 88,845 122.11 17.28 N/A
Three Years.......................................... 56,764 41.91 12.38 N/A
One Year............................................. 41,734 4.34 4.34 -2.26
KEMPER SMALL CAP GROWTH SUBACCOUNT..................... 32.70
Life of Subaccount (from 05/02/94)................... 137,190 242.98 24.29 23.81
Life of Portfolio (from 05/02/94).................... 137,190 242.98 24.29 23.81
Five Years........................................... 133,148 232.87 27.19 26.62
Three Years.......................................... 82,064 105.16 27.07 25.54
One Year............................................. 53,081 32.70 32.70 25.43
JANUS ASPEN CAPITAL APPRECIATION SUBACCOUNT(6)......... 64.70
Life of Subaccount (from 03/22/99)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/97).................... 128,849 222.12 55.02 N/A
One Year............................................. 65,878 64.70 64.70 N/A
SCUDDER VLIF INTERNATIONAL SUBACCOUNT.................. 52.38
Life of Subaccount (from 06/01/98)................... 59,959 49.90 3.93 3.44
Life of Portfolio (from 05/01/87).................... 167,592 318.98 11.96 N/A
Ten Years............................................ 120,964 202.41 11.70 N/A
Five Years........................................... 95,145 137.86 18.92 N/A
Three Years.......................................... 76,710 91.78 24.24 N/A
One Year............................................. 60,953 52.38 52.38 45.11
TEMPLETON DEVELOPING MARKETS SUBACCOUNT(7)............. 49.09
Life of Subaccount (from 03/12/99)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/97).................... 30,922 -22.69 -9.20 N/A
One Year............................................. 59,634 49.09 49.09 N/A
KEMPER-DREMAN HIGH RETURN EQUITY SUBACCOUNT............ -12.38
Life of Subaccount (from 06/01/98)................... 36,777 -8.06 -5.17 -9.00
Life of Portfolio (from 05/01/98).................... 35,717 -10.71 -6.59 N/A
One Year............................................. 35,046 -12.38 -12.38 -17.92
PIMCO LOW DURATION BOND SUBACCOUNT..................... 1.02
Life of Subaccount (from 03/12/99)................... N/A N/A N/A N/A
Life of Portfolio (from 02/16/99).................... 40,407 1.02 N/A N/A
PIMCO FOREIGN BOND SUBACCOUNT.......................... -2.30
Life of Subaccount (from 03/12/99)................... N/A N/A N/A N/A
Life of Portfolio (from 02/16/99).................... 39,081 -2.30 N/A N/A
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. See page B-6 for additional information.
B-5
<PAGE> 265
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Non-Standardized Total Return figures quoted are based on a hypothetical
$40,000 initial investment and assumes the deduction of all recurring
charges and fees applicable under the Contract except for the Withdrawal
Charge and any charge for applicable premium taxes which may be imposed in
certain states.
(2) The Standardized Average Annual Total Return figures quoted are based on a
hypothetical $1,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract including the
applicable Withdrawal Charge that may be imposed at the end of the quoted
period. Premium taxes are not reflected.
(3) The Year to Date percentage return figures quoted are based on the change in
unit values.
(4) The Ending Values quoted are based on a $40,000 initial investment and
assumes the deduction of all recurring charges and fees applicable under the
Contract except for the Withdrawal Charge and any charge for applicable
premium taxes which may be imposed in certain states.
(5) The high yield potential offered by this Subaccount reflects the substantial
risks associated with investments in high-yield bonds.
(6) There is presently no standardized performance data for the Janus Aspen
Capital Appreciation Subaccount, Templeton Developing Markets Subaccount,
PIMCO Low Duration Bond Subaccount and PIMCO Foreign Bond Subaccount because
they are newly formed. Standardized data will be included when it becomes
available.
(7) Performance of Class 2 Shares for periods after May 1, 1997 reflects Class
2's higher annual fees and expenses resulting from its Rule 12b-1 plan.
Maximum annual plan expenses are 0.25%. Past expense reductions by the
portfolio's manager increased returns.
B-6
<PAGE> 266
The following tables illustrate an assumed $40,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from the inception date of each Portfolio to December 31, 1999.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1987 ............................... $40,113
1988 ............................... 40,803
1989 ............................... 46,079
1990 ............................... 49,938
1991 ............................... 56,802
1992 ............................... 59,351
1993 ............................... 62,354
1994 ............................... 59,715
1995 ............................... 70,195
1996 ............................... 71,044
1997 ............................... 76,353
1998 ............................... 80,597
1999 ............................... 80,029
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1982 .............................. $ 49,487
1983 .............................. 56,067
1984 .............................. 62,325
1985 .............................. 74,906
1986 .............................. 87,079
1987 .............................. 91,017
1988 .............................. 104,107
1989 .............................. 101,410
1990 .............................. 84,555
1991 .............................. 126,846
1992 .............................. 147,452
1993 .............................. 174,666
1994 .............................. 168,562
1995 .............................. 195,336
1996 .............................. 219,548
1997 .............................. 241,708
1998 .............................. 241,834
1999 .............................. 238,841
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1994 .............................. $ 41,215
1995 .............................. 52,902
1996 .............................. 66,871
1997 .............................. 88,557
1998 .............................. 103,390
1999 .............................. 137,190
</TABLE>
<TABLE>
<CAPTION>
KEMPER-DREMAN HIGH RETURN
EQUITY SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1998 ............................... $40,766
1999 ............................... 35,717
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF MONEY MARKET SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1985 ............................... $41,035
1986 ............................... 42,868
1987 ............................... 44,800
1988 ............................... 47,318
1989 ............................... 50,806
1990 ............................... 54,043
1991 ............................... 56,399
1992 ............................... 57,472
1993 ............................... 58,118
1994 ............................... 59,454
1995 ............................... 61,954
1996 ............................... 64,214
1997 ............................... 66,670
1998 ............................... 69,234
1999 ............................... 71,514
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF GROWTH AND INCOME
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1994 ............................... $41,578
1995 ............................... 54,021
1996 ............................... 65,077
1997 ............................... 83,736
1998 ............................... 88,512
1999 ............................... 92,351
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1987 .............................. $ 35,409
1988 .............................. 40,768
1989 .............................. 55,419
1990 .............................. 50,462
1991 .............................. 55,468
1992 .............................. 53,012
1993 .............................. 72,052
1994 .............................. 70,457
1995 .............................. 77,209
1996 .............................. 87,390
1997 .............................. 93,997
1998 .............................. 109,981
1999 .............................. 167,592
</TABLE>
B-7
<PAGE> 267
<TABLE>
<CAPTION>
SCUDDER VLIF BOND SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1985 ............................... $42,748
1986 ............................... 47,334
1987 ............................... 47,250
1988 ............................... 49,145
1989 ............................... 54,117
1990 ............................... 57,674
1991 ............................... 66,903
1992 ............................... 70,603
1993 ............................... 78,257
1994 ............................... 73,480
1995 ............................... 85,651
1996 ............................... 86,839
1997 ............................... 93,437
1998 ............................... 98,204
1999 ............................... 95,930
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN CAPITAL
APPRECIATION SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1997 ............................... $50,173
1998 ............................... 78,235
1999 ............................... 128,849
</TABLE>
<TABLE>
<CAPTION>
PIMCO LOW DURATION BOND
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1999 ............................... $40,407
</TABLE>
<TABLE>
<CAPTION>
PIMCO FOREIGN BOND SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1999 ............................... $39,081
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON DEVELOPING
MARKETS SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- - ----- -----
<C> <S> <C>
1997 ............................... $26,634
1998 ............................... 20,741
1999 ............................... 30,922
</TABLE>
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED
ANNUITY CONVENTIONAL
AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- CONTRIBUTIONS
TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------
<S> <C> <C> <C>
10 Years.......................................... $107,946 $ 86,448 $ 81,693
20 Years.......................................... 233,048 165,137 133,476
30 Years.......................................... 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts. Income on
Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10% tax
penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following annuity charges and
expenses: 1.25% mortality and expense risk; .10% administration charges; 7%
maximum deferred withdrawal charge; and $30 annual records maintenance charge.
The tax-deferred accumulation would be reduced if these charges were reflected.
No implication is intended by the use of these assumptions that the return shown
is guaranteed in any way or that the return shown represents an average or
expected rate of return over the period of the Contracts. [IMPORTANT--THIS IS
NOT AN ILLUSTRATION OF YIELD OR RETURN].
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of
B-8
<PAGE> 268
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 statement 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
assets attributable to other variable annuity contracts offered by KILICO
through the Separate Account.
B-9
<PAGE> 269
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
Government Securities Subaccount, Kemper High Yield Subaccount, Kemper Small Cap
Growth Subaccount, Kemper-Dreman High Return Equity Subaccount (investment
options within the Kemper Variable Series, formerly Investors Fund Series),
Scudder VLIF Growth and Income Subaccount, Scudder VLIF International
Subaccount, Scudder VLIF Bond Subaccount (investment options within the Scudder
Variable Life Investment Fund), Janus Aspen Capital Appreciation Subaccount
(investment option within the Janus Aspen Series), PIMCO Low Duration Bond
Subaccount and PIMCO Foreign Bond Subaccount (investment options within the
PIMCO Variable Insurance Trust) thereof at December 31, 1999, and the changes in
their contract owners' equity for each of the two years then ended and for each
of the periods presented, except for the Scudder VLIF Bond Subaccount as to
which the period is April 7, 1999 (commencement of operations) to December 31,
1999, Janus Aspen Capital Appreciation Subaccount as to which the period is
March 22, 1999 (commencement of operations) to December 31, 1999, the PIMCO Low
Duration Bond Subaccount and the PIMCO Foreign Bond Subaccount as to which the
period is March 12, 1999 (commencement of operations) to December 31, 1999, 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-10
<PAGE> 270
This page intentionally left blank.
B-11
<PAGE> 271
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCUDDER VARIABLE
LIFE INVESTMENT
KEMPER VARIABLE SERIES* FUND
------------------------------------------------------- ----------------
KEMPER KEMPER KEMPER-DREMAN SCUDDER VLIF
GOVERNMENT KEMPER SMALL CAP HIGH RETURN GROWTH AND
SECURITIES HIGH YIELD GROWTH EQUITY INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio
funds, at current values............. $71,783 218,357 166,144 31,371 11,140
Dividends and other receivables........ -- 31 67 3 --
------- ------- ------- ------ ------
Total assets.................... 71,783 218,388 166,211 31,374 11,140
------- ------- ------- ------ ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and
administrative charges............. 68 225 155 -- --
Other payables....................... 6 445 -- -- --
------- ------- ------- ------ ------
Total liabilities............... 74 670 155 -- --
------- ------- ------- ------ ------
Contract owners' equity................ $71,709 217,718 166,056 31,374 11,140
======= ======= ======= ====== ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of proceeds from units sold over
payments for units redeemed.......... $34,942 1,825 65,173 34,783 10,927
Accumulated net investment income
(loss)............................... 37,352 220,219 23,953 (83) 228
Accumulated net realized gain (loss) on
sales of investments................. 346 3,970 25,083 2 19
Unrealized appreciation (depreciation)
of investments....................... (931) (8,296) 51,847 (3,328) (34)
------- ------- ------- ------ ------
Contract owners' equity................ $71,709 217,718 166,056 31,374 11,140
======= ======= ======= ====== ======
</TABLE>
- - ---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
B-12
<PAGE> 272
<TABLE>
<CAPTION>
PIMCO VARIABLE
SCUDDER VARIABLE LIFE INVESTMENT FUND JANUS ASPEN SERIES INSURANCE TRUST
------------------------------------- ------------------ -----------------------------
JANUS ASPEN PIMCO PIMCO
SCUDDER VLIF SCUDDER VLIF CAPITAL LOW DURATION FOREIGN
INTERNATIONAL BOND APPRECIATION BOND BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
27,586 176 743 22 250
1 -- -- -- --
------ --- --- -- ---
27,587 176 743 22 250
------ --- --- -- ---
3 -- -- -- --
2 -- -- -- 1
------ --- --- -- ---
5 -- -- -- 1
------ --- --- -- ---
27,582 176 743 22 249
====== === === == ===
21,253 174 565 22 246
728 (1) (2) 1 6
2,930 2 4 -- (1)
2,671 1 176 (1) (2)
------ --- --- -- ---
27,582 176 743 22 249
====== === === == ===
</TABLE>
B-13
<PAGE> 273
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCUDDER VARIABLE
LIFE INVESTMENT
KEMPER VARIABLE SERIES* FUND
------------------------------------------------------- ----------------
KEMPER KEMPER KEMPER-DREMAN SCUDDER VLIF
GOVERNMENT KEMPER SMALL CAP HIGH RETURN GROWTH AND
SECURITIES HIGH YIELD GROWTH EQUITY INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUE
Dividends and capital gains
distributions......................... $ 3,826 24,402 -- 263 316
EXPENSES
Mortality and expense risk and
administrative charges................ 1,011 3,256 1,739 325 84
------- ------- ------ ------ ----
Net investment income (loss).............. 2,815 21,146 (1,739) (62) 232
------- ------- ------ ------ ----
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of
investments........................... (611) (6,838) 9,762 12 38
Change in unrealized appreciation
(depreciation) of investments......... (2,754) (10,902) 32,251 (3,635) (108)
------- ------- ------ ------ ----
Net realized and unrealized gain (loss) on
investments............................. (3,365) (17,740) 42,013 (3,623) (70)
------- ------- ------ ------ ----
Net increase (decrease) in contract
owners' equity resulting from
operations.............................. $ (550) 3,406 40,274 (3,685) 162
======= ======= ====== ====== ====
</TABLE>
- - ---------------
* Formerly Investors Fund Series
(a) For the period (commencement of operations): April 7, 1999 - Scudder VLIF
Bond Subaccount; March 22, 1999 - Janus Aspen Capital Appreciation
Subaccount; March 12, 1999 - PIMCO Low Duration Bond Subaccount and PIMCO
Foreign Bond Subaccount; to December 31, 1999.
See accompanying notes to financial statements.
B-14
<PAGE> 274
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND JANUS ASPEN SERIES PIMCO VARIABLE INSURANCE TRUST
-------------------------------------- ------------------ -------------------------------
JANUS ASPEN PIMCO PIMCO
SCUDDER VLIF SCUDDER VLIF CAPITAL LOW DURATION FOREIGN
INTERNATIONAL BOND APPRECIATION BOND BOND
SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
----------------- ------------------ ------------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
737........ -- 2 1 8
4 1 4 -- 2
----- -- --- -- --
733 (1) (2) 1 6
----- -- --- -- --
2,937 2 4 -- (1)
2,620 1 176 (1) (2)
----- -- --- -- --
5,557 3 180 (1) (3)
----- -- --- -- --
6,290 2 178 -- 3
===== == === == ==
</TABLE>
B-15
<PAGE> 275
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCUDDER VARIABLE
LIFE INVESTMENT
KEMPER VARIABLE SERIES* FUND
------------------------------------------------------- ----------------
KEMPER KEMPER KEMPER-DREMAN SCUDDER VLIF
GOVERNMENT KEMPER SMALL CAP HIGH RETURN GROWTH AND
SECURITIES HIGH YIELD GROWTH EQUITY INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)............ $ 2,815 21,146 (1,739) (62) 232
Net realized gain (loss) on sales of
investments........................... (611) (6,838) 9,762 12 38
Change in unrealized appreciation
(depreciation) of investments......... (2,754) (10,902) 32,251 (3,635) (108)
-------- ------- ------- ------ ------
Net increase (decrease) in contract
owners' equity resulting from
operations.......................... (550) 3,406 40,274 (3,685) 162
-------- ------- ------- ------ ------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold................ 12,331 22,709 17,628 18,980 5,138
Net transfers (to) from affiliate and
subaccounts........................... (4,399) (27,431) (22,588) 11,471 4,453
Payments for units redeemed............. (14,018) (43,328) (13,139) (828) (310)
-------- ------- ------- ------ ------
Net increase (decrease) in contract
owners' equity from account unit
transactions........................ (6,086) (48,050) (18,099) 29,623 9,281
-------- ------- ------- ------ ------
Total increase (decrease) in contract
owners' equity.......................... (6,636) (44,644) 22,175 25,938 9,443
Beginning of period....................... 78,345 262,362 143,881 5,436 1,697
-------- ------- ------- ------ ------
End of period............................. $ 71,709 217,718 166,056 31,374 11,140
======== ======= ======= ====== ======
</TABLE>
- - ---------------
* Formerly Investors Fund Series
(a) For the period (commencement of operations): April 7, 1999 - Scudder VLIF
Bond Subaccount; March 22, 1999 - Janus Aspen Capital Appreciation
Subaccount; March 12, 1999 - PIMCO Low Duration Bond Subaccount and PIMCO
Foreign Bond Subaccount: to December 31, 1999.
See accompanying notes to financial statements.
B-16
<PAGE> 276
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND JANUS ASPEN SERIES PIMCO VARIABLE INSURANCE TRUST
------------------------------------- ------------------ -------------------------------
JANUS ASPEN PIMCO PIMCO
SCUDDER VLIF SCUDDER VLIF CAPITAL LOW DURATION FOREIGN
INTERNATIONAL BOND APPRECIATION BOND BOND
SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
733 (1) (2) 1 6
2,937 2 4 -- (1)
2,620 1 176 (1) (2)
------ --- --- -- ---
6,290 2 178 -- 3
------ --- --- -- ---
8,107 46 550 22 261
12,443 130 23 -- (7)
(127) (2) (8) -- (8)
------ --- --- -- ---
20,423 174 565 22 246
------ --- --- -- ---
26,713 176 743 22 249
869 -- -- -- --
------ --- --- -- ---
27,582 176 743 22 249
====== === === == ===
</TABLE>
B-17
<PAGE> 277
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE
KEMPER VARIABLE SERIES* INVESTMENT FUND
---------------------------------------------------- -----------------------------
KEMPER KEMPER KEMPER-DREMAN SCUDDER VLIF
GOVERNMENT KEMPER SMALL CAP HIGH RETURN GROWTH AND SCUDDER VLIF
SECURITIES HIGH YIELD GROWTH EQUITY INCOME INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)..... $ 3,569 17,149 18,381 (21) (4) (5)
Net realized gain (loss) on sales
of investments................. (67) 4,283 4,201 (10) (19) (7)
Change in unrealized appreciation
(depreciation) of
investments.................... 553 (17,978) (2,782) 307 74 51
-------- ------- ------- ----- ----- ---
Net increase in contract
owners' equity resulting from
operations................... 4,055 3,454 19,800 276 51 39
-------- ------- ------- ----- ----- ---
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold......... 10,692 27,800 17,275 4,774 1,453 731
Net transfers (to) from affiliate
and subaccounts................ 5,342 (40,100) 2,566 524 278 99
Payments for units redeemed...... (14,565) (34,613) (8,623) (138) (85) --
-------- ------- ------- ----- ----- ---
Net increase (decrease) in
contract owners' equity from
account unit transactions.... 1,469 (46,913) 11,218 5,160 1,646 830
-------- ------- ------- ----- ----- ---
Total increase (decrease) in
contract owners' equity.......... 5,524 (43,459) 31,018 5,436 1,697 869
Beginning of period................ 72,821 305,821 112,863 -- -- --
-------- ------- ------- ----- ----- ---
End of period...................... $ 78,345 262,362 143,881 5,436 1,697 869
======== ======= ======= ===== ===== ===
</TABLE>
- - ---------------
* Formerly Investors Fund Series
(a) For the period June 1, 1998 (commencement of operations) to December 31,
1998.
See accompanying notes to financial statements.
B-18
<PAGE> 278
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 an indirect 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-19
<PAGE> 279
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Government Securities Subaccount..................... 62,065 $ 72,714
Kemper High Yield Subaccount................................ 190,485 226,653
Kemper Small Cap Growth Subaccount.......................... 62,603 114,297
Kemper-Dreman High Return Equity Subaccount................. 34,995 34,699
SCUDDER VARIABLE LIFE INVESTMENT FUND:
Scudder VLIF Growth and Income Subaccount................... 1,016 11,174
Scudder VLIF International Subaccount....................... 1,356 24,915
Scudder VLIF Bond Subaccount................................ 27 175
JANUS ASPEN SERIES:
Janus Aspen Capital Appreciation Subaccount................. 22 567
PIMCO VARIABLE INSURANCE TRUST:
PIMCO Low Duration Bond Subaccount.......................... 2 23
PIMCO Foreign Bond Subaccount............................... 27 252
--------
TOTAL INVESTMENTS AT COST......................... $485,469
========
</TABLE>
A description of the underlying investments of the subaccounts are summarized
below.
KEMPER VARIABLE SERIES
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 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 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-DREMAN HIGH RETURN EQUITY SUBACCOUNT: This subaccount invests in the
Kemper-Dreman High Return Equity Portfolio of the Kemper Variable Series. The
Portfolio seeks to achieve a high rate of total return.
B-20
<PAGE> 280
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT: This subaccount invests in the
Scudder VLIF Growth and Income Portfolio (Class A Shares) of the Scudder
Variable Life Investment Fund. The Portfolio seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
SCUDDER VLIF INTERNATIONAL SUBACCOUNT: This subaccount invests in the Scudder
VLIF International Portfolio (Class A Shares) of the Scudder Variable Life
Investment Fund. The Portfolio seeks long-term growth of capital principally
from a diversified portfolio of foreign equity securities.
SCUDDER VLIF BOND SUBACCOUNT: This subaccount invests in the Scudder VLIF Bond
Portfolio (Class A Shares) of the Scudder Variable Life Investment Fund. The
Portfolio seeks high income from a high quality portfolio of bonds.
JANUS ASPEN SERIES
JANUS ASPEN CAPITAL APPRECIATION SUBACCOUNT: This subaccount invests in the
Janus Aspen Capital Appreciation Portfolio of the Janus Aspen Series. The
Portfolio seeks long-term growth of capital.
PIMCO VARIABLE INSURANCE TRUST
PIMCO LOW DURATION BOND SUBACCOUNT: This subaccount invests in the PIMCO Low
Duration Bond Portfolio of the PIMCO Variable Insurance Trust. The Portfolio
seeks to maximize total return, consistent with preservation of capital and
prudent investment management.
PIMCO FOREIGN BOND SUBACCOUNT: This subaccount invests in the PIMCO Foreign Bond
Portfolio of the PIMCO Variable Insurance Trust. The Portfolio seeks to maximize
total return, consistent with preservation of capital and prudent investment
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
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
B-21
<PAGE> 281
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 and the Scudder Variable Life Investment
Fund. Investors Brokerage Services, Inc., a wholly-owned subsidiary of KILICO,
is the principal underwriter for the Separate Account.
Janus Capital is the investment manager of the Janus Aspen Series. Pacific
Investment Management Company is the investment manager of the PIMCO Variable
Insurance Trust. Templeton Asset Management Ltd. is the investment manager of
the Templeton Variable Products Series Fund. None of these are affiliated with
KILICO.
(4) NET TRANSFERS (TO) FROM AFFILIATE AND SUBACCOUNTS
Net transfers (to) from affiliate or subaccounts include transfers of all or
part of the Contract Owner's interest to or from another eligible subaccount or
to the general account of KILICO.
(5) CONTRACT OWNERS' EQUITY
The Contract Owners' equity is affected by the investment results of, and
contract charges to, each subaccount. The accompanying financial statements
include only Contract Owners' payments pertaining to the variable portions of
their contracts and exclude any payments for the market value adjusted or fixed
portions, the latter being included in the general account of KILICO. Contract
Owners may elect to annuitize the contract under one of several annuity options,
as specified in the prospectus.
Contract Owners' equity at December 31, 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 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
--------
</TABLE>
B-22
<PAGE> 282
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- --------
<S> <C> <C> <C>
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 5.954 25,274
--------
130,665
--------
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
--------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified.............................. 1 20.207 24
Flexible Payment, Nonqualified........................... -- 20.207 --
Periodic Payment, Qualified.............................. 104 20.167 2,090
Periodic Payment, Nonqualified........................... 34 20.167 681
--------
2,795
--------
SCUDDER VLIF BOND SUBACCOUNT
Flexible Payment, Qualified.............................. -- 6.394 --
Flexible Payment, Nonqualified........................... -- 6.394 --
Periodic Payment, Qualified.............................. 22 6.435 144
Periodic Payment, Nonqualified........................... 1 6.435 5
--------
149
--------
TOTAL KEMPER ADVANTAGE III CONTRACT OWNERS'
EQUITY......................................... $297,730
========
KEMPER PASSPORT CONTRACTS
KEMPER VARIABLE SERIES:
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................ 3,318 $ 1.429 $ 4,740
Nonqualified............................................. 11,272 1.429 16,103
--------
20,843
--------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................ 7,927 1.903 15,088
Nonqualified............................................. 27,992 1.903 53,278
--------
68,366
--------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................ 2,345 3.449 8,089
Nonqualified............................................. 6,735 3.449 23,230
--------
31,319
--------
TOTAL KEMPER PASSPORT CONTRACT OWNERS' EQUITY.... $120,528
========
</TABLE>
B-23
<PAGE> 283
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
KEMPER VARIABLE SERIES:
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................ 263 $10.259 $ 2,700
Nonqualified............................................. 594 10.259 6,090
--------
8,790
--------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................ 778 9.717 7,563
Nonqualified............................................. 1,145 9.717 11,124
--------
18,687
--------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................ 394 14.691 5,793
Nonqualified............................................. 449 14.691 6,602
--------
12,395
--------
KEMPER-DREMAN HIGH RETURN EQUITY SUBACCOUNT
Qualified................................................ 1,744 9.192 16,032
Nonqualified............................................. 1,645 9.192 15,117
--------
31,149
--------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT
Qualified................................................ 569 10.096 5,749
Nonqualified............................................. 504 10.096 5,089
--------
10,838
--------
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Qualified................................................ 541 14.990 8,109
Nonqualified............................................. 1,112 14.990 16,665
--------
24,774
--------
TOTAL KEMPER DESTINATIONS CONTRACT OWNERS'
EQUITY......................................... $106,633
========
</TABLE>
B-24
<PAGE> 284
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- --------
<S> <C> <C> <C>
FARMERS VARIABLE ANNUITY I CONTRACTS
KEMPER VARIABLE SERIES:
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
--------
KEMPER-DREMAN HIGH RETURN EQUITY SUBACCOUNT
Qualified................................................ 4 9.043 35
Nonqualified............................................. 21 9.043 190
--------
225
--------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT
Qualified................................................ 8 10.293 87
Nonqualified............................................. 21 10.293 215
--------
302
--------
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Qualified................................................ 0 15.038 6
Nonqualified............................................. 0 15.038 7
--------
13
--------
SCUDDER VLIF BOND SUBACCOUNT
Qualified................................................ 0 9.763 3
Nonqualified............................................. 2 9.763 24
--------
27
--------
JANUS ASPEN SERIES:
JANUS ASPEN CAPITAL APPRECIATION SUBACCOUNT
Qualified................................................ 13 13.573 182
Nonqualified............................................. 41 13.573 561
--------
743
--------
PIMCO VARIABLE INSURANCE TRUST:
PIMCO LOW DURATION BOND SUBACCOUNT
Qualified................................................ -- 10.111 --
Nonqualified............................................. 2 10.111 22
--------
22
--------
PIMCO FOREIGN BOND SUBACCOUNT
Qualified................................................ 2 9.790 15
Nonqualified............................................. 24 9.790 234
--------
249
--------
TOTAL FARMERS VARIABLE ANNUITY I CONTRACT OWNERS'
EQUITY......................................... $ 1,878
========
</TABLE>
B-25
<PAGE> 285
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
------------------------------------
QUALIFIED NON-QUALIFIED
PLANS PLANS
STATE --------- -------------
<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-26
<PAGE> 286
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of issuance and distribution of the Contracts, other than any
underwriting discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Registration Fees........ $15,151.52
Printing and Engraving...................................... $50,000.00
Accounting Fees and Expenses................................ $15,000.00
Legal Fees and Expenses..................................... $15,000.00
----------
Total Expenses............................... $95,151.52
==========
</TABLE>
- - ---------------
* Expenses are estimated and are for period ending May 1, 2001 for continuous
offering of interest pursuant to Rule 415 but are not deducted from proceeds.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI, Section 1. of the Bylaws of Kemper Investors Life Insurance Company
provides for indemnification of Directors and Officers as follows:
SECTION 1. The company shall indemnify any person against all expenses
(including attorneys fees), judgments, fines, amounts paid in settlement
and other costs actually and reasonably incurred by him in connection with
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by
or in the right of the company) in which he is a party or is threatened to
be made a party by reason of his being or having been a director, officer,
employee or agent of the company, or serving or having served, at the
request of the company, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
or by reason of his holding a fiduciary position in connection with the
management or administration of retirement, pension, profit sharing or
other benefit plans including, but not limited to, any fiduciary liability
under the Employee Retirement Income Security Act of 1974 and any amendment
thereof, if he acted in good faith and in a manner he reasonably believed
to be in and not opposed to the best interests of the company, and with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that he did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, Registrant has sold, in reliance on Rule 506 of
Regulation D under the Securities Act of 1933, as amended, unregistered Private
Placement Group and Individual Variable Life Insurance Policies ("Policies") to
banks and other corporations as a financing or cost recovery vehicle for pre-
and post-retirement employee benefits 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.
Registrant has also sold unregistered Private Placement Individual Variable Life
Insurance Policies and Group Flexible Premium Variable Deferred Annuity
Contracts (collectively "HNW Policies") to certain high net worth
II-1
<PAGE> 287
"qualified purchasers", as that term is defined under Section 3(c)(7) of the
Securities Act of 1933. There was no predetermined aggregate offering price as
purchase amounts are premium payments under life insurance policies which are
based on the lives insured and insurance underwriting or purchase payments under
annuity contracts. Life Insurance Solutions, LLC, or Investors Brokerage
Services, Inc., affiliates of Registrant, serves as principal underwriter of
these offerings. Compensation up to 3% of premium may be paid to registered
broker-dealers for distribution-related activities involving the HNW Policies.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<C> <S>
(1)1(a) Distribution Agreement
(7)1(b) Fund Participation Agreement among Kemper Investors Life
Insurance Company, Investors Fund Series (formerly known as
Kemper Investors Fund), Zurich Kemper Investments, Inc. and
Kemper Distributors, Inc.
(4)1(c)(i) Fund Participation Agreement among Kemper Investors Life
Insurance Company, Janus Aspen Series and Janus Capital
Corporation
(5)1(c)(ii) Service Agreement between Kemper Investors Life Insurance
Company and Janus Capital Corporation
(7)1(d)(i) Participation Agreement by and among Kemper Investors Life
Insurance Company and Warburg, Pincus Trust and Credit
Suisse Asset Management, LLC (successor to Warburg Pincus
Asset Management, Inc.) and Credit Suisse Asset Management
Securities, Inc. (f/k/a Counsellors Securities Inc.)
(6)1(d)(ii) Service Agreement between Credit Suisse Asset Management,
LLC (successor to Warburg Pincus Asset Management, Inc.) and
Federal Kemper Life Assurance Company and Kemper Investors
Life Insurance Company
(13)1(d)(iii) Restatement of Participation Agreement among Counsellors
Securities Inc., Warburg Pincus Asset Management, Inc.
and/or the Warburg Pincus Funds and Kemper Investors Life
Insurance Company
(2)1(e) Specimen Selling Group Agreement of Investors Brokerage
Services, Inc.
(2)1(f) General Agent Agreement
(11)1(g)(i) Participation Agreement among Kemper Investors Life
Insurance Company, PIMCO Variable Insurance Trust, and PIMCO
Funds Distributors LLC
(11)1(g)(ii) Services Agreement between Pacific Investment Management
Company and Kemper Investors Life Insurance Company
(11)1(h) Participation Agreement among Templeton Variable Products
Series Fund, Franklin Templeton Distributors, Inc. and
Kemper Investors Life Insurance Company
(11)1(i) Participation Agreement between Kemper Investors Life
Insurance Company and Scudder Variable Life Investment Fund
(11)1(j) Participating Contract and Policy Agreement between Kemper
Investors Life Insurance Company and Scudder Kemper
Investments, Inc.
(11)1(k) Indemnification Agreement between Kemper Investors Life
Insurance Company and Scudder Kemper Investments, Inc.
(12)1(l)(i) Fund Participation Agreement between Kemper Investors Life
Insurance Company and The Dreyfus Socially Responsible
Growth Fund, Inc.
1(l)(ii) November 1, 1999 Amendment to Fund Participation Agreement
between Kemper Investors Life Insurance Company and The
Dreyfus Socially Responsible Growth Fund, Inc.
1(l)(iii) Administrative Services Agreement by and between The Dreyfus
Corporation and Kemper Investors Life Insurance Company
(redacted)
</TABLE>
II-2
<PAGE> 288
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<C> <S>
1(l)(iv) November 1, 1999 Amendment to Administrative Services
Agreement by and between The Dreyfus Corporation and Kemper
Investors Life Insurance Company (redacted)
1(m)(i) Fund Participation Agreement by and among The Alger American
Fund, Kemper Investors Life Insurance Company and Fred Alger
& Company, Incorporated
1(m)(ii) Service Agreement between Fred Alger Management, Inc. and
Kemper Investors Life Insurance Company (redacted)
(1)3(a) Articles of Incorporation
(1)3(b) Bylaws
(7)4(a) Form of Group Variable, Fixed and Market Value Adjusted
Annuity Contract
(7)4(b) Form of Certificate to Group Variable, Fixed and Market
Value Adjusted Annuity Contract.
(7)4(c) Form of Individual Variable, Fixed and Market Value Adjusted
Annuity Contract.
(7)4(d) Form of Application
(3)5 Opinion and Consent of Counsel regarding legality
23(a) Consents of PricewaterhouseCoopers LLP, Independent Public
Accountants
(3)23(b) Consent of Counsel (See Exhibit 5)
(9)99(a) Schedule III: Supplementary Insurance Information (years
ended December 31, 1999 and 1998)
(9)99(b) Schedule IV: Reinsurance (year ended December 31, 1999)
(10)99(c) Schedule IV: Reinsurance (year ended December 31, 1998)
(8)99(d) Schedule IV: Reinsurance (year ended December 31, 1997)
(9)99(e) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1999)
(10)99(f) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1998)
(8)99(g) Schedule V: Valuation and qualifying accounts (year ended
December 31, 1997)
</TABLE>
- - ---------------
(1) Incorporated herein by reference to the Registration Statement on Form S-1
(File No. 333-02491) filed on or about April 12, 1996.
(2) Incorporated herein by reference to Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-02491) filed on or about April 23,
1997.
(3) Incorporated herein by reference to Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-22389) filed on or about November 3,
1997.
(4) Incorporated herein by reference to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
September 14, 1995.
(5) Incorporated herein by reference to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1997.
(6) Incorporated herein by reference to Post-Effective Amendment No. 4 to the
Registration Statement on Form S-6 (File No. 33-79808) filed on or about
April 30, 1997.
(7) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 333-22389) filed on or about April 8, 1998.
(8) Incorporated herein by reference to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-4 for KILICO Variable Annuity Separate
Account (File No. 33-43501) filed on or about April 16, 1998.
(9) Incorporated herein by reference to Form 10-K for Kemper Investors Life
Insurance Company for fiscal year ended December 31, 1999 filed on or about
March 29, 2000.
(10) Incorporated herein by reference to Amendment No. 4 to the Registration
Statement on Form S-1 (File No. 333-02491) filed on or about April 20,
1999.
(11) Incorporated herein by reference to Amendment No. 5 to the Registration
Statement on Form S-1 (File No. 333-22389) filed on or about April 20,
1999.
II-3
<PAGE> 289
(12) Incorporated herein by reference to Post-Effective Amendment No. 28 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1999.
(13) Incorporated herein by reference to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-4 (File No. 333-22375) on or about
September 14, 1999.
(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, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 290
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 14th 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 14th day of April, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/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 Principal
Frederick L. Blackmon 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-5
<PAGE> 291
EXHIBIT LIST
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGES*
- - ------- DESCRIPTION ------------
<S> <C> <C>
1(l)(ii) November 1, 1999 Amendment to Fund Participation Agreement
between Kemper Investors Life Insurance Company and The
Dreyfus Socially Responsible Growth Fund, Inc.
1(l)(iii) Administrative Services Agreement by and between The Dreyfus
Corporation and Kemper Investors Life Insurance Company
(redacted)
1(l)(iv) November 1, 1999 Amendment to Administrative Services
Agreement by and between The Dreyfus Corporation and Kemper
Investors Life Insurance Company (redacted)
1(m)(i) Fund Participation Agreement by and among The Alger American
Fund, Kemper Investors Life Insurance Company and Fred Alger
& Company, Incorporated
1(m)(ii) Service Agreement between Fred Alger Management, Inc. and
Kemper Investors Life Insurance Company (redacted)
23(a) Consents of PricewaterhouseCoopers LLP, Independent Public
Accountants
</TABLE>
- - ---------------
* In manually signed original only.
<PAGE> 1
Exhibit 1(l)(ii)
NOVEMBER 1, 1999 AMENDMENT TO
FUND PARTICIPATION AGREEMENT
BETWEEN
KEMPER INVESTORS LIFE INSURANCE COMPANY AND
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
This Amendment to the April 29, 1999 Fund Participation Agreement
between Kemper Investors Life Insurance Company and The Dreyfus Socially
Responsible Growth Fund, Inc. (the "Agreement") is made for the purposes of
adding Dreyfus Investment Portfolios, Dreyfus Variable Investment Fund and
Dreyfus Life and Annuity Index Fund, Inc. (d/b/a Dreyfus Stock Index Fund) as
new parties to the Agreement, modifying Article I, paragraph 1.12 and Article
XII, paragraph 12.1 of the Agreement and modifying Exhibit A thereto by adding
three Participating Funds and/or Portfolios thereof.
The first paragraph of the Agreement is hereby revised to read in its
entirety as follows:
"This Agreement is entered into as of the 29th day of April, 1999, by
and among KEMPER INVESTORS LIFE INSURANCE COMPANY, a life insurance
company organized under the laws of the State of Illinois ("Insurance
Company"); THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.; DREYFUS
INVESTMENT PORTFOLIOS; DREYFUS VARIABLE INVESTMENT FUND; and DREYFUS
LIFE AND ANNUITY INDEX FUND, INC. (d/b/a DREYFUS STOCK INDEX FUND)
(each a "Fund")."
Article I, paragraph 1.12 of the Agreement is hereby revised to read in
its entirety as follows:
"Separate Account" shall mean KILICO Variable Annuity Separate Account
and KILICO Variable Separate Account, separate accounts established by
Insurance Company in accordance with the laws of the State of
Illinois."
Article XII, paragraph 12.1 of the Agreement is hereby revised to read
in its entirety as follows:
"Each notice required by this Agreement shall be given by certified
mail, return receipt requested, to the appropriate parties at the
following addresses:
Insurance Company: Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049
Attn: General Counsel
<PAGE> 2
Participating Funds: The Dreyfus Socially Responsible Growth Fund, Inc.
Dreyfus Investment Portfolios
Dreyfus Variable Investment Fund
Dreyfus Life and Annuity Index Fund, Inc.
(d/b/a Dreyfus Stock Index Fund)
c/o Premier Mutual Fund Services, Inc.
200 Park Avenue
New York, New York 10166
Attn: Vice President and
Assistant Secretary
with copies to: The Dreyfus Socially Responsible Growth Fund, Inc.
Dreyfus Investment Portfolios
Dreyfus Variable Investment Fund
Dreyfus Life and Annuity Index Fund, Inc.
(d/b/a Dreyfus Stock Index Fund)
c/o The Dreyfus Corporation
200 Park Avenue
New York, New York 10166
Attn: Mark N. Jacobs, Esq.
Adam Scaramella, Esq.
and
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
Attn: Lewis G. Cole, Esq.
Stuart H. Colemen, Esq.
Notice shall be deemed to be given on the date of receipt by the
addressee as evidenced by return receipt."
Exhibit A of the Agreement is hereby deleted and replaced with
the attached Exhibit A.
Except as hereby amended, all provisions, conditions and terms
of the Agreement shall continue in full force and effect. Further, all
parties to this Amendment, including the three new parties hereby
added, hereby agree to be bound by all provisions, conditions and terms
of the Agreement, as hereby amended, as if they were parties to the
original Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed in its name and on its behalf by its duly authorized
representative as of the 1st day of November, 1999.
<PAGE> 3
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /S/ James E. Hohmann
-------------------------------------
Name: James E. Hohmann
Title: Senior Vice President
Attest:
-----------------
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH
FUND, INC.
By: /S/ Stephanie Pierce
-------------------------------------
Name: Stephanie Pierce
Title: Vice President
Attest:
-----------------
DREYFUS INVESTMENT PORTFOLIOS
By: /S/ Stephanie Pierce
-------------------------------------
Name: Stephanie Pierce
Title: Vice President
Attest:
-----------------
DREYFUS VARIABLE INVESTMENT FUND
By: /S/ Stephanie Pierce
-------------------------------------
Name: Stephanie Pierce
Title: Vice President
Attest:
-----------------
DREYFUS LIFE AND ANNUITY INDEX FUND, INC.
(d/b/a DREYFUS STOCK INDEX FUND)
By: /S/ Stephanie Pierce
-------------------------------------
Name: Stephanie Pierce
Title: Vice President
Attest:
-----------------
<PAGE> 4
EXHIBIT A
LIST OF PARTICIPATING FUNDS
(AND/OR PORTFOLIOS THEREOF)
The Dreyfus Socially Responsible Growth Fund, Inc.
Dreyfus Investment Portfolios
MidCap Stock Portfolio
Dreyfus Variable Investment Fund
Capital Appreciation Portfolio
Small Cap Portfolio
Dreyfus Life and Annuity Index Fund, Inc. (d/b/a Dreyfus Stock Index Fund)
<PAGE> 1
Exhibit 1 (l)(iii)
ADMINISTRATIVE SERVICES AGREEMENT
ADMINISTRATIVE SERVICES AGREEMENT made as of the 29th day of April,
1999 by and between the Dreyfus Corporation ("Dreyfus"), a New York corporation,
and Kemper Investors Life Insurance Company ("Insurance Company"), an Illinois
corporation.
WITNESSETH:
WHEREAS, each of the investment companies listed on Schedule A hereto,
as such Schedule may be amended from time to time (each, a "Dreyfus Fund" and
collectively, the "Dreyfus Funds"), is an investment company registered under
the Investment Company Act of 1940, as amended, or a series thereof;
WHEREAS, Insurance Company, on its own behalf and on behalf of each of
the Separate Accounts identified therein (each, a "Separate Account"), has
entered into a Fund Participation Agreement (the "Participation Agreement") with
each of the Dreyfus Funds;
WHEREAS, Dreyfus provides investment advisory and/or administrative
services to the Dreyfus Funds; and
WHEREAS, Dreyfus desires that Insurance Company provide certain
administrative services which will benefit each of the Dreyfus Funds, and
Insurance Company desires to furnish such services on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, each party hereto severally agrees as follows:
1. Insurance Company agrees to provide to each of the Dreyfus Funds the
administrative services specified in Exhibit A hereto (the "Administrative
Services").
2. In consideration of the anticipated administrative expense savings
resulting to the Dreyfus Funds from Insurance Company's services, Dreyfus agrees
to pay Insurance Company at the end of each calendar month a fee (the "Service
Fee") which will accrue daily at an annual rate of [redacted] of the aggregate
net asset value of all of the issued and outstanding shares of each Dreyfus Fund
held in the subaccounts of the Separate Accounts.
3. The parties to this Agreement recognize and agree that Dreyfus'
payments to Insurance Company relate to administrative services provided to the
Dreyfus Funds and do not constitute payment in any manner for administrative
services provided by Insurance Company to the Separate Accounts or to
Contractholders (as defined in the Participation Agreement), for investment
advisory services or for costs of distribution of the Contracts (as defined in
the Participation Agreement) or shares of the Dreyfus Funds, and that these
payments are not otherwise related to investment advisory or distribution
services or expenses.
4. Insurance Company agrees to indemnify and hold harmless Dreyfus and
its directors, officers, and employees from any and all loss, liability, damage
and expense resulting from any gross negligence or willful wrongful act of
Insurance Company in performing its services under this Agreement or from a
breach of a material provision of this Agreement,
<PAGE> 2
except to the extent such loss, liability, damage or expense is the result of
Dreyfus' willful misfeasance, bad faith or gross negligence in the performance
of its duties.
Dreyfus agrees to indemnify and hold harmless Insurance Company and its
directors, officers, agents and employees from any and all loss, liability,
damage and expense resulting from any gross negligence or willful wrongful act
of Dreyfus in performing its services under this Agreement or from a breach of a
material provision of this Agreement, except to the extent such loss, liability,
damage or expense is the result of Insurance Company's willful misfeasance, bad
faith or gross negligence in the performance of its duties. Dreyfus also agrees
to indemnify and hold harmless Insurance Company and its directors, officers,
agents and employees from any and all loss, liability, damage and expense
resulting from a Dreyfus Fund's failure, whether unintentional or in good faith
or otherwise, to comply with the diversification requirements set forth in
Section 817(h) of the Internal Revenue Code of 1986, as amended, and the rules
and regulations thereunder.
5. It is understood and agreed that in performing the services under
this Agreement, Insurance Company, acting in its capacity described herein,
shall at no time be acting as an agent for Dreyfus or any of the Dreyfus Funds.
Insurance Company agrees, and agrees to cause its agents, not to make any
representations concerning a Dreyfus Fund except those contained in the Dreyfus
Fund's then current prospectus or in current sales literature furnished by the
Dreyfus Fund or Dreyfus to Insurance Company.
6. Any party may terminate this Agreement, without penalty, on sixty
(60) day's written notice to the other party.
This Agreement will terminate at the option of any party in the
event-of the termination of the Participation Agreement.
Termination of this Agreement under the preceding two sentences is
subject to payment by Dreyfus, within ten (10) days following the termination
date, of all Services Fees remaining unpaid for any completed calendar month and
pro-rated Service Fees through the termination date for any partial calendar
month.
This Agreement will terminate immediately upon the determination of any
party, with the advice of counsel, that the payment of the Service Fee is in
conflict with applicable law.
7. This Agreement, including the provisions set forth in paragraph 2,
may be amended only pursuant to a written instrument signed by the party to be
charged. This Agreement may not be assigned by a party hereto, by operation of
law or otherwise, without the prior written consent of the other party.
8. This Agreement shall be governed by the laws of the State of New
York, without giving effect to the principles of conflicts of law of such
jurisdiction.
9. This Agreement, including its Exhibit and Schedule, constitutes the
entire agreement between the parties with respect to the matters dealt with
herein, and supersedes any previous agreements and documents with respect to
such matters.
<PAGE> 3
IN WITNESS HEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /S/ Otis R. Heldman, Jr.
------------------------------------
Authorized Signatory
Otis R. Heldman, Jr.
----------------------------------------
Print or Type Name
THE DREYFUS CORPORATION
By: /S/ William Maresca
------------------------------------
William Maresca
----------------------------------------
Print or Type Name
<PAGE> 4
SCHEDULE A
The Dreyfus Socially Responsible Growth Fund, Inc.
<PAGE> 5
EXHIBIT A
Maintenance of Books and Records
- Assist as necessary to maintain book entry records on behalf
of the Dreyfus Funds regarding issuance to, transfer within
(via net purchaser orders), and redemption by, the Separate
Accounts of Dreyfus Fund shares.
- Maintain general ledgers regarding the Separate Accounts'
holdings of Dreyfus Fund shares, coordinate and reconcile
information, and coordinate maintenance of ledgers by
financial institutions and other contract owner service
providers.
Communication with the Dreyfus Funds
- Serve as the designee of the Dreyfus Funds for the receipt of
purchase and redemption orders from the Separate Accounts and
the transmission of such orders and payment therefore to the
Dreyfus Funds.
- Coordinate with the Dreyfus Funds' agents respecting daily
valuation of the Dreyfus Funds' shares and the Separate
Accounts' units Purchase Orders
- Determine net amount available for investment in the
Dreyfus Funds.
- Deposit receipt at the Dreyfus Funds' custodian(s)
(generally by wire transfer).
- Notify the custodian(s) of the estimated amount required to
pay dividends or distributions.
Redemption Orders
- Determine net amount required for redemptions by the
Dreyfus Funds.
Notify the custodian(s) and the Dreyfus Funds of cash
required to meet payments.
- Purchase and redeem shares of the Dreyfus Funds on behalf of
the Separate Accounts at the then-current price in accordance
with the terms of each Dreyfus Fund's then current prospectus.
- Assist in routing and revising sales and marketing materials
to incorporate or reflect the comments made on behalf of the
Dreyfus Funds. Assist in enforcing procedures adopted by the
Dreyfus Funds to reduce, discourage, or eliminate market
timing transactions in Dreyfus Fund shares in order to reduce
or eliminate adverse effects on the Dreyfus Fund or its
shareholders.
Processing Distributions from the Dreyfus Funds
- Process ordinary dividends and capital gains.
- Reinvest the Dreyfus Funds' distributions.
Reports
- Periodic information reporting to the Dreyfus Funds,
including, but not limited to, furnishing registration
statements, prospectuses, statements of additional
information, reports, solicitations for voting instructions,
sales or promotional materials and any other SEC filings with
respect to the Separate Accounts invested in the Dreyfus
Funds, as not otherwise provided for.
- Periodic information reporting about the Dreyfus Funds,
including any necessary delivery of a Dreyfus Fund's
prospectus, annual and semi-annual reports and other materials
that the Dreyfus Fund is required by law or otherwise to
provide to its shareholders, as not otherwise provided for.
<PAGE> 6
Dreyfus Fund-related Contract Owner Services
- Maintain adequate fidelity bond or similar coverage for all
Insurance Company officers, employees, investment advisers and
other individuals or entities controlled by the Insurance
Company who deal with the money and/or securities of the
Dreyfus Funds.
- Provide general information with respect to Dreyfus Fund
inquiries (not including information about performance or
related to sales).
- Provide information regarding performance of the Dreyfus Funds
and the subaccounts of the Separate Accounts.
- Oversee and assist the solicitation, counting and voting or
contract owner voting interests in the Dreyfus Funds pursuant
to Dreyfus Fund proxy statements.
Other Administrative Support
- Provide other administrative and legal compliance support for
the Funds as mutually agreed upon by the Insurance Company and
the Dreyfus Funds.
- Provide financial consultants with advise with respect to
inquiries related to the Dreyfus Funds (not including
information related to sales).
- Provide such other administrative support for the Dreyfus Fund
as may be mutually agreed to by Insurance Company and Dreyfus
to the extent permitted or required under applicable statutes,
and relieve the Dreyfus Fund of other usual or incidental
administrative services provided to individual
Contractholders.
<PAGE> 1
Exhibit 1(l)(iv)
NOVEMBER 1, 1999 AMENDMENT TO
ADMINISTRATIVE SERVICES AGREEMENT
BY AND BETWEEN
THE DREYFUS CORPORATION AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
This Amendment to the April 29, 1999 Administrative Services Agreement
by and between The Dreyfus Corporation and Kemper Investors Life Insurance
Company (the "Agreement") is made for the purpose of modifying the Agreement to
add three Participating Funds and/or Portfolios. The following revisions shall
be made to the Agreement:
A. Paragraph 2 of the Agreement is hereby replaced in its
entirety by the following:
2. In consideration of the anticipated administrative
expense savings resulting to the Dreyfus Funds from
Insurance Company's services, Dreyfus agrees to pay
Insurance Company at the end of each calendar month a
fee (the "Service Fee") which will accrue daily at an
annual rate as set forth in Schedule A, hereto, of
the aggregate net asset value of all of the issued
and outstanding shares of each Dreyfus Fund held in
the subaccounts of the Separate Accounts.
B. Schedule A of the Agreement shall be deleted and replaced with
the attached Schedule A.
All other terms of the Agreement shall remain in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed in its name and on its behalf by its duly authorized
representative as of the 1st day of November, 1999.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /S/ James E. Hohmann
------------------------------------
Name: James E. Hohmann
Title: Senior Vice President
Attest:
-------------------
THE DREYFUS CORPORATION
By: /S/ William H. Maresca
------------------------------------
Name: William H. Maresca
Title: Controller
Attest:
--------------------
<PAGE> 3
SCHEDULE A
(LIST OF PARTICIPATING FUNDS AND/OR PORTFOLIOS THEREOF)
The Dreyfus Socially Responsible Growth Fund, Inc. [redacted]
Dreyfus Investment Portfolios
MidCap Stock Portfolio [redacted]
Dreyfus Variable Investment Fund
Capital Appreciation Portfolio [redacted]
Small Cap Portfolio [redacted]
Dreyfus Life and Annuity Index Fund, Inc.
(d/b/a Dreyfus Stock Index Fund) [redacted]
<PAGE> 1
Exhibit 1(m)(i)
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this 1st day of May, 1999, by and among The
Alger American Fund (the "Trust"), an open-end management investment company
organized as a Massachusetts business trust, Kemper Investors Life Insurance
Company, a life insurance company organized as a corporation under the laws of
the State of Illinois, (the "Company"), on its own behalf and on behalf of each
segregated asset account of the Company set forth in Schedule A, as may be
amended from time to time (the "Accounts"), and Fred Alger and Company,
Incorporated, a Delaware corporation, the Trust's distributor (the
"Distributor").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares each representing an interest in a particular managed portfolio
of securities and other assets, and certain of those series named in Schedule B
are to be made available for purchase by the Company for the Accounts (the
"Portfolios");
WHEREAS, the Trust and the Distributor desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, shares of beneficial interest in the Trust are divided into
the following series which are available for purchase by the Company for the
Accounts: Alger American Small Capitalization Portfolio, Alger American Growth
Portfolio, Alger American Income and Growth Portfolio, Alger American Balanced
Portfolio, Alger American MidCap Growth Portfolio, and Alger American Leveraged
AllCap Portfolio;
WHEREAS, the Trust has received an order from the Commission, dated
February 17, 1989 (File No. 812-7076), granting Participating Insurance
Companies and their separate accounts exemptions from the provisions of Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the Trust to be sold to and held by variable annuity and variable
life insurance separate accounts of both affiliated and unaffiliated life
insurance companies (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register under the 1933 Act
certain
1
<PAGE> 2
variable life insurance policies and variable annuity contracts to be issued by
the Company under which the Portfolios are to be made available as investment
vehicles (the "Contracts");
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised;
WHEREAS, the Company desires to use shares of one or more Portfolios an
investment vehicles for the Accounts:
WHEREAS, the Distributor is duly registered as a broker-dealer under
the Securities Exchange Act of 1934 (the "1934 Act");
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
Purchase and Redemption of Trust Portfolio Shares
1.1. For purposes of this Article I, the Company shall be the Trust's agent
for the receipt from each account of purchase orders and requests for
redemption pursuant to the Contracts relating to each Portfolio,
provided that the Company notifies the Trust of such purchase orders
and requests for redemption by 10:30 a.m. Eastern time on the next
following Business Day, as defined in Section 1.3.
1.2. The Trust shall make shares of the Portfolios available to the Accounts
at the net asset value next computed after receipt of a purchase order
by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust describing
Portfolio purchase procedures. The Company will transmit orders from
time to time to the Trust for the purchase and redemption of shares of
the Portfolios. The Trustees of the Trust (the "Trustees") may refuse
to sell shares of any Portfolio to any person, or suspend or terminate
the offering of shares of any Portfolio if such action is required by
law or by regulatory authorities having jurisdiction or if, in the sole
discretion of the Trustees acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, such
action is deemed in the best interests of the shareholders of such
Portfolio.
1.3. The Company shall pay for the purchase of shares of a Portfolio on
behalf of an Account with federal funds to be transmitted by wire to
the Trust, with the reasonable expectation of receipt by the Trust by
2:00 p.m. Eastern time on the next Business Day after the Trust (or its
agent) receives the purchase order. Upon receipt by the Trust of the
federal funds so wired, such funds shall cease to be the responsibility
of the Company and shall become the responsibility of the Trust for
this purpose. "Business Day" shall mean any day on
2
<PAGE> 3
which the New York Stock Exchange is open for trading and on which the
Trust calculates its net asset value pursuant to the rules of the
Commission.
1.4. The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at
the net asset value next computed after receipt by the Trust (or its
agent) of the request for redemption, as established in accordance with
the provisions of the then current prospectus of the Trust describing
Portfolio redemption procedures. Unless otherwise revised in writing,
the Trust shall make payment for such shares in cash. Proceeds of
redemption with respect to a Portfolio will normally be paid to the
Company for an Account in federal funds transmitted by wire to the
Company by order of the Trust with the reasonable expectation of
receipt by the Company by 2:00 p.m. Eastern time on the next Business
Day after the receipt by the Trust (or its agent) of the request for
redemption. Such payment may be delayed if, for example, the
Portfolio's cash position so requires or if extraordinary market
conditions exist, but in no event shall payment be delayed for a
greater period than is permitted by the 1940 Act. The Trust reserves
the right to suspend the right of redemption, consistent with Section
22(e) of the 1940 Act and any rules thereunder.
1.5. Payments for the purchase of shares of the Trust's Portfolios by the
Company under Section 1.3 and payments for the redemption of shares of
the Trust's Portfolios under Section 1.4 on any Business Day may be
netted against one another for the purpose of determining the amount of
any wire transfer.
1.6. Issuance and transfer of the Trust's Portfolio shares will be by book
entry only. Stock certificates will not be issued to the Company or the
Accounts. Portfolio Shares purchased from the Trust will be recorded in
the appropriate title for each Account or the appropriate subaccount of
each Account.
1.7. The Trust shall furnish, on or before the ex-dividend date, notice to
the Company of any income dividends or capital gain distributions
payable on the shares of any Portfolio of the Trust. The Company hereby
elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional
shares of that Portfolio. The Company reserves the right to revoke this
election in writing and at that time receive all such income dividends
and capital gain contributions is cash. The Trust shall notify the
Company of the number of shares so issued as payment of such dividends
and distributions.
1.8. The Trust shall calculate the net asset value of each Portfolio on each
Business Day, as defined in Section 1.3. The Trust shall make the net
asset value per share for each Portfolio available to the Company or
its designated agent on a daily basis as soon as reasonably practical
after the net asset value per share ("NAV") is calculated and shall use
its best efforts to make such net asset value per share available to
the Company by 6:30 p.m. Eastern time each Business Day. In the event
of a material error in the computation
3
<PAGE> 4
of a Portfolio's NAV or any dividend or capital gain distribution
(each, a "pricing error"), the Distributor or the Trust shall
immediately notify the Company as soon as possible after the discovery
of the error. Such notification may be verbal, but shall be promptly
confirmed in writing. A pricing error shall be corrected as follows:
(a) if the pricing error results in a difference between the erroneous
NAV and the correct NAV equal to or greater than $0.01 per share, but
less than -1/2 of 1% of the Portfolio's NAV at the time of the error,
then the Distributor shall either reimburse the Portfolio for any loss,
after taking into consideration any positive effect of such error and
no adjustments to the Company's Accounts need be made, or, in the
Distributor discretion, the procedures described in item (b) shall be
followed; and (b) if the pricing error results in a difference between
the erroneous NAV and the correct NAV equal to or greater than -1/2 of
1% of the Portfolio's NAV at the time of the error, then the
Distributor shall reimburse the Portfolio for any unrecovered excess
redemption proceeds (as defined below) and shall reimburse the Company
for its reasonable costs of adjustments made to correct the Company's
Accounts. If an adjustment is necessary to correct an error of category
(b) above which has caused an Account's underlying contractholders to
receive less than the amount of shares or redemption proceeds to which
they are entitled, or is elected by the Distributor in connection with
a pricing error of category (a), the number of shares of the applicable
Account will be adjusted and the amount of any underpayments on
redemption transactions not corrected by such adjustment shall be
credited by the Trust to the Company for crediting of such amounts to
the applicable Account's underlying contractholder. In the event that
an NAV pricing error results in an Account's underlying contractholder
receiving redemption proceeds in an amount which is $500 or more in
excess of the amount that such underlying contractholder would have
received with the correct NAV (such amount being the "excess redemption
proceeds"), then the effect of such overpayment shall be corrected, to
the extent possible, by an adjustment to the number of shares in the
underlying contractholder's account, and the Company agrees that it
will make a good faith attempt to collect such excess redemption
proceeds not accounted for by such adjustment. Any overpayments that
have not yet been paid to the Company's underlying contractholders will
be remitted to the Trust by the Company upon notice by the Distributor
of such overpayment. In no event shall the Company br liable to the
underlying contractholders for any such adjustment or underpayment
amounts, other than the amounts paid by the Trust or the Distributor
for crediting to the company's underlying contractholder accounts as
set forth above. No provision in this Paragraph 1.8 shall require the
adjustment of an underlying contractholder's account if the adjustment
required for that account is less than $25. A pricing error within
category (a) or (b) above shall be deemed to constitute a "material
error" for purposes of this Agreement. The standards set forth in the
Paragraph 6 are based on the parties' understanding of the views
expressed by the staff of the SEC as of the date of this Agreement. In
the event that the views of the SEC staff are later modified or
superseded by SEC or judicial interpretation, the parties shall amend
the foregoing provisions of this Agreement to comport with the
appropriate standards, on terms mutually satisfactory to all.
4
<PAGE> 5
1.9. The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their segregated asset accounts,
to the Fund Sponsor or its affiliates and to such other entities as may
be permitted by Section 817(h) of the Code, the regulations hereunder,
or judicial or administrative interpretations thereof. No shares of any
Portfolio will be sold directly to the general public. The Company
agrees that it will use Trust shares only for the purposes of funding
the Contracts through the Accounts listed in Schedule A, as amended
from time to time.
1.10. The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding materially to those contained in
Section 2.9 and Article IV of this Agreement. The Trust also agrees
that if a Qualified Plan becomes an owner of 10% or more of the assets
of the Trust, such Qualified Plan must execute an agreement with the
Trust containing the aforementiond provisions
ARTICLE II.
Obligations of the Parties
2.1. The Trust shall prepare and be responsible for filing with the
Commission and any state regulators requiring such filing all
shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and
statements of additional information of the Trust. The Trust shall bear
the costs of registration and qualification of shares of the
Portfolios, preparation and filing of the documents listed in this
Section 2.1 and all taxes to which an issuer is subject on the issuance
and transfer of its shares.
2.2. The Company shall distribute such prospectuses, proxy statements and
periodic reports of the Trust to the Contract owners as required to be
distributed to such Contract owners under applicable federal or state
law.
2.3. The Trust shall provide such documentation (including a final copy of
the Trust's prospectus as set in type or in camera-ready copy) and
other assistance as is reasonably necessary in order for the Company to
print together in one document the current prospectus for the Contracts
issued by the Company and the current prospectus for the Trust. In
addition, at the request of the Company, the Trust shall provide the
Company electronic versions of the documents referenced in this
paragraph in one of the following formats: EDGAR, TXT (test file), DOC
(Word document) or RFT (Rich Text). The Trust shall bear the expense of
printing copies of its current prospectus that will be distributed to
existing Contract owners, and the Company shall bear the expense of
printing copies of the Trust's prospectus that are used in connection
with offering the Contracts issued by the Company.
5
<PAGE> 6
2.4. The Trust and the Distributor shall provide (1) at the Trust's expense,
one copy of the Trust's current Statement of Additional Information
("SAI") to the Company and to any Contract owner who requests such SAI,
(2) at the Company's expense, such additional copies of the Trust's
current SAI as the Company shall reasonably request and that the
Company shall require in accordance with applicable law in connection
with offering the Contracts issued by the Company.
2.5. The Trust, at its expense, shall provide the Company with copies of its
proxy material, periodic reports to shareholders and other
communications to shareholders in such quantity as the Company shall
reasonably require for purposes of distributing to Contract owners. The
Trust, at the Company's expense, shall provide the Company with copies
of its periodic reports to shareholders and other communications to
shareholders in such quantity as the Company shall reasonably request
for use in connection with offering the Contracts issued by the
Company. If requested by the Company in lieu thereof, the Trust shall
provide such documentation (including a final copy of the Trust's proxy
materials, periodic reports to shareholders and other communications to
shareholders, as set in type or in camera-ready copy) and other
assistance as reasonably necessary in order for the Company to print
such shareholder communications for distribution to Contract owners.
2.6. The Company agrees and acknowledges that the Distributor is the sole
owner of the name and mark "Alger" and that all use of any designation
comprised in whole or part of such name or mark under this Agreement
shall inure to the benefit of the Distributor. Except as provided in
Section 2.5, the Company shall not use any such name or mark on its own
behalf or on behalf of the Accounts or Contracts in any registration
statement, advertisement, sales literature or other materials relating
to the Accounts or Contracts without the prior written consent of the
Distributor. Upon termination of this Agreement for any reason, the
Company shall cease all use of any such name or mark as soon as
reasonably practicable. If it is furnished with all necessary
information by the Company sufficiently well in advance, the Trust
shall provide the materials described in Sections 2.3-2.5 to the
Company at least five Business Days prior to the Company's obligation
to mail the materials to Contract owners. If the materials required to
be delivered to be delivered by the Trust to the Company pursuant to
this Section 2.6 are not delivered as set forth in the preceding
sentence, the Trust shall reimburse the Company for any extraordinary
out-of-pocket costs caused by the delay (including but not limited to,
overtime for printing and mailing).
2.7. The Company shall furnish, or cause to be furnished, to the Trust or
its designee a copy of each Contract prospectus and/or statement of
additional information describing the Contracts, each report to
Contract owners, proxy statement, application for exemption or request
for no-action letter in which the Trust or the Distributor is named
contemporaneously with the filing of such document with the Commission.
The Company shall furnish, or shall cause to be furnished, to the Trust
or its designee each piece of sales literature or other promotional
material in which the Trust or the Distributor is named, at
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<PAGE> 7
least five Business Days prior to its use. No such material shall be
used if the Trust or its designee reasonably objects to such use within
three Business Days after receipt of such material.
2.8. The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or the
Distributor in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from
the registration statement or prospectus for the Trust shares (as such
registration statement and prospectus may be amended or supplemented
from time to time), annual and semi-annual reports of the Trust,
Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as
required by legal process or regulatory authorities or with the prior
written permission of the Trust, the Distributor or their respective
designees. The Trust and the Distributor agree to respond to any
request for approval on a prompt and timely basis. The Company shall
adopt and implement procedures reasonably designed to ensure that
"broker only" materials including information therein about the Trust
or the Distributor are not distributed to existing or prospective
Contract owners.
2.9. The Trust shall use its best efforts to provide the Company, on a
timely basis, with such information about the Trust, the Portfolios and
the Distributor, in such form as the Company may reasonably require, as
the Company shall reasonably request in connection with the preparation
of registration statements, prospectuses and annual and semi-annual
reports pertaining to the Contracts.
2.10. The Trust and the Distributor shall not give, and agree that no
affiliate of either of them shall give, any information or make any
representations or statements on behalf of the Company or concerning
the Company, the Accounts or the Contracts other than information or
representations contained in and accurately derived from the
registration statement or prospectus for the Contracts (as such
registration statement and prospectus may be amended or supplemented
from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials,
except as required by legal process or regulatory authorities or with
the prior written permission of the Company. The Company agrees to
respond to any request for approval on a prompt and timely basis.
2.11. So long as, and to the extent that, the Commission interprets the 1940
Act to require pass-through voting privileges for Contract owners, the
Company will provide pass-through voting privileges to Contract owners
whose cash values are invested, through the registered Accounts, in
shares of one or more Portfolios of the Trust. The Trust shall require
all Participating Insurance Companies to calculate voting privileges in
the same manner and the Company shall be responsible for assuring that
the Accounts calculate voting privileges in the manner established by
the Trust. With respect to each registered Account, the Company will
vote shares of each Portfolio of the Trust held by a registered Account
and for which no timely voting instructions from Contract owners are
received in
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<PAGE> 8
the same proportion as those shares for which voting instructions are
received. The Company and its agents will in no way recommend or oppose
or interfere with the solicitation of proxies for Portfolio shares held
to fund the Contacts without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion. The
Company reserves the right, to the extent permitted by law, to vote
shares held in any Account in its sole discretion.
2.12. The Company and the Trust will each provide to the other information
about the results of any regulatory examination relating to the
Contracts or the Trust, including relevant portions of any "deficiency
letter" and any response thereto.
2.13. No compensation shall be paid by the Trust to the Company, or by the
Company to the Trust, under this Agreement (except for specified
expense reimbursements). However, nothing herein shall prevent the
parties hereto from otherwise agreeing to perform, and arranging for
appropriate compensation for, other services relating to the Trust, the
Accounts or both.
2.14. The Trust shall furnish, or cause to be furnished, to the Company or
its designee a copy of each registration statement, prospectus,
statement of additional information, report to shareholders, proxy
statement, application for exemption, request for no-action letter, and
any amendment to the above, that relates to the Portfolios, the Company
or the Contracts and is prepared by or on behalf of the Trust, within 5
business days of the filing, of the document with the Commission or
other regulatory authority. The Trust shall furnish, or shall cause to
be furnished, to the Company or its designee each piece of sales
literature or other promotional material prepared by or on behalf of
the Trust in which the Company, any Account or the Contracts are named
at least 5 business days prior to its use. No such material shall be
used if the Company or its designee objects within three business days
after receipt of such material.
2.15. For purposes of this Article II, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements,
(such as published or designed for use in a newspaper, magazine or
other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other
public media), sales literature (i.e., any written communication
distributed or made generally available to customers or the public,
including brochures, circulars, research reports, market letters, form
letters, shareholder newsletters, seminar texts, reprints or excerpts
of any other advertisements, sales literature, or published article),
educational or training materials or other communications pertaining to
the Trust and distributed or made generally available to some or all
agents or employees of the Company.
2.16. The Trust will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Trust will either provide
for annual meetings (except insofar as the Commission may interpret
Section 16 of the 1940 Act not to require such
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<PAGE> 9
meetings) or, as the Trust currently intends, comply with Section 16(c)
of the 1940 Act (although the Trust is not one of the trusts described
in Section 16(c) of that Act) as well as with Sections 16(a) and, if
and when applicable, 16(b). Further, the Trust will act in accordance
with the Commission's interpretation of the requirements of Section
16(a) with respect to periodic elections of trustees and with whatever
rules the Commission may promulgate with respect thereto.
ARTICLE III.
Representations and Warranties
3.1. The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of
Illinois and that it has legally and validly established each Account
as a segregated asset account under such law as of the date set forth
in Schedule A, and that Investor Brokerage Services, Inc., the
principal underwriter for the Contracts, is registered as a
broker-dealer under the Securities Exchange Act of 1934 and is a member
in good standing of the National Association of Securities Dealers,
Inc.
3.2. The Company represents and warrants that it has registered or, prior to
any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act
and cause each Account to remain so registered to serve as a segregated
asset account for the Contracts, unless an exemption from registration
is available.
3.3. The Company represents and warrants that the Contracts will be
registered under the 1933 Act unless an exemption from registration is
available prior to any issuance or sale of the Contracts; the Contracts
will be issued and sold in compliance in all material respects with all
applicable federal and state laws; and the sale of the Contracts shall
comply in all material respects with state insurance law suitability
requirements.
3.4. The Trust represents and warrants that it is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts and that
it does and will comply in all material respects with the 1940 Act and
the rules and regulations thereunder.
3.5. The Trust and the Distributor represent and warrant that the Portfolio
shares offered and sold pursuant to this Agreement will be registered
under the 1933 Act and sold in accordance with all applicable federal
and state laws, and the Trust shall be registered under the 1940 Act
prior to and at the time of any issuance or sale of such shares. The
Trust shall amend its registration statement under the 1933 Act and the
1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Trust shall register and qualify
its shares for sale in accordance with the laws of the various states
only if and to the extent deemed advisable by the Trust.
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<PAGE> 10
3.6. The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements for
variable annuity, endowment or life insurance contracts set forth in
Section 817(h) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the rules and regulations thereunder, including without
limitation Treasury Regulation 1.817-5, and will notify the Company
immediately upon having a reasonable basis for believing any Portfolio
has ceased to comply or might not so comply and will immediately take
all reasonable steps to adequately diversify the Portfolio to achieve
compliance within the grace period afforded by Regulation 1.817-5.
3.7. The Trust represents and warrants that it is currently qualified as a
"regulated investment company" under Subchapter M of the Code, that it
will make every effort to maintain such qualification and will notify
the Company immediately upon having a reasonable basis for believing it
has ceased to so qualify or might not so qualify in the future.
3.8. The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of
a Portfolio shall at all times be covered by a blanket fidelity bond or
similar coverage for the benefit of the Trust in an amount not less
than the minimum coverage required by Rule 17g-1 or other applicable
regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
3.9. The Distributor represents that it is duly organized and validly
existing under the laws of the State of Delaware and that it is
registered, and will remain registered, during the term of this
Agreement, as a broker-dealer under the Securities Exchange Act of 1934
and is a member in good standing of the National Association of
Securities Dealers, Inc.
ARTICLE IV.
Potential Conflicts
4.1. The parties acknowledge that a Portfolio's shares may be made available
for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any
material irreconcilable conflict between the interests of the contract
owners of all Participating Insurance Companies. A material
irreconcilable conflict may arise for a variety of reasons, including:
(a) an action by any state insurance regulatory authority; (b) a change
in applicable federal or state insurance, tax or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in
voting instructions given by variable annuity contract and variable
life insurance contract owners; or (f) a decision by an insurer to
disregard the voting instructions of contract owners. The Trust shall
promptly inform the Company of any determination by the Trustees that a
material irreconcilable conflict exists and of the implications
thereof.
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<PAGE> 11
4.2. The Company agrees to report promptly any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist
the Trustees in carrying out their responsibilities under the Shared
Funding Exemptive Order by providing the Trustees with all information
reasonably necessary for and requested by the Trustees to consider any
issues raised including, but not limited to, information as to a
decision by the Company to disregard Contract owner voting
instructions. All communications from the Company to the Trustees may
be made in care of the Trust.
4.3. If it is determined by a majority of the Trustees, or a majority of the
disinterested Trustees, that a material irreconcilable conflict exists
that affects the interests of contract owners, the Company shall, in
cooperation with other Participating Insurance Companies whose contract
owners are also affected, at its own expense and to the extent
reasonably practicable (as determined by the Trustees) take whatever
steps are necessary to remedy or eliminate the material irreconcilable
conflict, which steps could include: (a) withdrawing the assets
allocable to some or all of the Accounts from the Trust or any
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Trust, or
submitting the question of whether or not such segregation should be
implemented to a vote of all affected Contract owners and, as
appropriate, segregating the assets of any appropriate group (i.e.,
annuity contract owners, life insurance contract owners, or variable
contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected
Contract owners the option of making such a change; and (b)
establishing a new registered management investment company or managed
separate account.
4.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that
decision represents a minority position or would preclude a majority
vote, the Company may be required, at the Trust's election, to withdraw
the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account; provided, however that such
withdrawal and termination shall be limited to the extent required by
the foregoing material irreconcilable conflict as determined by a
majority of the disinterested Trustees. Any such withdrawal and
termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end
of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of
shares of the Trust.
4.5. If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw
the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account within six (6) months after the
Trustees inform the Company in writing that the Trust has determined
that such decision has created a material irreconcilable conflict;
provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable
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<PAGE> 12
conflict as determined by a majority of the disinterested Trustees.
Until the end of such six (6) month period, the Trust shall continue to
accept and implement orders by the Company for the purchase and
redemption of shares of the Trust.
4.6. For purposes of Section 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed
action adequately remedies any material irreconcilable conflict, but in
no event will the Trust be required to establish a new funding medium
for any Contract. The Company shall not be required to establish a new
funding medium for the Contracts if an offer to do so has been declined
by vote of a majority of Contract owners materially adversely affected
by the material irreconcilable conflict. In the event that the Trustees
determine that any proposed action does not adequately remedy any
material irreconcilable conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within
six (6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and
termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested Trustees.
4.7. The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so
that the Trustees may fully carry out the duties imposed upon them by
the Shared Funding Exemptive Order, and said reports, materials and
data shall be submitted more frequently if reasonably deemed
appropriate by the Trustees.
4.8. If and to the extent that Rule 6e-3(T) is amended, or Rule 6e-3 is
adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared
Funding Exemptive Order, then the Trust and/or the Participating
Insurance Companies, as appropriate, shall (i) take such steps as may
be necessary to comply with Rule 6e-3(T), as amended, or Rule 6e-3, as
adopted, to the extent such rules are applicable; and (ii) Sections
2.16, 4.1, 4.2, 4.3, 4.4 and 4.5 of this Agreement shall continue in
effect only to the extent that terms and conditions substantially
similar to such sections are contained or permitted in such rule as so
amended or adopted.
ARTICLE V.
Indemnification
5.1. Indemnification By the Company. The Company agrees to indemnify and
hold harmless the Distributor, the Trust and each of its Trustees,
officers, employees and agents and
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each person, if any, who controls the Trust within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for
purposes of this Section 5.1) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the
written consent of the Company, which consent shall not be unreasonably
withheld) or expenses (including the reasonable costs of investigating
or defending any alleged loss, claim, damage, liability or expense and
reasonable legal counsel fees incurred in connection therewith)
(collectively, "Losses"), to which the Indemnified Parties may become
subject under any statute or regulation, or at common law or otherwise,
insofar as such Losses are related to the sale or acquisition of the
Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
registration statement or prospectus for the Contracts or in
the Contracts themselves or in sales literature generated or
approved by the Company on behalf of the Contracts or Accounts
(or any amendment or supplement to any of the foregoing)
(collectively, "Company Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, provided that this indemnity shall not
apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in
reliance upon and was accurately derived from written
information furnished to the Company by or on behalf of the
Trust for use in Company Documents or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations
(other than statements or representations contained in and
accurately derived from Trust Documents as defined in Section
5.2(a)) or wrongful conduct of the Company or persons under
its control, with respect to the sale or acquisition of the
Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Trust
Documents as defined in Section 5.2(a) or the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading if such statement or omission was made in
reliance upon and accurately derived from written information
furnished to the Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to
provide the services or furnish the materials required under
the terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company; or
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<PAGE> 14
(f) arise out of or result from the provision by the Company to
the Trust of materially insufficient or incorrect information
regarding the purchase or sale of shares of any Portfolio, or
the failure of the Company to provide such information on a
timely basis.
5.2. Indemnification by the Distributor. The Distributor agrees to indemnify
and hold harmless the Company and each of its directors, officers,
employees, and agents and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for the purposes of this Section 5.2) against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Distributor, which consent
shall not be unreasonably withheld) or expenses (including the
reasonable costs of investigating or defending any alleged loss, claim,
damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or regulation,
or at common law or otherwise, insofar as such Losses are related to
the sale or acquisition of the Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the registration statement or prospectus for the Trust (or any
amendment or supplement thereto) (collectively, "Trust
Documents" for the purposes of this Article V), or arise out
of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this indemnity shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and
was accurately derived from written information furnished to
the Distributor or the Trust by or on behalf of the Company
for use in Trust Documents or otherwise for use in connection
with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations
(other than statements or representations contained in and
accurately derived form Company Documents) or wrongful conduct
of the Distributor or persons under its control, with respect
to the sale or acquisition of the Contracts or Portfolio
shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Company
Documents or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein not misleading if such statement
or omission was made in reliance upon and accurately derived
from written information furnished to the Company by or on
behalf of the Trust; or
(d) arise out of or result from any failure by the Distributor or
the Trust to provide the
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<PAGE> 15
services or furnish the materials required under the terms of
this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Distributor or the
Trust in this Agreement or arise out of or result from any
other material breach of this Agreement (including a failure
to comply with the diversification requirements of Sections
817(h) of the Code) by the Distributor or the Trust.
5.3. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any Losses incurred or assessed against an Indemnified
Party that arise from such Indemnified Party's willful misfeasance, bad
faith or negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement.
5.4. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any claim made against an Indemnified party unless such
Indemnified Party shall have notified the other party in writing within
a reasonable time after the summons, or other first written
notification, giving information of the nature of the claim shall have
been served upon or otherwise received by such Indemnified Party (or
after such Indemnified Party shall have received notice of service upon
or other notification to any designated agent), but failure to notify
the party against whom indemnification is sought of any such claim
shall not relieve that party from any liability which it may have to
the Indemnified Party in the absence of Sections 5.1 and 5.2.
5.5. In case any such action is brought against an Indemnified Party, the
indemnifying party shall be entitled to participate, at its own
expense, in the defense of such action. The indemnifying party also
shall be entitled to assume the defense thereof, with counsel
reasonably satisfactory to the party named in the action. After notice
from the indemnifying party to the Indemnified Party of an election to
assume such defense, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the indemnifying
party will not be liable to the Indemnified Party under this Agreement
for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than
reasonable costs of investigation.
ARTICLE VI.
Termination
6.1. This Agreement shall terminate:
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<PAGE> 16
(a) at the option of any party upon 60 days advance written notice
to the other parties, unless a shorter time is agreed to by
the parties;
(b) at the option of the Trust or the Distributor if the Contracts
issued by the Company cease to qualify as annuity contracts or
life insurance contracts, as applicable, under the Code or if
the Contracts are not registered, issued or sold in accordance
with applicable state and/or federal law; or
(c) at the option of any party upon a determination by a majority
of the Trustees of the Trust, or a majority of its
disinterested Trustees, that a material irreconcilable
conflict exists; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust or the Distributor by the NASD,
the SEC, or any state securities or insurance department or
any other regulatory body regarding the Trust's or the
Distributor's duties under this Agreement or related to the
sale of Trust shares or the operation of the Trust; or
(e) at the option of the Company if the Trust or a Portfolio fails
to meet the diversification requirements specified in Section
3.6 hereof; or
(f) at the option of the Company if shares of the Series are not
reasonably available to meet the requirements of the Variable
Contracts issued by the Company, as determined by the Company,
and upon prompt notice by the Company to the other parties; or
(g) at the option of the Company in the event any of the shares of
the Portfolio are not registered, issued or sold in accordance
with applicable state and/or federal law, or such law
precludes the use of such shares as the underlying investment
media of the Variable Contracts issued or to be issued by the
Company; or
(h) at the option of the Company, if the Portfolio fails to
qualify as a Regulated Investment Company under Subchapter M
of the Code; or
(i) at the option of the Distributor if it shall determine in its
sole judgment reasonably exercised in good faith, that the
Company suffered a material adverse change in its business,
operations, financial condition since the date of this
Agreement or is the subject of material adverse publicity and
such material adverse change or material adverse publicity is
likely to have a material adverse impact upon the business and
operation of the Distributor or Trust; or
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<PAGE> 17
(j) at the option of the Company if it shall determine in its sole
judgement reasonably exercised in good faith, that the Trust
or the Distributor has suffered a material adverse change in
it business or financial condition since the date of this
Agreement or is the subject of material adverse publicity and
such material adverse change or material adverse publicity is
likely to have a material adverse impact upon the business and
operation of the Company; or
(k) at the option of any party upon another's breach of a material
provision of this Agreement, said termination to be effective
ten days after receipt of notice unless the breach is cured to
the satisfaction of the party giving notice within such ten
day period.
6.2. Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares
of any Portfolio and redeem shares of any Portfolio pursuant to the
terms and conditions of this Agreement for all Contracts in effect on
the effective date of termination of this Agreement. The parties agree
that this Section 6.2 shall not apply to any termination under Article
IV and the effect of Article IV terminations shall be governed by
Article IV of this Agreement.
6.3. The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.9 shall
survive the termination of this Agreement as long as shares of the
Trust are held on behalf of Contract owners in accordance with Section
6.2.
ARTICLE VII.
Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust or its Distributor:
Fred Alger Management, Inc.
30 Montgomery Street
Jersey City, NJ 07302
Attn: Gregory S. Duch
If to the Company:
Allen R. Reed
Assistant General Counsel
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<PAGE> 18
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049-0001
ARTICLE VIII.
Miscellaneous
8.1. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
8.2. This Agreement may be executed in two or more counterparts, each of
which taken together shall constitute one and the same instrument.
8.3. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
8.4. This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York. It
shall also be subject to the provisions of the federal securities laws
and the rules and regulations thereunder and to any orders of the
Commission granting exemptive relief therefrom and the conditions of
such orders. Copies of any such orders shall be promptly forwarded by
the Trust to the Company.
8.5. All liabilities of the Trust or a Portfolio, as the case may be,
arising, directly or indirectly, under this Agreement, of any and every
nature whatsoever, shall be satisfied solely out of the assets of the
Trust or the Portfolio, as the case may be, and no Trustee, officer,
agent or holder of shares of beneficial interest of the Trust or an
individual Portfolio shall be personally liable for any such
liabilities.
8.6. Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Commission,
the National Association of Securities Dealers, Inc. and state
insurance regulators) and shall permit such authorities reasonable
access to its books and records in connection with any investigation or
inquiry relating to this Agreement or the transactions contemplated
hereby.
8.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled
to under state and federal laws.
8.8. This Agreement shall not be exclusive in any respect.
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<PAGE> 19
8.9. Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the
other party.
8.10. No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed
by both parties.
8.11. Each party hereto shall, except as required by law or otherwise
permitted by this Agreement, treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto, and
shall not disclose such confidential information without the written
consent of the affected party unless such information has become
publicly available.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Participation Agreement as of the date and year first
above written.
Fred Alger & Company, Incorporated
By: /s/ Gregory S. Duch
-------------------------------------
Name: Gregory S. Duch
Title: Executive Vice President
The Alger American Fund
By: /s/ Gregory S. Duch
-------------------------------------
Name: Gregory S. Duch
Title: Treasurer
Kemper Investors Life Insurance Company
By: /s/ Otis R. Heldman, Jr.
-------------------------------------
Name: Otis R. Heldman, Jr.
Title: Vice President
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SCHEDULE A
The Accounts:
20
<PAGE> 21
SCHEDULE B
The Alger American Fund:
Alger American Balanced Portfolio
Alger American Income & Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Growth Portfolio
Alger American MidCap Growth Portfolio
Alger American Leveraged AllCap Portfolio
21
<PAGE> 1
Exhibit 1(m)(ii)
SERVICE AGREEMENT
AGREEMENT dated as of May 1, 1999, between Fred Alger Management, Inc.
("Alger"), a New York Corporation with its principal offices at 1 World Trade
Center, Suite 9333, New York, NY 10048, as Investment Adviser for The Alger
American Fund (the "Fund"), and Kemper Investors Life Insurance Company (the
"Company"), an Illinois corporation having its principal office and place of
business at One Kemper Drive, Long Grove, IL 60049.
In consideration of the promises and mutual covenants set forth in this
Agreement, the Parties agree as follows:
1. SERVICES PROVIDED
The Company agrees to provide services to the Fund including the
following:
a) responding to inquiries from the Company Contract owners using
one or more Portfolios of the Fund as an investment vehicle
regarding the services performed by the Company as they relate
to the Fund;
b) providing information to Alger and to Contract owners with
respect to shares attributable to Contract owner accounts;
c) printing and mailing of shareholder communications from the
Fund consistent with the Participation Agreement dated May 1,
1999 (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution
and tax notices) as may be required;
d) communication directly with Contract owners concerning the
Fund's operations;
e) providing such other similar services as Alger may reasonably
request pursuant to the extent permitted or required under
applicable statutes, rules, and regulations.
2. EXPENSE ALLOCATION
Subject to Paragraph 3 hereof, the Company or its affiliates shall
initially bear the costs of the following:
a) printing and distributing the Fund's prospectus, statement of
additional information and any amendments or supplements
thereto, periodic reports to shareholders, Fund proxy material
and other shareholder communications (collectively, the "Fund
Materials") to be distributed to prospective Contract owners;
b) printing and distributing all sales literature or promotional
material developed by
<PAGE> 2
the Company or its affiliates and relating to the contracts;
c) servicing Contract owners who have allocated Contract value to
a Portfolio, which servicing shall include, but is not limited
to, the items listed in Paragraph 1 of this Agreement.
d) Notwithstanding any other provisions of this Administrative
Services Agreement or the Participation Agreement between the
parties, Alger agrees to reimburse the Company for costs
related to the printing, mailing, and tabulation of any proxy
initiated by the Fund, the Distributor or Alger.
3. PAYMENT OF EXPENSES
a) In consideration of the administrative expense savings
resulting from the Company's services and to compensate the
Company for its costs, Alger agrees to pay the Company an
amount computed daily and paid quarterly in arrears equal to
[redacted] per annum of the average daily net assets of the
Fund attributable to the Contracts.
b) From time to time, the Parties hereto shall review the
Portfolio Servicing Fee to determine whether it reasonably
approximates the incurred and anticipated costs, over time of
the Company in connection with its duties hereunder. The
Parties agree to negotiate in good faith any change to the
Portfolio Servicing Fee proposed by a Party in good faith.
4. TERM OF AGREEMENT
This Agreement shall continue in effect for so long as Alger or its
successor(s) in interest, or any affiliate thereof, continues to
perform in a similar capacity for the Fund, and for so long as any
Contract value or any monies attributable to the Company is allocated
to a Portfolio, provided, however, that either party may Terminate this
Agreement upon a material breach of this Agreement by the other party
that remains uncured for 60 days after written notice by the
terminating party. However, Portfolio Servicing Fees shall in no event
be paid to the Company more than one year after the termination of this
Agreement.
5. INDEMNIFICATION
a) The Company agrees to indemnify and hold harmless Alger and
its officers, directors and affiliates from any and all loss,
liability and expense resulting from the gross negligence or
willful wrongful act of the Company under this Agreement,
except to the extent such loss, liability or expense is the
result of the willful misfeasance, bad faith or gross
negligence of Alger in the performance of
2
<PAGE> 3
its duties, or by reason of the reckless disregard of its
obligations and duties under this Agreement.
b) Alger agrees to indemnify and hold harmless the Company and
its officers, directors and affiliates from any and all loss,
liability and expense resulting from the gross negligence or
willful wrongful act of Alger under this Agreement, except to
the extent such loss, liability or expense is the result of
the willful misfeasance, bad faith or gross negligence of the
Company in the performance of its duties, or by reason of the
reckless disregard of its obligations and duties under this
Agreement.
6. NOTICE
Notices and communications required or permitted hereby will be given
to the following persons at the following addresses and facsimile
numbers, or such other persons, addresses or facsimile numbers as the
Party receiving such notices or communications may subsequently direct
in writing:
Fred Alger Management, Inc.
1 World Trade Center
Suite 9333
New York, NY 10048
Attn: Gregory S. Duch
Fax: (201) 451-8768
Kemper Investors Life Insurance Company
One Kemper Drive
Long Grove, IL 60049
Attn: Allen R. Reed, Esq.
Fax: (847) 969-3529
7. APPLICABLE LAW
Except insofar as the Investment Company Act of 1940 or other federal
laws and regulations may be controlling, this Agreement will be
construed and the provisions hereof interpreted under and in accordance
with New York law, without regard for that state's principles of
conflict of laws.
3
<PAGE> 4
8. SEVERABILITY
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement
will not be affected thereby.
9. RIGHTS CUMULATIVE
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, that the Parties are entitled to
under federal and state laws.
10. ASSIGNMENT
Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written consent of the other
party thereto.
11. AMENDMENT
This Agreement may be amended or modified in whole or in part only by a
written agreement executed by both parties.
12. DEFINED TERMS
Unless otherwise indicated, all capitalized terms used herein shall
have the meanings assigned to them in the Participation Agreement
between the Parties.
4
<PAGE> 5
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized officers signing below.
FRED ALGER MANAGEMENT, INC.
By: /S/ Gregory S. Duch
-------------------------------------
Gregory S. Duch
Executive Vice President
KEMPER INVESTORS LIFE
INSURANCE COMPANY
By: /S/ Otis R. Heldman, Jr.
-------------------------------------
Name: Otis R. Heldman, Jr.
-----------------------------------
Title: Vice President
----------------------------------
5
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contracts Owners of KILICO Individual and Group Variable, Fixed and Market Value
Adjusted Deferred Annuity Contracts
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-22389) of our report dated February 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 Contract
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-22389) 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
