<PAGE> 1
PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
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INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
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ZURICH PREFERRED
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
This Prospectus describes Variable and Market Value Adjusted Deferred Annuity
Contracts (the "Contract") offered by Kemper Investors Life Insurance Company
("we" or "KILICO"). The Contract is designed to provide annuity benefits for
retirement which may or may not qualify for certain federal tax advantages or as
nonqualified annuities. 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 or the
fixed option subject to a market value adjustment. The Contract currently offers
twenty-seven 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 Money Market
- Kemper Technology Growth
- Kemper Total Return
- Kemper High Yield
- Kemper Growth
- Kemper Government Securities
- Kemper Small Cap Growth
- Kemper Investment Grade Bond
SCUDDER VARIABLE LIFE INVESTMENT FUND ("VLIF") (CLASS A SHARES)
- Scudder VLIF Capital Growth
- Scudder VLIF International
- Scudder VLIF Bond
THE ALGER AMERICAN FUND
- Alger American Growth
- Alger American Small Capitalization
- Alger American MidCap Growth
JANUS ASPEN SERIES
- Janus Aspen Growth
- Janus Aspen Aggressive Growth
- Janus Aspen Worldwide Growth
- Janus Aspen Balanced
FIDELITY VARIABLE INSURANCE PRODUCTS FUND ("VIP")
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II ("VIP II")
- Fidelity VIP Equity-Income (Initial Class Shares)
- Fidelity VIP Growth (Initial Class Shares)
- Fidelity VIP II Index 500 (Service Class 2 Shares)
- Fidelity VIP II Contrafund(R) (Initial Class Shares)
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. ("VP")
- American Century VP Income & Growth
- American Century VP Value
J.P. MORGAN SERIES TRUST II
- J.P. Morgan Small Company
WARBURG PINCUS TRUST
- Warburg Pincus Trust-Emerging Markets
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
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 (888) 477-9700.
A TABLE OF CONTENTS FOR THE SAI APPEARS ON PAGE 57. 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 JUNE 23, 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> 2
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..................................................... 8
THE CONTRACTS............................................... 13
THE ACCUMULATION PERIOD..................................... 13
CONTRACT CHARGES AND EXPENSES............................... 19
THE ANNUITY PERIOD.......................................... 21
FEDERAL INCOME TAXES........................................ 24
DISTRIBUTION OF CONTRACTS................................... 29
VOTING RIGHTS............................................... 29
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 29
DOLLAR COST AVERAGING....................................... 30
SYSTEMATIC WITHDRAWAL PLAN.................................. 30
EXPERTS..................................................... 30
LEGAL MATTERS............................................... 31
SPECIAL CONSIDERATIONS...................................... 31
AVAILABLE INFORMATION....................................... 31
BUSINESS.................................................... 32
PROPERTIES.................................................. 37
LEGAL PROCEEDINGS........................................... 37
SELECTED FINANCIAL DATA..................................... 38
SUPPLEMENT TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDING
THREE MONTHS ENDED MARCH 31, 2000......................... 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 42
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS................... 54
EXECUTIVE COMPENSATION...................................... 56
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 57
FINANCIAL STATEMENTS........................................ 57
APPENDIX A ILLUSTRATION OF A MARKET VALUE ADJUSTMENT........ 89
APPENDIX B KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED
FIXED AND VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA
DISCLOSURE STATEMENT...................................... 91
</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 when you make premium payments to us.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ALLOCATION OPTION--The twenty-seven (27) Subaccounts and the MVA Option
available under the Contract for allocation of Purchase Payments, or
transfers of Contract Value during the Accumulation Period.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments. Life annuity payments involving life contingencies depend
upon the annuitant.
ANNUITY DATE--The date on which annuity payments from us to the annuitant
start.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date when we make
annuity payments to the annuitant.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person you designate to receive any benefits under a
Contract upon your death or upon the Annuitant's death prior to the Annuity
Period.
COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.
CONTRACT--A Variable and Market Value Adjusted Deferred Annuity Contract
offered on an individual or group basis. Contracts issued on a group basis
are represented by a certificate. Contracts issued on an individual basis
are represented by an individual annuity contract.
CONTRACT VALUE--The sum of the values of your Accumulated Guarantee Period
Value and Separate Account Value during the Accumulation Period.
CONTRACT YEAR--Period between anniversaries of the Date of Issue of a
Contract.
DATE OF ISSUE--The date on which the first Contract Year commences.
DEBT--The principal of any outstanding loan plus any accrued interest.
Requests for loans must be made in writing to us.
FIXED ANNUITY--An annuity where we guarantee the amount of each annuity
payment.
FUND OR FUNDS--Kemper Variable Series, Scudder Variable Life Investment
Fund, The Alger American Fund, Janus Aspen Series, Fidelity Variable
Insurance Products Fund, Fidelity Variable Insurance Products Fund II,
American Century Variable Portfolios, Inc., J.P. Morgan Series Trust II,
Warburg Pincus Trust and The Dreyfus Socially Responsible Growth Fund,
Inc., including any Portfolios thereunder.
GENERAL ACCOUNT--All our assets other than those allocated to any legally
segregated separate account.
GUARANTEED INTEREST RATE--The rate of interest we set for a given Guarantee
Period.
GUARANTEE PERIOD--The period of time for which a Guaranteed Interest Rate
of an MVA Option is guaranteed. You may elect MVA Options having Guarantee
Periods of from one to ten years.
GUARANTEE PERIOD VALUE--The sum of:
- your Purchase Payments allocated to an MVA Option or amounts you
transfer to an MVA Option, plus
- interest credited, minus
- your withdrawals and transfers, plus or minus
- any applicable Market Value Adjustment previously made.
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula. 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.
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MVA OPTION -- A fixed account accumulation option to which payments may be
allocated or contract value transferred.
NON-QUALIFIED CONTRACT -- A Contract issued in connection with a retirement
plan which does not receive favorable tax treatment under Section 401, 403,
408, 408A or 457 of the Internal Revenue Code.
OWNER ("YOU, YOUR, YOURS") -- The person designated in the Contract as
having the privileges of ownership defined in the Contract.
PORTFOLIO(S) -- The underlying portfolios in which the Subaccounts invest.
Each Portfolio is an investment company registered with the SEC or a
separate investment series of a registered investment company.
PURCHASE PAYMENTS -- Amounts paid to us by you or on your behalf.
QUALIFIED CONTRACT -- A Contract issued in connection with a retirement
plan which receives favorable tax treatment under Section 401, 403, 408,
408A or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT -- The KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT VALUE -- The sum of your Subaccount Values.
SUBACCOUNTS -- The twenty-seven subdivisions of the Separate Account, the
assets of which consist solely of shares of the corresponding Portfolios.
SUBACCOUNT VALUE -- The value of your allocations to a Subaccount.
VALUATION DATE -- Each day when a Subaccount is valued. Subaccounts are
normally valued every day the New York Stock Exchange is open for trading.
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) you specify.
2
<PAGE> 5
SUMMARY
Because this is a summary; it does not contain all of the information that may
be important. Read the entire Prospectus and Statement of Additional Information
before deciding to invest.
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified and Qualified Contracts are described in this
Prospectus.
The minimum initial Purchase Payment is $25,000 and, subject to certain
exceptions, the minimum subsequent payment is $100.
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts that you select. Each Subaccount invests in a
corresponding Portfolio. (See "The Funds," page 9.)
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccount(s).
The MVA Options provide fixed-rate accumulations, each for a specified Guarantee
Period. MVA Options are only available during the Accumulation Period. You may
allocate amounts to one or more MVA Options. We may offer additional MVA Options
with different Guarantee Periods at our discretion. For new Contracts, we may
limit to 3 the number of MVA Options available. We credit a Guaranteed Interest
Rate daily to amounts allocated to an MVA Option. Each Guaranteed Interest Rate
is set at our discretion, but once set is guaranteed not to change for the
duration of the Guarantee Period. At the end of a Guarantee Period, your money
will be transferred to the money market subaccount unless you timely elect
another MVA Option.
Transfers between Subaccounts are permitted before and after annuitization,
subject to limitations. A transfer from a Guarantee Period is subject to a
Market Value Adjustment.
The minimum withdrawal amount is $500 for the Subaccounts and $5,000 for the MVA
Options. A minimum $5,000 plus the value of outstanding Contract loans must
remain after a withdrawal. If less than $5,000 remains after partial withdrawal,
we will terminate the Contract. If a partial withdrawal is made in connection
with a 1035 exchange, direct transfer, or direct rollover, a $5,000 Contract
Value must also remain in the Contract after the transfer. If this withdrawal
request would reduce the Contract Value to less than $5,000, and you have not
terminated your Contract, your partial withdrawal request will be limited so
that the Contract Value remaining will be $5,000. No transfer, rollover, or 1035
exchange is permitted if there is an outstanding loan on your Contract.
Withdrawals will have tax consequences, including income tax and in some
circumstances an additional 10% penalty tax. Withdrawals are permitted from
Contracts issued with Section 403(b) Qualified Plans only under limited
circumstances. (See "Federal Income Taxes," page 24.)
A Market Value Adjustment also applies to any withdrawal (except during the
"free look" period), transfer, purchase of an annuity option. The Market Value
Adjustment does not apply to the death benefit. The Market Value Adjustment is
applied to the amount being withdrawn. (See "The Contracts," page 13.)
Contract charges include:
- mortality and expense risk charges,
- administrative expenses,
- records maintenance charge, and
- applicable premium taxes.
(See "Charges Against the Separate Account," page 19.) In addition, the Funds
pay their investment advisers varying fees for investment advice and also incur
other operational expenses. (See the Funds' prospectuses for such information.)
Dollar Cost Averaging and Automatic Asset Rebalancing are available to you. (See
"Dollar Cost Averaging," page 30 and "The Accumulation Period -- Automatic Asset
Rebalancing," page 18.)
The Contract may be purchased as an Individual Retirement Annuity, Simplified
Employee Pension --IRA, Traditional and Roth Individual Retirement Annuity, tax
sheltered annuity, and as a nonqualified annuity. (See "Taxation of Annuities in
General," page 24 and "Qualified Plans," page 26.)
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<PAGE> 6
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 13.) 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.
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<PAGE> 7
SUMMARY OF EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments)................................................ None
Contingent Deferred Sales Load (as a percentage of amount surrendered)................................................ None
Surrender Fees (in addition to Withdrawal Charge)..................................................................... None
Surrenders and other withdrawals from the MVA Option are subject to a Market Value Adjustment. The Market Value
Adjustment may increase or reduce the Guarantee Period Value.
Transfer Fees (voluntary transfers in excess of 12 per year).......................................................... $25
Maximum Records Maintenance Charge.................................................................................... $30
Under certain circumstances the annual Records Maintenance Charge may be reduced or waived. The annual Records
Maintenance Charge will be $15 for Contracts with a Contract Value between $25,000 and $50,000 and will be waived
for Contracts with a Contract Value exceeding $50,000 on the date of assessment.
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average daily account value)
<S> <C>
Mortality and Expense Risk.............. 1.00%
Administration
Current............................... 0.25%
Maximum............................... 0.45%*
Account Fees and Expenses............... 0.00%
Total Current Separate Account Annual Expenses... 1.25%
Total Maximum Separate Account Annual Expenses... 1.45%*
</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
MONEY TECHNOLOGY TOTAL KEMPER KEMPER GOVERNMENT SMALL CAP
MARKET GROWTH(1)(2) RETURN HIGH YIELD GROWTH SECURITIES GROWTH
------ ------------ ------ ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees......................... .50% .51% .55% .60% .60% .55% .65%
Other Expenses.......................... .04 .44% .06 .07 .06 .08 .06
Rule 12b-1 Fees.........................
--- --- --- --- --- --- ---
Total Portfolio Annual Expenses......... .54% .95% .61% .67% .66% .63% .71%
=== === === === === === ===
<CAPTION>
KEMPER SCUDDER
INVESTMENT VLIF SCUDDER SCUDDER
GRADE CAPITAL VLIF VLIF
BOND(3) GROWTH INTERNATIONAL BOND
---------- ------- ------------- -------
<S> <C> <C> <C> <C>
Management Fees......................... .60% .46% .85% .48%
Other Expenses.......................... .05 .03 .18 .09
Rule 12b-1 Fees.........................
--- --- ---- ---
Total Portfolio Annual Expenses......... .65% .49% 1.03% .57%
=== === ==== ===
</TABLE>
<TABLE>
<CAPTION>
ALGER ALGER JANUS JANUS FIDELITY
ALGER AMERICAN AMERICAN JANUS ASPEN ASPEN JANUS VIP
AMERICAN SMALL MIDCAP ASPEN AGGRESSIVE WORLDWIDE ASPEN EQUITY-
GROWTH CAPITALIZATION GROWTH GROWTH(4) GROWTH(4) GROWTH(4) BALANCED(4) INCOME(5)
-------- -------------- -------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............. .75% .85% .80% .65% .65% .65% .65% .48%
Other Expenses.............. .04 .05 .05 .02 .02 .05 .02 .09
Rule 12b-1 Fees.............
--- --- --- --- --- --- --- ---
Total Portfolio Annual
Expenses.................. .79% .90% .85% .67% .67% .70% .67% .57%
=== === === === === === === ===
</TABLE>
<TABLE>
<CAPTION>
AMERICAN WARBURG
FIDELITY FIDELITY CENTURY PINCUS DREYFUS
FIDELITY VIP II VIP II VP AMERICAN J.P. MORGAN TRUST- SOCIALLY
VIP INDEX CONTRA- INCOME & CENTURY VP SMALL EMERGING RESPONSIBLE
GROWTH(5) 500(6) FUND(5) GROWTH VALUE COMPANY(7) MARKETS(8) GROWTH
--------- -------- -------- -------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............... .58% .24% .58% .70% 1.00% .60% 0.00% .75%
Other Expenses................ .08 .11 .09 .00 .00 .55 1.40 .04
Rule 12b-1 Fees............... .25
--- --- --- --- ---- ---- ---- ---
Total Portfolio Annual
Expenses.................... .66% .60% .67% .70% 1.00% 1.15% 1.40% .79%
=== === === === ==== ==== ==== ===
</TABLE>
* We reserve the right to increase the administration charge up to a maximum
of .45%. We currently do not charge the maximum.
(1) Portfolios commenced operations on May 1, 1999. "Other Expenses" have been
annualized.
(2) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on May 1, 2000, to limit their respective fees and to
reimburse other expenses to the extent necessary to limit total operating
expenses of the Kemper Technology Growth Portfolio of Kemper Variable Series
to the amount set forth in the table above. Without taking into effect this
expense cap for the Kemper Technology Growth Portfolio of Kemper Variable
Series: Management Fees would be .75%; Other Expenses are .44%; and Total
Portfolio Annual Expenses are 1.19%.
(3) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on May 1, 2000, to limit their respective fees and to
reimburse other expenses to the extent necessary to limit total operating
expenses of the Kemper Investment Grade Bond Portfolio to .80%. The amount
set forth in the table above reflects actual expenses for the past fiscal
year, which were lower than this expense limit.
(4) 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
Growth, Janus Apsen Aggressive Growth, Janus Aspen Worldwide Growth and
Janus Aspen Balanced Portfolios. All expenses are shown without the effect
of any expense offset arrangements.
5
<PAGE> 8
(5) A portion of the brokerage commissions that certain Portfolios pay was used
to reduce expenses. In addition, certain Portfolios have entered into
arrangements with their custodian whereby credits realized as a result of
uninvested cash balances were used to reduce a portion of Portfolio
expenses. With these reductions, Management Fees, Other Expenses and Total
Portfolio Annual Expenses would have been .48%, .08% and .56%, respectively,
for the Fidelity VIP Equity-Income Portfolio, .58%, .07% and .65%,
respectively, for the Fidelity VIP Growth Portfolio; and .58%, .07% and
.65%, respectively, for the Fidelity VIP II Contrafund Portfolio.
(6) Fidelity VIP II Index 500 (Service Class 2 Shares) Portfolio's total annual
expenses reflect Fidelity Management & Research Company's ("FMR") voluntary
agreement to reimburse the class to the extent total operating expenses
(excluding interest, taxes, securities lending costs, brokerage commissions
and extraordinary expenses), as a percentage of average net assets, exceed a
certain rate. FMR's voluntary agreement may be discontinued by FMR at any
time. With this reimbursement, Management Fees, Other Expenses, Rule 12b-1
Fees and Total Portfolio Annual Expenses would have been .24%, .04%, .25%
and .53%, respectively. Service Class 2 expenses are based on estimated
expenses for the first year.
(7) Reflects an agreement by Morgan Guaranty Trust Company of New York to
reimburse the Portfolio to the extent expenses exceed 1.15%. Absent fee
waiver and expense reimbursement, total operating expenses would have been
2.57%.
(8) The expense figures shown are net of certain fee waivers or reductions from
the Portfolio's investment adviser and/or 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
Warburg Pincus Trust-Emerging Markets Portfolio would have been 1.25%, 1.88%
and 3.13%, respectively. Fee waivers and expense reimbursements may be
discontinued at any time.
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 do or do not surrender your
Contract, you would pay the following
expenses on a $1,000 investment,
assuming 5% annual return on assets and
assuming the current .25% administration
charge. This example also assumes the
current level of Fund expenses for all
years shown.
Kemper Money Market $19 $58 $ 99 $215
Kemper Technology Growth 23 70 -- --
Kemper Total Return 19 60 103 222
Kemper High Yield 20 62 106 229
Kemper Growth 20 61 105 228
Kemper Government Securities 20 60 104 225
Kemper Small Cap Growth 20 63 108 233
Kemper Investment Grade Bond 20 61 105 227
Scudder VLIF Capital Growth 18 56 96 209
Scudder VLIF International 24 73 125 267
Scudder VLIF Bond 19 59 -- --
Alger American Growth 21 65 -- --
Alger American Small 22 69 -- --
Capitalization
Alger American MidCap Growth 22 67 -- --
Janus Aspen Growth 20 62 106 229
Janus Aspen Aggressive Growth 20 62 106 229
Janus Aspen Worldwide Growth 20 63 108 232
Janus Aspen Balanced 20 62 106 229
Fidelity VIP Equity-Income 19 59 101 218
Fidelity VIP Growth 20 61 105 228
Fidelity VIP II Index 500 19 59 102 221
Fidelity VIP II Contrafund 20 62 106 229
American Century VP Income & 20 63 -- --
Growth
American Century VP Value 23 72 -- --
J.P. Morgan Small Company 25 77 -- --
Warburg Pincus Trust-Emerging 27 84 144 304
Markets
Dreyfus Socially Responsible 21 65 -- --
Growth
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you do or do not surrender your
Contract, you would pay the following
expenses on a $1,000 investment,
assuming 5% annual return on assets and
assuming the maximum .45% administration
charge which we reserve the right to
charge. This example also assumes the
current level of Fund expenses for all
years shown.
Kemper Money Market $21 $64 $110 $237
Kemper Technology Growth 25 77 -- --
Kemper Total Return 21 66 113 244
Kemper High Yield 22 68 116 250
Kemper Growth 22 68 116 249
Kemper Government Securities 22 67 114 246
Kemper Small Cap Growth 22 69 118 254
Kemper Investment Grade Bond 22 67 115 248
Scudder VLIF Capital Growth 20 62 107 231
Scudder VLIF International 26 79 135 287
Scudder VLIF Bond 21 65 -- --
Alger American Growth 23 72 -- --
Alger American Small 24 75 -- --
Capitalization
Alger American MidCap Growth 24 73 -- --
Janus Aspen Growth 22 68 116 250
Janus Aspen Aggressive Growth 22 68 116 250
Janus Aspen Worldwide Growth 22 69 118 253
Janus Aspen Balanced 22 68 116 250
Fidelity VIP Equity-Income 21 65 111 239
Fidelity VIP Growth 22 68 116 249
Fidelity VIP II Index 500 21 66 113 243
Fidelity VIP II Contrafund 22 68 116 250
American Century VP Income & 22 69 -- --
Growth
American Century VP Value 25 78 -- --
J.P. Morgan Small Company 27 83 -- --
Warburg Pincus Trust-Emerging 29 90 154 324
Markets
Dreyfus Socially Responsible 23 72 -- --
Growth
</TABLE>
The purpose of the preceding tables is to assist you in understanding the
various costs and expenses that an Owner in a Subaccount will bear directly or
indirectly. The tables reflect expenses of both the Separate Account and the
Fund but not the MVA Option. See "Contract Charges and Expenses" and "The MVA
Option" for more information regarding the various costs and expenses. THE
EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR FUTURE
EXPENSES AND DO NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH MAY BE
ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN. The examples assume a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This hypothetical rate
of return is not intended to be representative of past or future performance of
any Subaccount. The Records Maintenance Charge is a single charge; it is not a
separate charge for each Subaccount. In addition, the effect of the Records
Maintenance Charge has been reflected by applying the percentage derived by
dividing the total amounts of annual Records Maintenance Charge collected by the
total net assets of all the Subaccounts in the Separate Account.
7
<PAGE> 10
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
Kemper Corporation is a majority-owned (71.67 percent) subsidiary of Zurich
Holding Company of America ("ZHCA"), which is a wholly-owned subsidiary of
Zurich Insurance Company ("Zurich"). Zurich is a wholly-owned subsidiary of
Zurich Financial Services ("ZFS"). ZFS was formed in the September, 1998 merger
of the Zurich Group with the financial services business of B.A.T. Industries.
ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c., fifty-seven percent
and forty-three percent, respectively.
THE MVA OPTION
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. The MVA Option is not available in all states. At our
discretion, we may offer additional Guarantee Periods.
The amounts allocated to the MVA Option under the Contracts are invested under
the state insurance laws regulating our General Account. Assets supporting the
amounts allocated to Guarantee Periods are held in a "non-unitized" separate
account. However, our General Account assets are available to fund benefits
under the Contracts. A non-unitized separate account is a separate account in
which you do not participate in the performance of the assets through unit
values. There are no discrete units for this separate account. The assets of the
non-unitized separate account are held as reserves for our guaranteed
obligations. The assets of the separate account are not chargeable with
liabilities arising out of the business conducted by any other separate account
or out of any other business we may conduct.
State insurance laws concerning the nature and quality of investments regulate
our General Account investments and any non-unitized separate account
investments. These laws generally permit investment in federal, state and
municipal obligations, preferred and common stocks, corporate bonds, real estate
mortgages, real estate and certain other investments. (See "Management's
Discussion and Analysis--INVESTMENTS" and "FINANCIAL STATEMENTS" for information
on KILICO's investments.) Our affiliate, Scudder Kemper Investments, Inc.
("SKI"), manages our General Account.
We consider the return available on the instruments in which Contract proceeds
are invested when establishing Guaranteed Interest Rates. This return is only
one of many factors considered in establishing Guaranteed Interest Rates. (See
"The Accumulation Period-- Establishment of Guaranteed Interest Rates.")
Our investment strategy for the non-unitized separate account is generally to
match Guarantee Period liabilities with assets, such as debt instruments. We
expect to invest in debt instruments such as:
- securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the
United States Government;
- debt securities which have an investment grade, at the time of purchase,
within the four (4) highest grades assigned by Moody's Investors
Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other
nationally recognized rating service;
- other debt instruments including issues of or guaranteed by banks or bank
holding companies and corporations, which obligations, although not rated
by Moody's or Standard & Poor's, are deemed by our management to have an
investment quality comparable to securities which may be otherwise
purchased; and
- options and futures transactions on fixed income securities.
Our General Account 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.")
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<PAGE> 11
We are not obligated to invest the amounts allocated to the MVA Option according
to any particular strategy, except as state insurance laws may require. (See
"Management's Discussion and Analysis--INVESTMENTS.")
THE SEPARATE ACCOUNT
We established the KILICO Variable Annuity Separate Account on May 29, 1981
pursuant to Illinois law as the KILICO Money Market Separate Account. KILICO
Money Market Separate Account was initially registered with the Securities and
Exchange Commission ("SEC") as an open-end, diversified management investment
company. On November 2, 1989, contract owners approved a Reorganization under
which the Separate Account was restructured as a unit investment trust. The SEC
does not supervise the management, investment practices or policies of the
Separate Account or KILICO.
Benefits provided under the Contracts are our obligations. Although the assets
in the Separate Account are our property, they are held separately from our
other assets and are not chargeable with liabilities arising out of any other
business we may conduct. Income, capital gains and capital losses, whether or
not realized, from the assets allocated to the Separate Account are credited to
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.
Twenty-seven Subaccounts of the Separate Account are currently available. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios.
We may add or delete Subaccounts in the future.
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges and to transfer assets from one Subaccount to another as 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 Funds:
- Kemper Variable Series
- Scudder Variable Life Investment Fund
- The Alger American Fund
- Janus Aspen Series
- Fidelity Variable Insurance Products Fund
- Fidelity Variable Insurance Products Fund II
- American Century Variable Portfolios, Inc.
- J.P. Morgan Series Trust II
- Warburg Pincus Trust
- The Dreyfus Socially Responsible Growth Fund, Inc.
The Funds provide investment vehicles for variable life insurance and variable
annuity contracts. 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 the Funds' responses to any of those events
insufficiently protects Owners, we will take appropriate action.
The Funds 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.
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<PAGE> 12
The twenty-seven Portfolios are summarized below:
KEMPER VARIABLE SERIES
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments. The Portfolio seeks to maintain a net asset value of $1.00
per share but there is no assurance that the Portfolio will be able to do so.
KEMPER TECHNOLOGY GROWTH PORTFOLIO seeks growth of capital.
KEMPER TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, consistent with reasonable risk.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital.
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income.
SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A SHARES)
SCUDDER VLIF CAPITAL GROWTH PORTFOLIO seeks to maximize long-term capital growth
through a broad and flexible investment program.
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.
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH PORTFOLIO seeks long-term capital appreciation.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO seeks long-term capital
appreciation.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO seeks long-term capital appreciation.
JANUS ASPEN SERIES
JANUS ASPEN GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a
manner consistent with the preservation of capital.
JANUS ASPEN BALANCED PORTFOLIO seeks long-term capital growth, consistent with
preservation of capital and balanced by current income.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VIP EQUITY-INCOME PORTFOLIO (INITIAL CLASS SHARES) seeks reasonable
income. The fund will also consider the potential for capital appreciation. The
fund seeks a yield which exceeds the composite yield on the securities
comprising the S&P 500.
FIDELITY VIP GROWTH PORTFOLIO (INITIAL CLASS SHARES) seeks capital appreciation.
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<PAGE> 13
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY VIP II INDEX 500 PORTFOLIO (SERVICE CLASS 2 SHARES) seeks investment
results that correspond to the total return of common stocks publicly traded in
the United States, as represented by the S&P 500.
FIDELITY VIP II CONTRAFUND PORTFOLIO (INITIAL CLASS SHARES) seeks long-term
capital appreciation.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AMERICAN CENTURY VP INCOME & GROWTH PORTFOLIO seeks capital growth by investing
in common stocks. Income is a secondary objective.
AMERICAN CENTURY VP VALUE PORTFOLIO seeks long-term capital growth. Income is a
secondary objective.
J.P. MORGAN SERIES TRUST II
J.P. MORGAN SMALL COMPANY PORTFOLIO seeks to provide a high total return from a
portfolio of small company stocks.
WARBURG PINCUS TRUST
WARBURG PINCUS TRUST-EMERGING MARKETS PORTFOLIO seeks long-term growth of
capital by investing in equity securities of emerging markets.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Fund's primary goal is to provide capital growth with current income as a
secondary goal by investing 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.
The Portfolios may not achieve their stated objectives. 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., our affiliate, serves as investment manager
for each of the available Portfolios of Kemper Variable Series and Scudder
Variable Life Investment Fund. Fred Alger Management, Inc. serves as the
investment adviser for the available Portfolios of The Alger American Fund.
Janus Capital Corporation is the investment adviser for the four available
Portfolios of the Janus Aspen Series. Fidelity Management & Research Company is
the investment adviser for the available Portfolios of the Fidelity Variable
Insurance Products Fund and Fidelity Variable Insurance Products Fund II.
Bankers Trust Company, a wholly-owned subsidiary of Bankers Trust New York
Corporation, serves as the sub-adviser to the Fidelity VIP II Index 500
Portfolio. American Century Investment Management, Inc. is the investment
adviser for the two available Portfolios of the American Century Variable
Portfolios, Inc. J.P. Morgan Investment Management, Inc. is the investment
adviser for the J.P. Morgan Small Company Portfolio. Credit Suisse Asset
Management, LLC is the investment adviser for the Warburg Pincus Trust-Emerging
Markets Portfolio. The Dreyfus Corporation serves as the investment adviser, and
NCM Capital Management Group, Inc. is the sub-adviser, for The Dreyfus Socially
Responsible Growth Fund, Inc. The investment advisers are paid fees for their
services by the Funds they manage. We may receive compensation from 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.
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We reserve the right to eliminate the shares of any of the Portfolios
and to substitute shares of another Portfolio or of another investment company,
if the shares of a Portfolio are no longer available for investment, or if in
our judgment further investment in any Portfolio becomes inappropriate in view
of the purposes of the Separate Account. We will not substitute any shares
attributable to any shares held by 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.
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<PAGE> 14
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 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 marketing, tax,
or investment conditions warrant. We will notify all Owners of these changes.
If we deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be:
- operated as a management company under the Investment Company Act of 1940
("1940 Act");
- deregistered under that Act in the event such registration is no longer
required; or
- combined with our other separate accounts.
To the extent permitted by law, we may transfer the assets of the Separate
Account to another separate account or to the General Account.
PERFORMANCE INFORMATION
The Separate Account may advertise several types of performance information for
the Subaccounts. All Subaccounts may advertise standardized "average annual
total return" and nonstandardized "total return." The Kemper High Yield
Subaccount, Kemper Government Securities Subaccount and Kemper Investment Grade
Bond Subaccount may also advertise "yield". The Kemper Money Market Subaccount
may advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of Subaccount's future
performance.
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 and nonstandardized total return for the life of the
Portfolio, meaning the time the underlying Portfolio has been in existence.
Standardized average annual total return will be current to the most recent
calendar quarter. Nonstandardized total return will be current to most recent
calendar month. Standardized average annual total return figures are annualized
and, therefore, represent the average annual percentage change in the value of a
Subaccount investment over the applicable period. Nonstandardized total return
may include annualized and nonannualized (cumulative) figures. Nonannualized
figures represent the actual percentage change over the applicable period.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for the Kemper Money
Market Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period, compounded on a semi-annual basis. The effective yield for the
Kemper Money Market Subaccount is calculated similarly, but includes the effect
of assumed compounding calculated under rules prescribed by the SEC. The Kemper
Money Market Subaccount's effective yield will be slightly higher than its yield
due to this compounding effect.
The Subaccounts' performance figures and Accumulation Unit values fluctuate. The
standardized performance figures reflect the deduction of all expenses and fees,
including a prorated portion of the Records Maintenance Charge. The
nonstandardized performance figures reflect the deduction of all expenses and
fees, excluding a prorated portion of the Records Maintenance Charge.
The Subaccounts may be compared to relevant indices and performance data from
independent sources, including the Dow Jones Industrial Average, the Standard &
Poor's 500 Stock Index, the Consumer Price Index, the CDA Certificate of Deposit
Index, the Salomon Brothers High Grade Corporate Bond Index, the Lehman Brothers
Government/Corporate Bond Index, the Merrill Lynch Government/Corporate Master
Index, the Lehman Brothers Long Government/Corporate Bond Index, the Lehman
Brothers Government/Corporate 1-3 Year Bond Index, the Standard & Poor's Midcap
400 Index, the NASDAQ Composite Index, the Russell 2000 Index and the Morgan
Stanley Capital International Europe, Australia, Far East Index. Please note the
differences and similarities between the investments which a Subaccount may
purchase and the investments measured by the indexes. In particular, the
comparative information with regard to the indexes will not reflect the
deduction of any Contract
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<PAGE> 15
charges or portfolio expenses. In addition, certificates of deposit may offer
fixed or variable yields and principal is guaranteed and may be insured. The
Subaccounts are not insured and the value of their units 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 is provided in the
Statement of Additional Information.
THE CONTRACTS
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $25,000 and the minimum subsequent
payment is $100. Purchase Payments in excess of $1,000,000 require our prior
approval.
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 the amounts of purchase payments in the
Guarantee Periods on the date we receive the returned Contract, without any
deduction for 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 change a Beneficiary at any time by
signing our form. No Beneficiary change is binding on us until we receive it. We
assume no responsibility for the validity of a Beneficiary change.
Amounts payable during the Annuity Period may not be assigned. In addition, to
the extent permitted by law, annuity payments are not subject to levy,
attachment or other judicial process for the payment of the payee's debts or
obligations.
You designate the Beneficiary. If you or the Annuitant dies, and no designated
Beneficiary or contingent beneficiary is alive at that time, we will pay you or
the Annuitant's estate.
Under a Qualified Contract, the provisions of the applicable plan may prohibit a
change of Beneficiary. Generally, an interest in a Qualified Contract may not be
assigned.
THE ACCUMULATION PERIOD
A. APPLICATION OF PURCHASE PAYMENTS.
You allocate your Purchase Payments to the Subaccount(s) or MVA Option(s). 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 an MVA Option begin earning interest one day after we
receive them. However, with respect to initial Purchase Payments, the amount is
credited no later than 2 business days after the application for the Contract is
complete. After the initial purchase, we determine the number of Accumulation
Units credited by dividing the Purchase Payment allocated to a Subaccount by the
Subaccount's Accumulation Unit value, as computed after we receive the Purchase
Payment.
The number of Accumulation Units will not change due to investment experience.
Accumulation Unit value varies to reflect the investment experience of the
Subaccount and the assessment of charges against the Subaccount, other than the
Records Maintenance Charge. The number of Accumulation Units and Guarantee
Period Value is reduced when the Records Maintenance Charge is assessed.
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<PAGE> 16
If we are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, we will promptly request the
necessary information. If the requested information is not furnished within 5
business days after we receive the initial Purchase Payment, or if we determine
that we cannot issue the Contract within the five 5 day period, we will return
the initial Purchase Payment to you, unless you consent to our retaining the
Purchase Payment until the application is completed.
B. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units credited 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 canceled 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:
(a / b) - c, where:
(a) 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;
(b) is the net asset value per share of the investment held in the
Subaccount determined at the end of the preceding Valuation Period;
(c) is the factor representing the mortality and expense risk and
administration charges.
C. GUARANTEE PERIODS OF THE MVA OPTION.
You may allocate Purchase Payments or transfer Contract Value to one or more
Guarantee Periods with durations of one to ten years. Each MVA Option has a
Guaranteed Interest Rate which will not change during the Guarantee Period.
Interest is credited daily at the effective annual rate. The minimum Purchase
Payment is $5,000 per MVA Option per allocation.
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<PAGE> 17
The following example illustrates how we credit Guarantee Period interest.
EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 4.0% Effective Annual Rate
</TABLE>
<TABLE>
<CAPTION>
INTEREST CREDITED CUMULATIVE
YEAR DURING YEAR INTEREST CREDITED
---- ----------------- -----------------
<S> <C> <C>
1 ............................................... $1,600.00 $1,600.00
2 ............................................... 1,664.00 3,264.00
3 ............................................... 1,730.56 4,994.56
4 ............................................... 1,799.78 6,794.34
5 ............................................... 1,871.77 8,666.11
</TABLE>
Accumulated Value at the end of 5 years is:
$40,000 + $8,666.11 = $48,666.11
NOTE: THIS EXAMPLE ASSUMES THAT NO WITHDRAWALS ARE MADE DURING THE FIVE-YEAR
PERIOD. IF YOU MAKE WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET VALUE
ADJUSTMENTS 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.
We send written notice 30 days before the beginning of a new Guarantee Period.
If you do not elect a new Guarantee Period, the MVA assets will be transferred
automatically to the Kemper Money Market Subaccount on the Guarantee Period
maturity date. You may choose a different Guarantee Period by preauthorized
telephone instructions or by giving us written notice. (See "Market Value
Adjustment" 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 1-888-477-9700 or write to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049 for the
new Guaranteed Interest Rates.
D. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
We declare the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate. Once
established, rates are guaranteed for the respective Guarantee Periods. We
advise you of the Guaranteed Interest Rate for a chosen Guarantee Period when we
receive a Purchase Payment, when a transfer is made or when a Guarantee Period
renews. Withdrawals of Accumulated Guarantee Period Value are subject to a
Market Value Adjustment. (See "Market Value Adjustment" below.)
We have no specific formula for establishing the Guaranteed Interest Rates. The
determination may be influenced by, but not necessarily correspond to, the
current interest rate environment. (See "The MVA Option".) We may also consider,
among other factors, the duration of a Guarantee Period, regulatory and tax
requirements, sales commissions and administrative expenses we bear, and general
economic trends.
WE MAKE THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED.
WE CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE GUARANTEED INTEREST RATES.
E. CONTRACT VALUE.
On any Valuation Date, Contract Value equals the total of:
- the number of Accumulation Units credited to each Subaccount, times
- the value of a corresponding Accumulation Unit for each Subaccount, plus
- Accumulated Guarantee Period Value.
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<PAGE> 18
F. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, you may transfer your Contract Value among the
Subaccounts and the Guarantee Periods, subject to the following provisions:
- the Contract Value transferred into or out of the Guarantee Periods must
be at least $5,000, unless the entire Guarantee Period Value is
transferred;
- we reserve the right to charge $25 for each transfer (that is not part of
the Automatic Asset Rebalancing, see p. 22) when there are more than 12
transfers in a Contract Year.
In addition, transfers of Guarantee Period Value before the Guarantee Period end
date are subject to Market Value Adjustment. 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.
If you authorize a third party to transact transfers on your behalf as a part of
an advisory service, we will reallocate the Contract Value pursuant to an
authorized program. However, we do not currently offer or participate in any
advisory service program and we take no responsibility for any third party
advisory service 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.
We make transfers pursuant to written or telephone instructions specifying in
detail the requested changes. Transfers involving a Subaccount are based upon
the Accumulation Unit values, as calculated after we receive transfer
instructions. We may suspend, modify or terminate the transfer provision. We
disclaim all liability if we follow good faith instructions given in accordance
with our procedures, including requests for personal identifying information,
that are designed to limit unauthorized use of the privilege. Therefore, you
bear the risk of loss in the event of a fraudulent telephone transfer.
G. PARTIAL WITHDRAWALS DURING ACCUMULATION PERIOD.
You may redeem some or all of the Contract Value minus previous withdrawals,
plus or minus any applicable Market Value Adjustment. Withdrawals will have tax
consequences. (See "Federal Tax Matters.") A withdrawal of the entire Contract
Value is called a surrender. Your ability to surrender may be limited by the
terms of a qualified plan. (See "Federal Tax Matters".)
Partial withdrawals are subject to the following:
In any Contract Year, you may make a partial withdrawal, subject to the
following:
- the partial withdrawal from the Subaccounts must be at least $500,
- the minimum withdrawal from the MVA Options must be at least $5,000
(before any Market Value Adjustment),
- at least $5,000 of Contract Value less Debt must remain in the Contract
after the withdrawal,
- if there is an outstanding loan the greater of $5,000 or 20% of Contract
Value must be retained in the contract
- transfers, rollovers, and exchanges are not permitted if there is an
outstanding loan.
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 cancel Accumulation Units on a pro rata basis from all investment options in
which you have an interest.
Election to withdraw shall be made in writing to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049 and should
be accompanied by the Contract if surrender is requested. Withdrawal requests
are processed only on days when the New York Stock Exchange is open. The
Withdrawal Value attributable to the Subaccounts is determined on the basis on
the Accumulation Unit values, as calculated after we receive the request. The
Withdrawal Value attributable to the Subaccounts is paid within 7 days after we
receive the request. However, we may suspend withdrawals or delay payment:
- during any period when the New York Stock Exchange is closed,
- when trading in a Portfolio is restricted or the SEC determines that an
emergency exists, or
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- as the SEC by order may permit.
For withdrawal requests from the MVA Option, we may defer any payment for up to
six months, as permitted by state law. During the deferral period, we will
continue to credit interest at the current Guaranteed Interest Rate for the same
Guarantee Period.
H. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected on the Guarantee Period end date or during the "free look" period, may
be adjusted up or down by a Market Value Adjustment.
The Market Value Adjustment reflects the relationship between
- 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
- 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:
MVA = GPV X .075 X (J - I) X N
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 Amount subject to the Market
Value Adjustment, rounded to the next higher number of complete years, and
N is the number of months remaining in the Guarantee Period.
For an illustration showing an upward and a downward adjustment, see Appendix A.
I. DEATH BENEFIT.
If you (or the Annuitant) die during the Accumulation Period, prior to attaining
age 75, the beneficiary will be paid the greatest of:
- the Contract Value less Debt, or
- the total amount of Purchase Payments, minus both Debt and the aggregate
dollar amount of all previous partial withdrawals, or
- the amount that would have been payable in the event of a full surrender.
If you (or the Annuitant) die at age 75 or later, the death benefit is the
Contract Value minus Debt or, if larger, the amount that would have been paid in
the event of a full surrender.
You or the 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 Contracts, if you are not the Annuitant and you die before the
Annuitant, the death benefit will be paid to your designated Beneficiary. The
available Annuity Options are limited by the Code, as described under "Annuity
Options". The death benefit is determined as stated above, except your age at
death is used in determining the amount payable. If the Beneficiary is your
surviving spouse, the surviving spouse may elect to be
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treated as the successor Owner of the Contract and is not required to begin
death benefit distribution. The issue age of the deceased Owner applies in
computing the death benefit, payable at the death of a spouse who has elected to
be treated as the successor Owner.
J. LOANS.
The Owner of a Contract issued as a tax sheltered annuity under Section 403(b)
of the Code or with a qualified plan under Code Section 401 may request a loan
(if permitted by the ERISA Qualified Plan) any time during the accumulation
period. Loans are made from the general account. In general, under the Code
loans may not exceed 50% of the Contract Value. If the Contract Value is at
least $20,000 or the Contract is part of an ERISA qualified plan, the maximum
loan amount is the lesser of:
- 50% of the Contract Value, or
- $50,000 reduced by the principal of any outstanding loan, plus loan
interest due or accrued ("loan balance") over the prior 12 months.
If the Contract Value is less than $20,000 and is not part of an ERISA qualified
plan, the maximum loan amount is the lesser of:
- $10,000, or
- 80% of the Contract Value, less Debt.
The minimum loan is $1,000.
For non-ERISA loans, the loan interest rate is 5.5% per year. For loans issued
under ERISA plans, the loan interest rate will vary based on current rates.
Interest that is not paid when due is added to the loan and will bear interest
at the same rate as the loan. While the loan is outstanding, the portion of the
General Account Contract Value that equals the debt will earn interest at a rate
2.5% less than the loan rate.
Loans must be repaid in substantially equal quarterly payments within 5 years.
Loans used to purchase your principal residence must be repaid within 15 years.
If a loan payment is not made when due, interest will continue to accrue. On
403(b) Contracts, to the extent permitted by law, the amount of the missed
payment will be deducted from your Contract and paid to us. Any loan payment
which is not made when due, plus interest, will be treated as a distribution of
the entire remaining loan balance and will be taxable to the borrower, and may
be subject to early withdrawal tax penalty.
If there is an outstanding loan balance when the Contract is surrendered or
annuitized, or when a death benefit is paid, the amount payable will be reduced
by the amount of the loan outstanding plus accrued interest. Any loans made
under a Contract will be subject to Code requirements, our administrative
procedures as reflected under our loan agreements, and, if applicable, ERISA.
K. AUTOMATIC ASSET REBALANCING.
You may elect Automatic Asset Rebalancing on a monthly, quarterly, semi-annual
or annual basis. Funds held under the DCA or MVA options are not eligible for
this option. There is no charge for this service.
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CONTRACT CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk charge,
- administrative expenses,
- Records Maintenance Charge, and
- applicable premium taxes.
Subject to certain expense limitations, you indirectly bear investment
management fees and other Fund expenses.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
1. MORTALITY AND EXPENSE RISK CHARGE.
We assess each Subaccount a daily asset charge for mortality and expense risks
at a rate of 1.00% per annum. Variable Annuity payments reflect the investment
experience of each Subaccount but are not affected by changes in actual
mortality experience or by actual expenses we incur.
The mortality risk we assume arises from two contractual obligations. First, if
you or the Annuitant die before you attain age 75, we may, in some cases, pay
more than Contract Value. (See "Death Benefit", page 18) 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 .25% per annum. We reserve the right to increase this charge to a
maximum of .45 per annum. If we increase this charge we will give you 3 months
advance notice. These charges reimburse us for expenses incurred for
administering the Contracts. These expenses include your inquiries, changes in
allocations, reports to you, Contract maintenance costs, and data processing
costs. The administrative charge covers the average anticipated administrative
expenses incurred while the Contracts are in force. There is not necessarily a
direct relationship between the amount of the charge and the administrative
costs of the particular Contract.
B. RECORDS MAINTENANCE CHARGE.
We will assess an annual Records Maintenance Charge (assessed ratably each
quarter) during the Accumulation Period against each Contract which has
participated in one or more of the Subaccounts during the calendar year whether
or not any Purchase Payments have been made during the year. The Records
Maintenance Charge is:
- $7.50 quarterly for Contracts with Contract Value under $25,000.
- $3.75 quarterly for Contracts with Contract Value between $25,000 and
$50,000.
- No Records Maintenance Charge for Contracts with Contract Value over
$50,000.
The Record Maintenance Charge is not assessed during the Annuity Period.
The Records Maintenance Charge is to reimburse us for expenses incurred in
establishing and maintaining the records relating to a Contract's participation
in the Separate Account. The Records Maintenance Charge will be assessed at the
end of each calendar quarter and will constitute a reduction in the net assets
of each Subaccount.
At any time the Records Maintenance Charge is assessed, the applicable charge
will be assessed ratably against each Subaccount in which the Contract is
participating and a number of Accumulation Units sufficient to equal the proper
portion of the charge will be redeemed from such Subaccount, or from the
Guarantee Periods if necessary to meet the assessment.
C. WITHDRAWAL CHARGE.
There is no withdrawal charge.
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D. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value may reflect the deduction of investment
management fees, Rule 12b-1 fees and general operating expenses. Subject to
limitations, you indirectly bear these fees and expenses. (See "Summary of
Expenses.") Further detail is provided in the attached prospectuses for the
Portfolios and the Funds' Statements of Additional Information.
E. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If we pay state premium taxes, we may charge the amount
paid against Contract Value upon annuitization, unless the tax was previously
assessed. See "Appendix B--State Premium Tax Chart" in the Statement of
Additional Information. It is our current practice under this Contract to pay
premium tax directly and not charge you. This practice is subject to change
without notice.
F. REDUCTION OR ELIMINATION OF CERTAIN CHARGES.
Contracts may be available for purchase in certain group or sponsored
arrangements that qualify for reductions or eliminations of certain charges, the
time periods in which such charges apply, or both. Group arrangements include
those in which a trustee, an employer or an association purchases Contracts
covering a group of individuals. Sponsored arrangements include those in which
an employer or association allows us to offer Contracts to its employees or
members on an individual basis.
In certain circumstances, the risk of adverse mortality and expense experience
for Contracts purchased in certain group or sponsored arrangements may be
reduced. Then, the daily asset charge for mortality and expense costs may
likewise be reduced. The daily asset charge for administrative costs and the
Records Maintenance Charge may also be reduced or eliminated if we anticipate
lower administrative expenses. In certain other circumstances, sales expenses in
certain group or sponsored arrangements may be reduced or eliminated.
In determining whether a group or sponsored arrangement qualifies for reduced or
eliminated charges, we will consider:
- the size and type of group to which sales are to be made and
administrative services provided, and the persistency expected from the
group;
- the total amount of Purchase Payments to be received and the method in
which they will be remitted;
- any prior or existing relationship with us;
- the level of commission paid to selling broker-dealers;
- the purpose for which the Contract is being purchased, and whether that
purchase makes it likely that sales costs and administrative expenses
will be reduced; and
- the frequency of projected surrenders or distributions.
We make any reductions or eliminations according to objective guidelines in
effect when an application for a Contract is approved. We may change these
guidelines from time to time. Any variation in the charges will reflect
differences in costs or services and will be offered uniformly to all members of
the group or sponsored arrangement. In no event will a charge reduction or
elimination be permitted if it is unfairly discriminatory to any person or
prohibited by law.
We may also decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, beyond what
is disclosed above, we guarantee that they will not increase. We bear the risk
that such charges will not cover our costs. On the other hand, should such
charges exceed our costs, we will not refund any charges. Any profit is
available for corporate purposes including, among other things, payment of
distribution expenses.
We may also offer reduced fees and charges, including but not limited to,
Records Maintenance Charge and mortality and expense risk and administrative
charges, for certain sales that may result in cost savings. Reductions in these
fees and charges will not unfairly discriminate against any Owner.
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THE ANNUITY PERIOD
Contracts may be annuitized under one of several Annuity Options, which are
available either on a fixed or variable basis. You may annuitize any time after
the first contract year but no later than the Annuitant's 90th birthday. We make
annuity payments beginning on the Annuity Date under the Annuity Option you
select.
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
- the selected Annuity Option, and
- the investment performance of the selected Subaccount(s) (if variable
annuitization is elected).
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly.
2. ANNUITY OPTIONS.
You may elect one of the Contract's Annuity Options. You may decide at any time
(subject to the provisions of any applicable retirement plan and state
variations) to begin annuity payments. You may change the Annuity Option before,
but not after, the Annuity Date. 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 $5,000. In addition, if
the first monthly payment is less than $50 we may change the frequency of
payments to quarterly, semiannual or annual intervals so that the initial
payment is at least $50.
The amount of periodic annuity payments may depend upon:
- the Annuity Option you select;
- the age of the payee;
- the investment experience of the selected Subaccount(s); and
- the interest rates at the time of annuitization.
For example:
- if Option 1, income for a specified period, is selected, shorter
periods result in fewer payments with higher values.
- if Option 2, life income, is selected, it is likely that each payment
will be smaller than would result if income for a short period were
specified.
- if Option 3, life income with installments guaranteed, is selected,
each payment will probably be smaller than would result if the life
income option were selected.
- if Option 4, the joint and survivor annuity, is selected, each payment
is smaller than those measured by an individual life income option.
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. Finally, if you participate in a Subaccount with higher
investment performance, it is likely you will receive a higher periodic payment.
If the Beneficiary is not an individual, the entire interest must be distributed
within 5 years of your death. The Death Benefit distribution must begin no later
than one year from your death, unless a later date is prescribed by federal
regulation.
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For Non-Qualified Contracts, if you die before the Annuity Date, available
Annuity Options are limited. The Annuity Options available are:
- Option 2 or
- Option 1 or 3 for a period no longer than the life expectancy of the
Beneficiary (but not less than 5 years from your death).
OPTION 1--INCOME FOR SPECIFIED PERIOD.
Option 1 provides an annuity payable monthly for a selected number of years
ranging from five to thirty. Upon the payee's death, if the Beneficiary is an
individual, we automatically continue payments to the Beneficiary for the
remainder of the period specified. If the Beneficiary is not an individual
(e.g., an estate or trust), we pay the discounted value of the remaining
payments in the specified period. Although there is no life contingency risk
associated with Option 1, we continue to deduct the daily asset charges for
mortality and expense risks and administrative costs.
You may elect to surrender the Contract or make partial withdrawals after
annuity payments begin under Option 1. We will then pay the discounted value of
the remaining payments.
OPTION 2--LIFE INCOME.
Option 2 provides for an annuity over the lifetime of the payee. If Option 2 is
elected, annuity payments terminate automatically and immediately on the payee's
death without regard to the number or total amount of payments made. Thus, it is
possible for an individual to receive only one payment if death occurred prior
to the date the second payment was due.
OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.
Option 3 provides an annuity payable monthly during the payee's lifetime.
However, Option 3 also provides for the automatic continuation of payments for
the remainder of the specified period if the Beneficiary is an individual and
payments have been made for less than the specified period. The period specified
may be five, ten, fifteen or twenty years. If the Beneficiary is not an
individual, we pay the discounted value of the remaining payments in the
specified period.
OPTION 4--JOINT AND SURVIVOR ANNUITY.
Option 4 provides an annuity payable monthly while both payees are living. Upon
either payee's death, the monthly income payable continues over the life of the
surviving payee at a percentage specified when Option 4 is elected. Annuity
payments terminate automatically and immediately upon the surviving payee's
death without regard to the number or total amount of payments received.
3. ALLOCATION OF ANNUITY.
You may elect payments on a fixed or variable basis, or a combination. Any
Guarantee Period Value is annuitized on a fixed basis. Any Separate Account
Contract Value is annuitized on a variable basis. The MVA Option is not
available during the Annuity Period. You may exercise the transfer privilege
during the Accumulation Period. Transfers during the Annuity Period are subject
to certain limitations. We reserve the right to restrict the number of
Subaccounts available during the Annuity Period.
4. TRANSFER DURING ANNUITY PERIOD.
During the Annuity Period, the payee may, by written request, transfer
Subaccount Value from one Subaccount to another Subaccount, subject to the
following limitations:
- Transfers to a Subaccount are prohibited during the first year of the
Annuity Period; subsequent transfers are limited to one per year.
- All interest in a Subaccount must be transferred.
- If we receive notice of transfer to a Subaccount more than 7 days before
an annuity payment date, the transfer is effective during the Valuation
Period after the date we receive the notice.
- If we receive notice of transfer to a Subaccount less than 7 days before
an annuity payment date, the transfer is effective during the Valuation
Period after the annuity payment date.
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- Transfers to the General Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least 30 days prior to
the anniversary.
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
5. ANNUITY UNIT VALUE.
Annuity Unit value is determined independently for each Subaccount.
Annuity Unit value for any Valuation Period is:
- Annuity Unit value for the preceding Valuation Period, times
- the net investment factor for the current Valuation Period, times
- an interest factor which offsets the 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.
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 benefit, if any, depends upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
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FEDERAL INCOME TAXES
A. INTRODUCTION
This discussion is not exhaustive and is not intended as tax advice. A qualified
tax adviser should always be consulted with regard to the application of the law
to individual circumstances. This discussion is based on the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Department regulations, and
interpretations existing on the date of this Prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and the
courts.
This discussion does not address state or local tax consequences nor federal
estate or gift tax consequences, associated with buying a Contract. In addition,
WE MAKE NO GUARANTEE REGARDING ANY TAX TREATMENT--FEDERAL, STATE, OR LOCAL--OF
ANY CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
B. OUR TAX STATUS
We are taxed as a life insurance company and the operations of the Separate
Account are treated as a part of our total operations. The Separate Account is
not separately taxed as a "regulated investment company". Investment income and
capital gains of the Separate Account are not taxed to the extent they are
applied under a Contract. We do not anticipate that we will incur federal income
tax liability attributable to the income and gains of the Separate Account, and
therefore we do not intend to provide for these taxes. If we are taxed on
investment income or capital gains of the Separate Account, then we may impose a
charge against the Separate Account to provide for these taxes.
C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under the Code, except as described below, increases in the Contract Value of a
Non-Qualified Contract are generally not taxable to you or the Annuitant until
received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
- the Contract must be owned by an individual,
- Separate Account investments must be "adequately diversified",
- we, rather than you, must be considered the owner of Separate Account
assets for federal tax purposes, and
- annuity payments must appropriately amortize Purchase Payments and
Contract earnings.
NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons", such as corporations, trusts or similar entities, are not
annuity contracts for federal income tax purposes. The investment income on
these contracts is taxed each year as ordinary income received or accrued by the
non-natural owner. There are exceptions to this general rule for non-natural
owners. Contracts are generally treated as held by a natural person if the
nominal owner is a trust or other entity holding the contract as an agent for a
natural person. However, this special exception does not apply to an employer
who is the nominal owner of a contract under a non-qualified deferred
compensation plan for its employees.
Additional exceptions to this rule include:
- certain contracts acquired by a decedent's estate,
- certain Qualified Contracts,
- certain contracts used with structured settlement agreements, and
- certain contracts purchased with a single premium when the annuity
starting date is no later than a year from contract purchase and
substantially equal periodic payments are made at least annually.
DIVERSIFICATION REQUIREMENTS. For a contract to be treated as an annuity for
federal income tax purposes, separate account investments must be "adequately
diversified". The Treasury Secretary issued regulations prescribing standards
for adequately diversifying separate account investments. If the separate
account failed to comply with these diversification standards, the contract
would not be treated as an annuity contract for federal income tax purposes and
the owner would generally be taxed on the difference between the contract value
and the purchase payments.
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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. In those circumstances, income and gains from separate account assets
are includible in the owner's gross income. The Internal Revenue Service
("IRS"), in published rulings, stated that a variable contract owner will be
considered the owner of separate account assets if the owner possesses the
ability to exercise investment control over the assets. As of the date of this
Prospectus, no comprehensive guidance has been issued by the IRS clarifying the
circumstances when such investment control by a variable contract owner would
exist. As a result, your right to allocate the Contract Value among the
Subaccounts may cause you to be considered the owner of the assets of the
Separate Account.
We do not know what limits may be set forth in any guidance that the IRS may
issue, or whether any such limits will apply to existing Contracts. We therefore
reserve the right to modify the Contract as necessary to attempt to prevent you
from being considered the owner of the Separate Account assets. However there is
no assurance that such efforts would be successful.
DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur)
when you have 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 FROM NONQUALIFIED CONTRACTS
Partial withdrawals from a Non-Qualified Contract are includible in income to
the extent the Contract Value exceeds the "investment in the contract." This
amount is referred to as the "income on the contract". Full withdrawals are also
includible in income to the extent they exceed the "investment in the contract."
Investment in the contract equals the total of Purchase Payments minus any
amounts previously received from the Contract that were not includable 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.
There may be special income tax issues present in situations where the Owner and
the Annuitant are not the same person and are not married to one another. A tax
adviser should be consulted in those situations.
3. TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as income equals the
payment minus the exclusion amount. The exclusion amount for variable annuity
payments is the "investment in the contract" allocated to the variable annuity
option and adjusted for any period certain or refund feature, divided by the
number of payments expected to be made. The exclusion amount for fixed annuity
payments is the payment times the ratio of the investment in the contract
allocated to the fixed annuity option and adjusted for any period certain or
refund feature, to the expected value of the fixed annuity payments.
Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments stop because
the annuitant dies before the total amount of the investment in the contract is
recovered, the unrecovered amount generally is allowed as a deduction to the
annuitant in the last taxable year.
4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon your or the Annuitant's death. Before the
Annuity Date, death benefits are includible in income and:
- if distributed in a lump sum are taxed like a full withdrawal, or
- if distributed under an Annuity Option are taxed like annuity payments.
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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 Contract
unless:
- received on or after you reach age 59 1/2,
- attributable to your disability,
- made to a Beneficiary after your death or, for non-natural Owners, after
the primary Annuitant's death,
- made as a series of substantially equal periodic payments (at least
annually) for your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and a designated beneficiary (within the
meaning of the tax law),
- made under a Contract purchased with a single premium when the annuity
starting date is no later than a year from Contract purchase and
substantially equal periodic payments are made at least annually, or
- made with annuities used with certain structured settlement agreements.
6. AGGREGATION OF CONTRACTS
The taxable amount of an annuity payment or withdrawal from a Non-Qualified
Contract may be determined by combining some or all of the Non-Qualified
Contracts you own. For example, if you purchase a Contract and also purchase an
immediate annuity at approximately the same time, the IRS may treat the two
contracts as one contract. Similarly, if a person transfers part of his interest
in one annuity contract to purchase another annuity contract, the IRS might
treat the two contracts as one contract. In addition, if you purchase two or
more deferred annuity contracts from the same company (or its affiliates) during
any calendar year, these contracts are treated as one contract. The effects of
this aggregation are not always clear. However, it could affect the taxable
amount of an annuity payment or withdrawal and the amount which might be subject
to the 10% penalty tax.
7. LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
For Contracts issued after June 8, 1997 to a non-natural owner, all or some
portion of otherwise deductible interest may not be deductible by the owner.
However, this interest deduction disallowance does not affect Contracts where
the Owner is taxable each year on the investment income under the Contract.
Entities considering purchasing the Contract, or entities that will be
beneficiaries under a Contract, should consult a tax adviser.
D. QUALIFIED PLANS
Qualified Contracts are used with retirement plans which receive favorable tax
treatment as Individual Retirement Annuities, Simplified Employee
Pensions--IRAs, Roth Individual Retirement Annuities, tax sheltered annuities,
and certain deferred compensation plans ("qualified plans"). Numerous special
tax rules apply to qualified plans and to Qualified Contracts. Therefore, we
make no attempt to provide more than general information about use of Qualified
Contracts.
Under the Code, qualified plans generally enjoy tax-deferred accumulation of
amounts invested in the plan. Therefore, in considering whether or not to
purchase a Contract in a qualified plan, you should only consider the Contract's
other features, including the availability of lifetime annuity payments and
death benefit protection.
The tax rules applicable to qualified plans vary according to the type, terms
and conditions of the plan. For example, for both withdrawals and annuity
payments under certain Qualified Contracts, there may be no "investment in the
contract" and the total amount received may be taxable. Both the amount of the
permitted contribution, and the corresponding deduction or exclusion, are
limited under qualified plans. In Qualified Contracts, the Owner and Annuitant
generally are the same individual. Also, if the joint Annuitant is not the
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<PAGE> 29
Annuitant's spouse, the annuity options may be limited, depending on the
difference in their ages. Furthermore, the length of any Guarantee Period may be
limited in some circumstances to satisfy certain minimum distribution
requirements under the Code.
Qualified Contracts are subject to special rules specifying the time at which
distributions must begin and the amount that must be distributed each year. In
the case of Individual Retirement Annuities, distributions of minimum amounts
must generally begin by April 1 of the calendar year following the calendar year
in which the owner attains age 70 1/2. An excise tax is imposed for the failure
to comply with the minimum distribution requirements. This excise tax generally
equals 50% of the amount by which a minimum required distribution exceeds the
accrual distribution.
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Contracts. For Individual Retirement Annuities, the penalty tax does not apply
to a payment:
- received after you reach age 55 and have separated from service,
- received after you reach age 59 1/2,
- received after your death or because of your disability, or
- made as a series of substantially equal periodic payments (at least
annually) for your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and your designated beneficiary.
In addition, the penalty tax does not apply to certain distributions used for
qualified first time home purchases or for higher education expenses. Special
conditions must be met to qualify for these exceptions. If you wish to take a
distribution for these purposes you should consult your tax adviser. Other
exceptions may apply.
Qualified Contracts are amended to conform to plan requirements. However, you
are cautioned that the rights of any person to any benefits under qualified
plans may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract. In addition, we are not
bound by terms and conditions of qualified plans if they are inconsistent with
the Contract.
1. QUALIFIED PLAN TYPES
We may issue Contracts for the following types of qualified plans.
INDIVIDUAL RETIREMENT ANNUITIES. The Code permits eligible individuals to
contribute to an individual retirement annuity known as an "IRA." The Code
limits 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 with such plans should consult a tax adviser.
ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth
IRAs differ from other IRAs in certain respects, including:
- Roth IRA contributions are never deductible,
- "qualified distributions" from a Roth IRA are excludable from income,
- mandatory distribution rules do not apply before death,
- a rollover to a Roth IRA must be a "qualified rollover contribution,"
under the Code,
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<PAGE> 30
- special eligibility requirements apply, and
- contributions to a Roth IRA can be made after the Owner reaches age
70 1/2.
All or part of an IRA may be converted into a Roth IRA without taking an actual
distribution. You may convert by notifying the IRA issuer or trustee. You must
be eligible for a qualified rollover contribution to convert an IRA to a Roth
IRA. A conversion typically results in the inclusion of some or all of the IRA
value in gross income, except that the 10% penalty tax does not apply. Persons
with adjusted gross incomes in excess of $100,000 or who are married and file a
separate return are not eligible to make a qualified rollover contribution or a
transfer in a taxable year from a non-Roth IRA to a Roth IRA.
Any "qualified distribution," as defined in Section 408A, from a Roth IRA is
excludible from gross income. A qualified distribution includes a distribution
made after you reach age 59 1/2, after your death, because of your disability,
or made to a first-time homebuyer.
TAX-SHELTERED ANNUITIES. 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
gross income for tax purposes. These annuity contracts are commonly referred to
as "tax-sheltered annuities". If you purchase a Contract for such purposes, you
should seek competent advice as to eligibility, limitations on permissible
amounts of purchase payments and other tax consequences associated with the
Contracts. In particular, you should consider that the Contract provides a death
benefit that in certain circumstances may exceed the greater of the Purchase
Payments and the Contract Value. It is possible that such death benefit could be
characterized as an incidental death benefit. If the death benefit were so
characterized, this could result in currently taxable income to you. In
addition, there are limitations on the amount of incidental benefits that may be
provided under a tax-sheltered annuity. Even if the death benefit under the
Contract were characterized as an incidental death benefit, it is unlikely to
violate those limits unless you also purchase a life insurance contract as part
of your tax-sheltered annuity plan.
Tax-sheltered annuity contracts must contain restrictions on withdrawals of:
- 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, 1988. These amounts can
be paid only if you have reached age 59 1/2, separated from service,
died, or becomes disabled (within the meaning of the tax law), or in the
case of hardship (within the meaning of the tax law). Amounts permitted
to be distributed in the event of hardship are limited to actual
contributions; earnings thereon cannot be distributed on account of
hardship. Amounts subject to the withdrawal restrictions applicable to
Section 403(b)(7) custodial accounts may be subject to more stringent
restrictions. (These limitations on withdrawals generally do not apply to
the extent you direct us to transfer some or all of the Contract Value to
the issuer of another tax-sheltered annuity or into a Section 403(b)(7)
custodial account.) Additional restrictions may be imposed by the plan
sponsor.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. The Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. Generally, a Contract purchased by a state or local
government or a tax-exempt organization will not be treated as an annuity
contract for federal income tax purposes. Those who intend to use the Contracts
in connection with such plans should seek competent advice.
2. DIRECT ROLLOVERS
If the Contract is used with a retirement plan that is qualified under Sections
401(a), 403(a), or 403(b) of the Code, any "eligible rollover distribution" from
the Contract will be subject to "direct rollover" and mandatory withholding
requirements. An eligible rollover distribution generally is any taxable
distribution from such a qualified retirement plan, excluding certain amounts
such as:
- 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."
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<PAGE> 31
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, you cannot elect out of withholding with respect to an eligible
rollover distribution. However, this 20% withholding will not apply if, instead
of receiving the eligible rollover distribution, you elect to have it directly
transferred to certain Qualified Plans. Prior to receiving an eligible rollover
distribution, a notice will be provided explaining generally the direct rollover
and mandatory withholding requirements and how to avoid the 20% withholding by
electing a direct rollover.
E. FEDERAL INCOME TAX WITHHOLDING
We withhold and send to the U.S. Government a part of the taxable portion of
each distribution unless the payee notifies us before distribution of an
available election not to have any amounts withheld. In certain circumstances,
we may be required to withhold tax. The withholding rates for the taxable
portion of periodic annuity payments are the same as the withholding rates for
wage payments. In addition, the withholding rate for the taxable portion of
non-periodic payments (including withdrawals prior to the maturity date and
conversions of, or rollovers from, non-Roth IRAs to Roth IRAs) is 10%. The
withholding rate for eligible rollover distributions is 20%.
DISTRIBUTION OF CONTRACTS
The Contracts are sold by licensed insurance agents in those states where the
Contract may be lawfully sold. The agents are also registered representatives of
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc. Sales commissions may vary, but are not expected to
exceed 6.25% of Purchase Payments. In addition to commissions, we may pay
additional promotional incentives, in the form of cash or other compensation, to
selling broker-dealers. These incentives may be offered to certain licensed
broker-dealers that sell or are expected to sell certain minimum amounts during
specified time periods. The Contracts are distributed through the principal
underwriter for the Separate Account:
Investors Brokerage Services, Inc. ("IBS")
1 Kemper Drive
Long Grove, Illinois, 60049
IBS is our wholly-owned subsidiary. IBS enters into selling group agreements
with affiliated and unaffiliated broker-dealers. All of the investment options
are not available to all Owners. The investment options are available only under
Contracts that are sold or serviced by broker-dealers having a selling group
agreement with IBS authorizing the sale of Contracts with the investment options
specified in this Prospectus. Other distributors may sell and service contracts
with different investment options.
VOTING RIGHTS
Proxy materials in connection with any Fund shareholder meeting are delivered to
each Owner with Subaccount interests invested in the Fund as of the record date.
Proxy materials include a voting instruction form. We vote all Fund shares
proportionately in accordance with instructions received from Owners. We will
also vote any Fund shares attributed to amounts we have accumulated in the
Subaccounts in the same proportion that Owners vote. A Fund is not required to
hold annual shareholders' meetings. Funds hold special meetings as required or
deemed 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
Each quarter, we send you a statement showing amounts credited to each
Subaccount and to the Guarantee Period Value. In addition, if you transfer
amounts among the investment options or make additional unscheduled payments,
you will 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.
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<PAGE> 32
You will have access to Contract information through the Interactive Voice
Response System (IVR) at (888) 477-9700. You will also be able to access your
account information from our website at www.zurichkemper.com.
You may also direct inquiries to the selling agent or may call 1-888-477-9700 or
write to Kemper Investors Life Insurance Company, Customer Service, 1 Kemper
Drive, Long Grove, Illinois 60049.
DOLLAR COST AVERAGING
DOLLAR COST AVERAGING FOR THE KEMPER MONEY MARKET AND KEMPER GOVERNMENT
SECURITIES SUBACCOUNTS
Under our Dollar Cost Averaging program ("DCA"), you designate a portion of the
Kemper Money Market or Kemper Government Securities Subaccount Value to be
transferred on a monthly or quarterly basis to the other Subaccounts. The DCA
program is available only during the Accumulation Period. DCA to the MVA Options
are not permitted.
The first DCA will occur on the requested beginning date. If the requested
beginning date is a non-business day, the first DCA will occur on the first
business day prior to the requested beginning date. If you do not provide a
requested beginning date, the first DCA will occur on the first business day
following receipt of your request. We will delay the beginning date if
information is missing from your request or if your request is deemed not in
good order. Subsequent DCA transfers will occur, every one or three months, on
the same day of the month as the initial DCA transfer. If a subsequent DCA
transfer is scheduled for a non-business day, the transfer will take place on
the business day prior to the scheduled DCA transfer date.
DOLLAR COST AVERAGING FROM OUR GENERAL ACCOUNT
Deposits and transfers into our general account will be automatically
transferred to the subaccounts on a monthly frequency over a period no greater
than seven (7) months from the date of the initial transfer or deposit to the
General Account. All assets transferred or deposited to the General Account will
be transferred from the General Account by the end of the seven (7) month
period. The first DCA transfer will occur one month following the date of the
initial deposit or transfer to the DCA account. Subsequent DCA transfers will
occur on the same day of the month as the initial DCA transfer. If a subsequent
DCA transfer is scheduled for a non-business day, the transfer will take place
on the business day prior to the scheduled DCA transfer date.
We reserve the right to offer additional DCA periods at any time. All additional
DCA periods will be offered for a limited period of time and may be changed,
revoked or canceled at any time for future deposits or transfers.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing you to pre-authorize
periodic withdrawals during the Accumulation Period. You instruct us to withdraw
selected amounts from the Subaccounts or Guarantee Periods on a monthly,
quarterly, semi-annual or annual basis. SWP is not available from the MVA
accounts or under the DCA Program. WITHDRAWALS TAKEN UNDER THE SWP MAY BE
SUBJECT TO THE 10% TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME TAXES AND MAY
BE SUBJECT TO 20% WITHHOLDING. If you are interested in SWP, you may obtain an
application and information concerning this program and its restrictions from us
or your agent. We give thirty days' notice if we amend the SWP. The SWP may be
terminated at any time by the 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 accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
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LEGAL MATTERS
Legal matters with respect to our organization, our authority to issue annuity
contracts and the validity of the Contract, have been passed upon by Debra P.
Rezabek, our Senior Vice President, General Counsel and Corporate Secretary.
Jorden Burt Boros Cicchetti Berenson & Johnson, LLP, 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 advisor regarding the tax
consequences, as an assignment may be a taxable event.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934 and file reports and other information with the SEC. These reports and
other information can be inspected and copied at the SEC's public reference
facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500 West
Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies also
can be obtained from the SEC's Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
We have filed registration statements (the "Registration Statements") relating
to the Contracts with the SEC under the Securities Act of 1933 and the
Investment Company Act of 1940. This Prospectus has been filed as part of the
Registration Statements and does not contain all of the information set forth in
the Registration Statements. These Registration Statements contain further
information about us and the Contracts. The Registration Statements may be
inspected and copied, and copies can be obtained at prescribed rates, as
mentioned above.
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<PAGE> 34
BUSINESS
CORPORATE STRUCTURE
KILICO was founded in 1947 and is incorporated under the insurance laws of the
State of Illinois. We are licensed in the District of Columbia and all states
except New York. We are a wholly-owned subsidiary of Kemper Corporation
("Kemper"), a non-operating holding company. KILICO and Kemper are wholly-owned
subsidiaries of Zurich Financial Services ("ZFS" or "Zurich"). ZFS is owned by
Zurich Allied AG and Allied Zurich p.l.c., fifty-seven percent and forty-three
percent, respectively. Zurich Allied AG is listed on the Swiss Market Index.
Allied Zurich p.l.c. is included in the FTSE-100 Share Index in London.
STRATEGIC INITIATIVES
Our management, operations and strategic directions are integrated with those of
several other Kemper subsidiaries:
- Federal Kemper Life Assurance Company ("FKLA"),
- Zurich Life Insurance Company of America ("ZLICA"), and
- Zurich Direct, Inc., ("ZD").
This integration streamlines management, controls costs, improves profitability,
increases operating efficiencies and productivity, and helps to expand the
companies' distribution capabilities. Headquartered in Long Grove, Illinois,
FKLA markets term and interest-sensitive life insurance, as well as certain
annuity products through brokerage general agents and other independent
distributors. ZLICA markets term life insurance products primarily through ZD.
ZD is an affiliated direct marketing life insurance agency currently marketing
basic, low-cost term life insurance through various marketing media.
Over the last several years, we increased the competitiveness of our variable
annuity products by adding multiple variable subaccount investment options and
investment managers to existing variable annuity products. In 1997, we
introduced a non-registered individual and group variable bank-owned life
insurance contract ("BOLI") and a series of individual variable life insurance
contracts. In 1998, we introduced a new registered individual variable annuity
product with 37 variable subaccount investment options and various investment
managers.
NARRATIVE DESCRIPTION OF BUSINESS
We offer both individual fixed-rate (general account) and individual and group
variable (separate account) annuity contracts, as well as individual term life,
universal life and individual and group variable life insurance products through
various distribution channels. We offer investment-oriented products, guaranteed
returns or a combination of both, to help policyholders meet multiple insurance
and financial objectives. Financial institutions, securities brokerage firms,
insurance agents and financial planners are important distribution channels for
our products. Our sales mainly consist of deposits received on certain long
duration annuity and variable life insurance contracts as well as reinsurance
premiums assumed from FKLA.
Our fixed and variable annuities generally have surrender charges that are a
specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
Over the last several years, in part reflecting the current interest rate
environment, we have increased our emphasis on marketing our existing and new
separate account products. Unlike the fixed-rate annuity business where we
manage spread revenue, these variable products pose minimal investment risk for
us, as policyholders direct their premium to one or more subaccounts that invest
in underlying investment funds. We, in turn, receive administrative fee revenue
on these variable products which compensates us for providing death benefits
potentially in excess of cash surrender values. In addition, on variable life
insurance contracts, cost of insurance charges compensate us for providing death
benefit coverage substantially in excess of surrender values.
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<PAGE> 35
As a result of this strategy, our separate account assets and related sales of
our variable annuity and life products have increased over the last couple of
years. KILICO's separate account assets and sales were as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Separate account assets..................................... $9,778.1 $7,099.2 $5,122.0
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Variable annuity sales...................................... $ 468.9 $ 300.4 $ 259.8
Variable life sales......................................... 1,661.1 1,523.0 2,708.6
-------- -------- --------
Total separate account sales...................... $2,130.0 $1,823.4 $2,968.4
======== ======== ========
</TABLE>
During mid-1998, we introduced DESTINATIONS, a registered individual variable
annuity product. DESTINATIONS offers 37 variable subaccount investment options
with various investment managers, ten guarantee period accounts and a fixed
account, dollar cost averaging and a guaranteed retirement income benefit
option.
During mid-1997, we introduced variable BOLI, a group variable life insurance
contract that is primarily marketed to banks and other large corporate entities.
Also in 1997, we issued a series of non-registered variable individual universal
life insurance contracts that are marketed primarily to high net worth
individuals. Significant fluctuations in our sales of the variable life products
are due mainly to the nature of the BOLI product--high dollar volume per sale,
low frequency of sales--and the uncertainty surrounding BOLI's tax advantaged
status since the release of the Clinton Administration's fiscal year budgets,
from 1998 through 2001.
Investors Brokerage Services, Inc., ("IBS"), our wholly-owned subsidiary, is the
principal underwriter and distributor of our registered variable annuity and
variable life products. IBS, Life Insurance Solutions, L.L.C., an affiliate, and
Benefit Finance Securities, L.L.C., a non-affiliate, are distributors of our
BOLI and high net worth products.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted our general account fixed annuity sales over the
last several years. Our general account fixed annuity sales were as follows (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
General account fixed annuity sales......................... $383.8 $179.9 $145.7
====== ====== ======
</TABLE>
Our general account fixed annuity sales increased $203.9 million in 1999,
compared with 1998. This increase is primarily due to strong sales of the new
variable annuity product introduced in mid-1998 that offers both a variable and
a fixed option, including dollar cost averaging. Dollar cost averaging allows
contractholders the option to deposit amounts in the general account and
authorize pro-rated amounts to be automatically transferred into the separate
account over a specified period of time in order to reduce the effects of
significant market fluctuations.
During 1999, 1998 and 1997, we assumed $21.3 million, $21.6 million and $21.1
million, respectively, of term life insurance premiums from FKLA. Excluding the
amounts assumed from FKLA, our total term life sales, including new and renewal
premiums, net of reinsurance ceded, amounted to $677 thousand in 1999, compared
with $846 thousand in 1998 and $1.1 million in 1997.
FEDERAL INCOME TAX DEVELOPMENTS
In early 2000, the Clinton Administration's Fiscal Year 2001 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not these proposals will be accepted, amended or
omitted in the final Budget approved by Congress. If the current Budget
proposals are accepted, BOLI contracts may no longer be tax advantaged products
and therefore less attractive to those
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<PAGE> 36
customers who purchase them in recognition of their favorable tax attributes.
Additionally, sales of these products during 2000 may also be negatively
impacted until the likelihood of the current proposals being enacted into law
has been determined.
NAIC RATIOS
The National Association of Insurance Commissioners (the "NAIC") annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System ("IRIS") ratios. Currently, twelve IRIS ratios are
calculated. The primary purpose of the ratios is to provide an "early warning"
of any negative developments. The NAIC reports a company's ratios to state
regulators who may then contact the company if three or more ratios fall outside
the NAIC's "usual ranges".
Based on statutory financial data as of December 31, 1999, we had three ratios
outside the usual ranges; the change in capital and surplus ratios, gross and
net, and the change in reserving ratio. Our change in capital and surplus
ratios, both gross and net is due to the payment of dividends to Kemper in 1999
of $115.0 million. Our change in reserving ratio primarily reflected the level
of interest-sensitive life surrenders and withdrawals during 1999, as well as an
increase in individual variable life renewal premiums, as compared to 1998. The
increase in individual variable life renewal premiums in 1999 is mainly due to
an increase in sales of individual universal life insurance in 1998. Other than
certain states requesting quarterly financial reporting and/or explanations of
the underlying causes for certain ratios, no state regulators have taken any
action due to our IRIS ratios for 1999 or earlier years.
RISK-BASED CAPITAL, ASSET ADEQUACY AND CODIFICATION
Under Illinois' asset adequacy and risk-based capital rules, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to assure that
assets supporting reserves are adequate to cover liabilities under a variety of
economic scenarios. The focus of risk-based capital rules is a risk-based
formula that applies prescribed factors to various risk elements in an insurer's
business and investments to develop a minimum capital requirement designed to be
proportional to the amount of risk assumed by the insurer. We have capital
levels substantially exceeding any that would mandate action under the
risk-based capital rules and are in compliance with applicable asset adequacy
rules.
In March 1998, the NAIC approved the codification of statutory accounting
principles. Codification is effective January 1, 2001. We have not quantified
the impact that codification will have on our statutory financial position or
results of operations.
RESERVES AND REINSURANCE
The following table provides a breakdown of our reserves for future policy
benefits by product type (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
----------- -----------
<S> <C> <C>
General account annuities................................... $2,729 $2,864
Interest-sensitive life insurance and other................. 671 688
Term life reserves.......................................... 9 9
Ceded future policy benefits................................ 310 345
------ ------
Total............................................. $3,719 $3,906
====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions where we insured liabilities of approximately $516
million in 1992 and $416 million in 1991 with an affiliate, Fidelity Life
Association, A Mutual Legal Reserve Company ("FLA"). FLA shares directors,
management, operations and employees with FKLA pursuant to an administrative and
management services agreement. FLA produces policies not produced by FKLA or
KILICO as well as other policies similar to certain FKLA policies. At December
31, 1999 and 1998, our reinsurance reserve credit from FLA related to these
coinsurance transactions totaled approximately $309.7 million and $344.8
million, respectively. Utilizing FKLA's employees, we are the servicing company
for this coinsured business and are reimbursed by FLA for the related servicing
expenses.
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<PAGE> 37
During December 1997, we entered into a funds withheld reinsurance agreement
with a Zurich affiliated company, Zurich Insurance Company, Bermuda Branch
("ZICBB"), formerly ZC Life Reinsurance Limited. Under the terms of this
agreement, we ceded, on a yearly renewable term basis, 90 percent of the net
amount at risk (death benefit payable to the insured less the insured's separate
account cash surrender value) related to BOLI, which is held in our separate
accounts. As consideration for this reinsurance coverage, we cede separate
account fees (cost of insurance charges) to ZICBB and retain a portion in a
funds withheld account which is included as a component of benefits and funds
payable in the accompanying consolidated balance sheets. During 1998, we
modified the reinsurance agreement to increase the reinsurance from 90 percent
to 100 percent.
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement (in millions):
BANK OWNED LIFE INSURANCE (BOLI)
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Face amount in force....................................... $ 82,021 $ 66,186 $ 59,338
======== ======== ========
Net amount at risk ceded................................... $(75,979) $(62,160) $(51,066)
======== ======== ========
Cost of insurance charges ceded............................ $ 166.4 $ 175.5 $ 24.3
======== ======== ========
Funds withheld account..................................... $ 263.4 $ 170.9 $ 23.4
======== ======== ========
</TABLE>
We have a funds withheld account ("FWA") supporting reserve credits on
reinsurance ceded on the BOLI product. Amendments to the reinsurance contracts
during 1998 changed the methodology used to determine increases to the FWA. A
substantial portion of the FWA was marked-to-market based predominantly upon the
total return of the Government Bond Division of the KILICO Variable Series I
Separate Account. During 1998, we recorded a $2.5 million increase to the FWA
related to this mark-to-market. In November 1998, to properly match revenue and
expenses, we had also placed assets supporting the FWA in a segmented portion of
our General Account. This portfolio was classified as "trading" under Statement
of Financial Accounting Standards No. 115 ("FAS 115") at December 31, 1998 and
through November 30, 1999. FAS 115 mandates that assets held in a trading
account be valued at fair value, with changes in fair value flowing through the
income statement as realized capital gains and losses. During 1998, we recorded
a realized capital gain of $2.8 million upon transfer of these assets from
"available for sale" to the trading portfolio as required by FAS 115. In
addition, we recorded realized capital losses of $7.3 million and $0.2 million
related to the changes in fair value of this portfolio during 1999 and 1998,
respectively.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, we no longer marked-to-market a portion of the FWA
liability and therefore no longer designated the related portion of assets as
"trading". As a result, changes in fair value to the FWA and the assets
supporting the FWA no longer flow through our operating results.
In 1996, we assumed, on a yearly renewable term basis, term life insurance from
FKLA. As a result of this transaction, we recorded reserves in 1999 and 1998 of
approximately $8.0 million and $8.5 million, respectively.
COMPETITION
We are in a highly competitive business. We compete with a large number of other
stock and mutual life insurance companies, many of which are larger financially,
although none is truly dominant in the industry. With our emphasis on annuity
products, we also compete for savings dollars with securities brokerage and
investment advisory firms as well as other institutions that manage assets,
produce financial products or market other types of investment products.
Our principal methods of competition continue to be innovative products, often
designed for selected distribution channels and economic conditions, as well as
appropriate product pricing, careful underwriting, expense control and the
quality of services provided to policyholders and agents.
35
<PAGE> 38
To address our competition, we have adopted certain business strategies. These
include:
- systematic review of investment risk and our capital position,
- customer segmentation and focus,
- continued focus on existing and new variable annuity and variable life
insurance products,
- distribution through diversified channels, and
- ongoing efforts to continue as a low-cost provider of insurance products
and high-quality services to agents and policyholders through the use of
technology.
EMPLOYEES
At December 31, 1999, we used the services of approximately 940 employees of
FKLA, which are also shared with FLA and ZLICA.
REGULATION
We are generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions where we are licensed to do
business. These departments enforce laws and regulations designed to assure that
insurance companies maintain adequate capital and surplus, manage investments
according to prescribed character, standards and limitations and comply with a
variety of operational standards. The departments also make periodic
examinations of individual companies and review annual and other reports on the
financial condition of each company operating within their respective
jurisdictions. Regulations, which often vary from state to state, cover most
aspects of the life insurance business, including market practices, policy forms
and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
In addition, certain of our variable life insurance and annuity products, and
the related separate accounts, are subject to regulation by the Securities and
Exchange Commission (the "SEC").
We believe we are in compliance in all material respects with all applicable
regulations.
INVESTMENTS
A changing marketplace has affected the life insurance industry. To accommodate
customers' increased preference for safety over higher yields, we have
systematically reduced our investment risk and strengthened our capital
position.
We carefully monitor our cash flow and regularly and systematically plan our
investment program to provide funds to meet all obligations and to optimize
investment return. An affiliated company, Scudder Kemper Investments, Inc.
("SKI") and its subsidiaries and affiliates, manages our securities portfolio. A
majority-owned Kemper real estate subsidiary handles our real estate related
investments. Our board of directors directs our investment policy. Our
investment strategies take into account the nature of each annuity and life
insurance product, the respective crediting rates and the estimated future
policy benefit maturities.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
Prospectus and elsewhere (such as in our filings with the SEC, press releases,
presentations by KILICO or its management or oral statements) about markets for
our products and trends in our operations or financial results, as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend," and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to known and unknown risks, uncertainties
and other factors which may cause actual
36
<PAGE> 39
results to be materially different from those contemplated by the
forward-looking statements. These factors include, among other things:
- general economic conditions and other factors, including prevailing interest
rate levels and stock market performance, which may affect our ability to sell
our products, the market value of our investments and the lapse rate and
profitability of our contracts,
- our ability to achieve anticipated levels of operational efficiencies through
certain cost-saving initiatives,
- customer response to new products, distribution channels and marketing
initiatives,
- mortality, morbidity, and other factors which may affect the profitability of
our insurance products,
- changes in the federal income tax laws and regulations which may affect the
relative tax advantages of some of our products,
- increasing competition which could affect the sale of our products,
- regulatory changes or actions, including those relating to regulation of
financial services affecting (among other things) bank sales and underwriting
of insurance products, regulations of the sale and underwriting and pricing of
insurance products, and
- the risk factors or uncertainties listed from time to time in our filings with
the SEC.
PROPERTIES
We primarily share 84,270 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois. We also share 93,666 sq. ft. of office space leased by FKLA and
ZLICA from Zurich American Insurance Company, an affiliate, located in
Schaumburg, Illinois.
LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to our
insurance business. Based upon the advice of legal counsel, our management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position. There are
no material legal proceedings pending to which the Separate Account or IBS is a
party.
37
<PAGE> 40
SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1999, and for the opening balance sheet as of the
acquisition date, January 4, 1996. Such information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in this Prospectus. All amounts are shown in millions.
<TABLE>
<CAPTION>
PREACQUISITION
--------------
DECEMBER 31
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 JANUARY 4 --------------
1999 1998 1997 1996 1996(2) 1995
----------- ----------- ----------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE................ $ 363.4 $ 419.7 $ 425.5 $ 356.2 $ -- $ 68.1(1)
========= ========= ========= ======== ======== ========
NET INCOME EXCLUDING REALIZED
INVESTMENT RESULTS......... $ 51.1 $ 31.4 $ 31.9 $ 25.6 $ -- $ 74.2
========= ========= ========= ======== ======== ========
NET INCOME (LOSS)............ $ 44.9 $ 65.1 $ 38.7 $ 34.4 $ -- $ (133.0)(1)
========= ========= ========= ======== ======== ========
FINANCIAL SUMMARY
Total separate account
assets..................... $ 9,778.1 $ 7,099.2 $ 5,122.0 $2,127.2 $1,761.1 $1,761.1
========= ========= ========= ======== ======== ========
Total assets................. $14,655.7 $12,239.7 $10,589.7 $7,717.9 $7,682.7 $7,581.7
========= ========= ========= ======== ======== ========
Future policy benefits....... $ 3,409.1 $ 3,561.6 $ 3,856.9 $4,256.5 $4,585.1 $4,573.2
========= ========= ========= ======== ======== ========
Stockholder's equity......... $ 630.0 $ 853.9 $ 865.6 $ 751.0 $ 745.6 $ 605.9
========= ========= ========= ======== ======== ========
</TABLE>
---------------
(1) Real estate-related investment losses adversely impacted total revenue and
net loss for 1995. These losses reflect a change in our strategy with
respect to our real estate-related investments resulting from the January 4,
1996 acquisition of Kemper by the Zurich-led investor group.
(2) The consolidated information presented as of the acquisition on January 4,
1996 is accounted for using the purchase method of accounting.
38
<PAGE> 41
SUPPLEMENT TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCLUDING THREE MONTHS ENDED MARCH 31, 2000
The following discussion supplements the Management's Discussion and Analysis
appearing on page 42 of this Prospectus.
RESULTS OF OPERATIONS
We recorded net income of $10.7 million in the first quarter of 2000, compared
with net income of $10.6 million in the first quarter of 1999.
The following table reflects the components of net income:
Net income:
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
2000 1999
---- ----
<S> <C> <C>
Operating earnings before amortization of goodwill.......... $15.3 $14.4
Amortization of goodwill.................................... (3.2) (3.2)
Net realized capital losses................................. (1.4) (.6)
----- -----
Net income............................................. $10.7 $10.6
===== =====
</TABLE>
The following table reflects the major components of net realized capital gains
and losses included in net income.
Net realized capital gains (losses)
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
2000 1999
---- ----
<S> <C> <C>
Fixed maturities............................................ $(2.3) $(1.0)
Trading account securities-holding losses................... -- (1.9)
Equity securities........................................... .1 .7
Real estate-related investments............................. .1 1.3
----- -----
Realized investment losses.................................. (2.1) (.9)
Income tax benefit.......................................... (.7) (.3)
----- -----
Net realized capital losses................................. $(1.4) $ (.6)
===== =====
</TABLE>
Operating earnings before amortization of goodwill increased to $15.3 million in
the first quarter of 2000, compared with $14.4 million in the first quarter of
1999. This increase was primarily due to:
- an increase in spread revenue (net investment income less interest credited to
policyholders)
- an increase in non-BOLI separate account fees, offset by
- an increase in commissions and operating expenses, net of the deferral of
insurance acquisition costs
- an increase in claims incurred and other policyholder benefits
39
<PAGE> 42
The following table reflects our sales:
Sales
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
2000 1999
---- ----
<S> <C> <C>
Annuities:
General account........................................ $123.3 $ 62.5
Separate account....................................... 179.2 95.6
------ ------
Total annuities...................................... 302.5 158.1
------ ------
Life insurance:
Separate account bank-owned life insurance ("BOLI")....... 112.8 667.2
Separate account variable universal life insurance........ 5.8 11.0
Term life................................................. 5.0 5.3
Interest-sensitive life................................... .1 --
------ ------
Total life........................................ 123.7 683.5
------ ------
Total sales................................................. $426.2 $841.6
====== ======
</TABLE>
Sales of annuity products consist of total deposits received, which are not
recorded as revenue within the consolidated statements of operations. General
account fixed annuity sales increased $60.8 million in the first quarter of
2000, compared with the first quarter of 1999. Separate account variable annuity
sales increased $83.6 million in the first quarter of 2000, compared with the
first quarter of 1999. The increase in general account and separate account
sales was primarily due to continued strong sales of our latest variable annuity
product that offers both a variable option and a fixed option, including dollar
cost averaging.
Sales of variable annuities increase administrative fees earned, and they pose
minimal investment risk for us, as policyholders allocate net premium to one or
more subaccounts that invest in underlying investment funds which invest in
stocks and bonds.
The decrease in BOLI sales in 2000 was primarily due to the nature of the BOLI
product -- high dollar volume per sale, low frequency of sales.
Spread revenue increased in the first three months of 2000, compared with the
same period in 1999, due to a decrease in interest credited to policyholders and
a modest increase in investment income. The increase in investment income is
primarily due to the reinvestment of 1999 and 2000 sales proceeds, maturities
and prepayments at higher yields due to funds being directed to higher yielding
securities, and the overall increasing interest rate environment. This increase
is offset by a decrease in cash and invested assets from the 1999 levels,
reflecting the surrender and withdrawal activity of 1999 and the dividends paid
to Kemper Corporation in 1999. Also contributing to this decrease in cash and
invested assets is the ongoing exchanges from the fixed to the variable option
of in-force annuity policies, primarily reflecting the dollar cost averaging
option mentioned above. The decrease in interest credited was primarily due to a
decrease in policyholder liabilities due to surrender and withdrawal activity in
1999 and a decrease in crediting rates in 2000 and 1999.
Separate account fees and charges consist of the following as of March 31, 2000
and 1999:
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
2000 1999
---- ----
<S> <C> <C>
Separate account fees on non-BOLI variable life and
annuities................................................. $ 15.5 $ 10.7
BOLI cost of insurance charges and fees -- direct(3)........ 44.0 46.5
BOLI cost of insurance charges - ceded(1)(3)................ (46.2) (46.0)
BOLI premium tax expense loads (2).......................... 1.9 11.4
------ ------
Total................................................ $ 15.2 $ 22.6
====== ======
</TABLE>
---------------
(1) Includes $3.5 million and $(0.8) million of cost of insurance charges ceded
related to appreciation (depreciation) of the BOLI funds withheld account
during 2000 and 1999, respectively.
(2) There is a corresponding offset in taxes, licenses and fees.
(3) No commissions were paid on BOLI.
40
<PAGE> 43
Separate account fees on non-BOLI variable life and annuities increased during
the first quarter of 2000, compared with 1999, primarily due to new sales during
1999 and 2000.
BOLI cost of insurance charges and fees decreased $2.7 million in the first
quarter of 2000, compared with 1999, primarily reflecting a decrease in the net
cost of insurance charges on the mortality-rated BOLI contracts.
BOLI premium tax expense loads decreased in 2000, compared with 1999, due to the
decrease in BOLI sales in 2000.
Policyholder surrenders, withdrawals and death benefits were as follows:
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
2000 1999
---- ----
<S> <C> <C>
General account............................................. $157.1 $135.5
Separate account............................................ 104.9 115.0
------ ------
Total....................................................... $262.0 $250.5
====== ======
</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 increased $21.6
million in the first quarter of 2000, compared with the first quarter of 1999,
reflecting an increase in claims as well as an increase in overall surrenders
and withdrawals.
Separate account surrenders, withdrawals and death benefits decreased $10.1
million in the first quarter of 2000, compared with the first quarter of 1999.
Contributing to this decrease is a partial withdrawal on a BOLI contract in the
first quarter of 1999 of $27.8 million.
Claims and other policyholder benefits increased $1.8 million in the first
quarter of 2000, compared with 1999, primarily due to increased death benefits
in excess of account values on universal life products.
Taxes, licenses and fees decreased during the first quarter of 2000, compared
with 1999, primarily reflecting premium taxes on BOLI. We received a
corresponding expense load related to these premium taxes in separate account
fees and other charges during the first quarter of 1999 and 2000. Excluding the
taxes due on BOLI, taxes, licenses and fees amounted to $1.0 million for the
first quarter of 2000, compared with $1.3 million for the same period in 1999.
Commissions expense and the deferral of insurance acquisition costs increased in
the first quarter of 2000, compared with the first quarter of 1999, due to the
higher level of sales, excluding BOLI.
Operating expenses increased $3.7 million in the first quarter of 2000, compared
with the same period in 1999. The primary reason for this increase was an
increase in salaries and related benefits due to continued staffing needs for
various new business initiatives.
41
<PAGE> 44
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
42
<PAGE> 45
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.
43
<PAGE> 46
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
44
<PAGE> 47
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
45
<PAGE> 48
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.
46
<PAGE> 49
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
47
<PAGE> 50
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>
48
<PAGE> 51
<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.
49
<PAGE> 52
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.
50
<PAGE> 53
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
51
<PAGE> 54
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
52
<PAGE> 55
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.
53
<PAGE> 56
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>
54
<PAGE> 57
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Debra P. Rezabek (44) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996.
General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO,
Secretary since January 1996. FKLA and FLA since 1995. General Counsel and Director of
Government Affairs of FKLA and FLA since 1992 and of KILICO
since 1993. Senior Vice President, General Counsel and
Corporate Secretary of ZLICA and ZD since March 1996.
Director of ZD from March 1996 to March 1997. Secretary of
IBS and IBSIA since 1993. Director of IBS and IBSIA from
1993 to 1996. General Counsel and Assistant Secretary of
KILICO, FKLA and FLA from 1992 to 1996. Assistant Secretary
of Kemper since January 1996.
Edward L. Robbins (60) Senior Vice President and Chief Actuary of FKLA, FLA, ZLICA
Senior Vice President and Chief and ZD since March 1999. Senior Actuary of FKLA, FLA,
Actuary since March 1999. KILICO, ZLICA and ZD from July 1998 to March 1999. Principal
of KPMG Peat Marwick LLP from May 1984 to July 1998.
Kenneth M. Sapp (54) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Senior Vice President of ZD since March 1998. Director
1998. of IBS since May 1998. Director of IBSIA since September
1998. Vice President--Aetna Life Brokerage of Aetna Life &
Annuity Company from February 1992 to January 1998.
George Vlaisavljevich (57) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.
William H. Bolinder (56) Director of FKLA and FLA since January 1996. Director of
Chairman of the Board from ZLICA and ZD since March 1995. Chairman of the Board of FKLA
January 1996 to June 1999 and FLA from January 1996 to June 1999 and since April 2000.
and since April 2000. Chairman of the Board of ZLICA and ZD from March 1995 to
Director since January 1996. June 1999 and since April 2000. Chairman of the Board and
Director of Kemper since January 1996. Director of SKI since
January 1996. Vice Chairman of SKI from January 1996 to
1998. Member of the Group Executive Board of Zurich
Financial Services Group since 1998. Member of the Corporate
Executive Board of Zurich Insurance Group from October 1994
to 1998. Chairman of Zurich American Insurance Company since
1998. Chairman of the Board of American Guarantee and
Liability Insurance Company, Zurich American Insurance
Company of Illinois, American Zurich Insurance Company and
Steadfast Insurance Company since 1995. Chief Executive
Officer of American Guarantee and Liability Insurance
Company, Zurich American Insurance Company of Illinois and
American Zurich Insurance Company from 1986 to June 1995.
President of Zurich Holding Company of America ("ZHCA")
since 1995. Vice Chairman of ZHCA since 1996. Underwriter
for Zurich American Lloyds since 1986.
David A. Bowers (53) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich U.S. since August
1985. Vice President, General Counsel and Secretary of
Kemper since January 1996.
Gunther Gose (55) Director of FKLA, FLA and ZLICA since November 1998. Chief
Director since November 1998. Financial Officer and Member of the Group Executive Board of
Zurich Financial Services since October 1998. Member of the
Corporate Executive Board of Zurich Insurance Group from
April 1990 to October 1998.
</TABLE>
55
<PAGE> 58
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.
56
<PAGE> 59
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements; Report of Independent Accountants; Financial
Statements of the Separate Account; Appendix A Table of Historical Hypothetical
Accumulation Unit Values and Performance Information; and Appendix B State
Premium Tax Chart. The Statement of Additional Information should be read in
conjunction with this Prospectus.
FINANCIAL STATEMENTS
The financial statements of KILICO that are included in this Prospectus should
be considered primarily as bearing on our ability to meet our obligations under
the Contracts. The Contracts are not entitled to participate in our earnings,
dividends or surplus.
The unaudited financial statements as of March 31, 2000, appearing on pages
58-63 of this Prospectus, supplement the audited financial statements of Kemper
Investors Life Insurance Company and Subsidiaries as of December 31, 1999,
appearing on pages 64-88 of this Prospectus.
57
<PAGE> 60
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31
2000 DECEMBER 31
(UNAUDITED) 1999
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: March 31, 2000, $3,321,201; December
31, 1999, $3,397,188).................................. $3,192,585 $ 3,276,017
Equity securities (cost: March 31, 2000, $65,466; December
31, 1999, $65,235)..................................... 62,546 61,592
Short-term investments.................................... 19,980 42,391
Joint venture mortgage loans.............................. 67,291 67,242
Third-party mortgage loans................................ 63,787 63,875
Other real estate-related investments..................... 19,541 20,506
Policy loans.............................................. 258,576 261,788
Other invested assets..................................... 26,008 25,621
----------- -----------
Total investments................................. 3,710,314 3,819,032
Cash........................................................ 29,168 12,015
Accrued investment income................................... 129,511 127,219
Goodwill.................................................... 200,721 203,907
Value of business acquired.................................. 115,340 119,160
Deferred insurance acquisition costs........................ 180,565 159,667
Deferred income taxes....................................... 85,045 93,502
Reinsurance recoverable..................................... 299,579 309,696
Receivable on sales of securities........................... 3,500 3,500
Other assets and receivables................................ 32,131 29,950
Assets held in separate accounts............................ 10,124,499 9,778,068
----------- -----------
Total assets...................................... $14,910,373 $14,655,716
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits...................................... $3,624,968 $ 3,718,833
Other policyholder benefits and funds payable............... 464,328 457,328
Other accounts payable and liabilities...................... 62,303 71,482
Liabilities related to separate accounts.................... 10,124,499 9,778,068
----------- -----------
Total liabilities................................. 14,276,098 14,025,711
----------- -----------
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 loss........................ (127,202) (120,819)
Retained deficit............................................ (45,370) (56,023)
----------- -----------
Total stockholder's equity........................ 634,275 630,005
----------- -----------
Total liabilities and stockholder's equity........ $14,910,373 $14,655,716
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE> 61
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUE
Net investment income....................................... $ 66,259 $ 65,693
Realized investment losses.................................. (2,120) (965)
Premium income.............................................. 5,003 5,688
Separate account fees and charges........................... 15,154 22,646
Other income................................................ 3,352 2,584
-------- --------
Total revenue..................................... 87,648 95,646
-------- --------
BENEFITS AND EXPENSES
Interest credited to policyholders.......................... 37,236 41,546
Claims incurred and other policyholder benefits............. 4,991 3,173
Taxes, licenses and fees.................................... 2,805 12,731
Commissions................................................. 23,369 12,693
Operating expenses.......................................... 14,429 10,766
Deferral of insurance acquisition costs..................... (25,024) (14,325)
Amortization of insurance acquisition costs................. 4,148 2,813
Amortization of value of business acquired.................. 4,140 4,960
Amortization of goodwill.................................... 3,186 3,186
-------- --------
Total benefits and expenses....................... 69,280 77,543
-------- --------
Income before income tax expense............................ 18,368 18,103
Income tax expense (benefit)
Current................................................... (623) 32,830
Deferred.................................................. 8,338 (25,322)
-------- --------
Total income tax expense.......................... 7,715 7,508
-------- --------
Net income........................................ $ 10,653 $ 10,595
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE> 62
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
2000 1999
------- --------
<S> <C> <C>
NET INCOME.................................................. $10,653 $ 10,595
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains (losses) on investments arising
during period:
Unrealized holding gains (losses) on investments....... (9,113) (40,358)
Adjustment to value of business acquired............... 213 4,251
Adjustment to deferred insurance acquisition costs..... (959) 2,139
------- --------
Total unrealized holding gains (losses) on
investments arising during period................ (9,859) (33,968)
------- --------
Less reclassification adjustments for items included in
net income:
Adjustment for (gains) losses included in realized
investment gains (losses)............................. (1,155) 2,115
Adjustment for amortization of premium on fixed
maturities included in net investment income.......... (1,353) (3,674)
Adjustment for (gains) losses included in amortization
of value of business acquired......................... (106) (311)
Adjustment for (gains) losses included in amortization
of insurance acquisition costs........................ (982) (22)
------- --------
Total reclassification adjustments for items
included in net income........................... (3,596) (1,892)
------- --------
Other comprehensive loss, before related income tax expense
(benefit)................................................. (6,263) (32,076)
Related income tax expense (benefit)...................... 120 (11,226)
------- --------
Other comprehensive loss, net of tax.............. (6,383) (20,850)
------- --------
Comprehensive income (loss)....................... $ 4,270 $(10,255)
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE> 63
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 10,653 $ 10,595
Reconcilement of net income to net cash provided (used):
Realized investment (gains) losses..................... 2,120 965
Net change in trading account securities............... -- (18,011)
Interest credited and other charges.................... 37,180 40,957
Deferred insurance acquisition costs, net.............. (20,876) (11,512)
Amortization of value of business acquired............. 4,140 4,960
Amortization of goodwill............................... 3,186 3,186
Amortization of discount and premium on investments.... 1,455 3,833
Deferred income taxes.................................. 8,336 (25,323)
Net change in current Federal income taxes............. (17,897) 6,708
Benefits and premium taxes due related to separate
account bank-owned life insurance..................... 15,152 36,897
Other, net............................................. (10,579) 142
--------- ---------
Net cash flow from operating activities........... 32,870 53,397
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity...................... 26,759 128,690
Fixed maturities sold prior to maturity................ 209,812 158,279
Equity securities...................................... 1,104 732
Mortgage loans, policy loans and other invested
assets................................................ 12,969 16,586
Cost of investments purchased or loans originated:
Fixed maturities....................................... (164,218) (300,295)
Equity securities...................................... (1,257) --
Mortgage loans, policy loans and other invested
assets................................................ (8,261) (11,786)
Short-term investments, net............................... 22,411 26,262
Net change in receivable and payable for securities
transactions........................................... -- (742)
Net change in other assets................................ (1,279) --
--------- ---------
Net cash from investing activities................ 98,040 17,726
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................... 122,128 62,848
Withdrawals............................................ (243,055) (141,344)
Other..................................................... 7,170 4,091
--------- ---------
Net cash from financing activities................ (113,757) (74,405)
--------- ---------
NET INCREASE (DECREASE) IN CASH............................. 17,153 (3,282)
CASH at the beginning of period............................. 12,015 13,486
--------- ---------
CASH at the end of the period............................... $ 29,168 $ 10,204
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE> 64
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Kemper Investors Life Insurance Company ("KILICO") is incorporated under the
insurance laws of the State of Illinois. KILICO is licensed in the District
of Columbia and all states, except New York. KILICO is a wholly-owned
subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding company.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles.
2. In the opinion of management, all necessary adjustments consisting of normal
recurring accruals have been made for a fair statement of the results of
KILICO for the periods included in these financial statements. These
financial statements should be read in conjunction with the financial
statements and related notes in the 1999 Annual Report on Form 10-K.
3. KILICO, along with its affiliates Federal Kemper Life Assurance Company,
Zurich Life Insurance Company of America, Fidelity Life Association (A Mutual
Legal Reserve Company) ("FLA") and Zurich Direct, Inc. operate under the
trade name Zurich Kemper Life ("ZKL"). ZKL is segregated by Strategic
Business Unit ("SBU"). The SBU concept has each SBU concentrate on a specific
customer market. The SBU is the focal point of ZKL because it is at the SBU
level that ZKL can clearly identify customer segments and then work to
understand and satisfy the needs of each customer. The contributions of ZKL's
SBUs to consolidated revenues, operating results and certain balance sheet
data pertaining thereto, are shown in the following tables on the basis of
generally accepted accounting principles. For purposes of this disclosure,
ZKL excludes FLA, as it is owned by its policyholders.
ZKL 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 ZKL level. ZKL's SBUs cross legal entity lines, as
certain similar products are sold by more than one legal entity.
Summarized financial information for ZKL's SBUs are as follows:
As of and for the period ending March 31, 2000:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
---------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues.................. $ 85,902 $ 53,925 $ 36,550 $ 18,707 $ 195,084
========== =========== ========== ======== ===========
Net income...................... $ 4,895 $ 4,788 $ 3,704 $ 1,816 $ 15,203
========== =========== ========== ======== ===========
Total assets.................... $3,024,406 $10,619,740 $4,752,614 $165,744 $18,562,504
========== =========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
REVENUE INCOME (LOSS) ASSETS
-------- ------------- -----------
<S> <C> <C> <C>
Total revenue, net income (loss) and assets,
respectively, from above: .......................... $195,084 $15,203 $18,562,504
Less:
Revenue, net income & assets of FKLA................ 80,032 3,694 3,186,847
Revenue, net income & assets of ZLICA............... 13,553 1,794 458,777
Revenue, net (loss) & assets of Zurich Direct....... 13,851 (938) 6,507
-------- ------- -----------
Totals per KILICO's consolidated financial
statements....................................... $ 87,648 $10,653 $14,910,373
======== ======= ===========
</TABLE>
62
<PAGE> 65
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of and for the period ending March 31, 1999:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
---------- ---------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues................... $ 90,520 $ 57,285 $ 33,743 $ 8,955 $ 190,503
========== ========== ========== ======= ===========
Net income (loss)................ $ 4,781 $ 6,716 $ 2,139 $(1,617) $ 12,019
========== ========== ========== ======= ===========
Total assets..................... $3,134,465 $8,946,914 $4,234,473 $54,234 $16,370,086
========== ========== ========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
NET
REVENUE INCOME (LOSS) ASSETS
-------- ------------- -----------
<S> <C> <C> <C>
Total revenue, net income (loss) and assets,
respectively, from above:.......................... $190,503 $12,019 $16,370,086
Less:
Revenue, net income & assets of FKLA............... 75,584 3,060 2,968,386
Revenue, net income & assets of ZLICA.............. 13,208 1,233 414,970
Revenue, net (loss) & assets of Zurich Direct...... 6,065 (2,869) 3,059
-------- ------- -----------
Total per KILICO's consolidated financial
statements...................................... $ 95,646 $10,595 $12,983,671
======== ======= ===========
</TABLE>
4. On March 31, 2000, KILICO purchased, 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.
63
<PAGE> 66
REPORT OF INDEPENDENT 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> 67
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> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
INCOME STATEMENT ---------- ---------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income....................... $ 167,439 $ -- $ -- $ 4,249 $ 171,688
Net investment income................ 155,885 212,767 91,664 455 460,771
Realized investment gains............ 2,503 7,744 2,692 50 12,989
Fees and other income................ 78,668 73,823 23,663 8,007 184,161
---------- ---------- ---------- ------- -----------
Total revenue................... 404,495 294,334 118,019 12,761 829,609
---------- ---------- ---------- ------- -----------
BENEFITS AND EXPENSES
Policyholder benefits................ 247,878 153,327 60,061 2,234 463,500
Intangible asset amortization........ 58,534 25,593 15,589 -- 99,716
Net deferral of insurance acquisition
costs............................. (50,328) (18,222) (13,033) (5,242) (86,825)
Commissions and taxes, licenses and
fees.............................. 39,477 66,552 16,668 3,518 126,215
Operating expenses................... 55,859 20,282 14,320 19,472 109,933
---------- ---------- ---------- ------- -----------
Total benefits and expenses..... 351,420 247,532 93,605 19,982 712,539
---------- ---------- ---------- ------- -----------
Income (loss) before income tax expense
(benefit)............................ 53,075 46,802 24,414 (7,221) 117,070
Income tax expense (benefit)........... 25,554 21,144 10,545 (2,528) 54,715
---------- ---------- ---------- ------- -----------
Net income (loss)............... $ 27,521 $ 25,658 $ 13,869 $(4,693) $ 62,355
========== ========== ========== ======= ===========
BALANCE SHEET
Total assets......................... $2,877,854 $7,416,791 $3,759,173 $41,669 $14,095,487
========== ========== ========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- ------- -----------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $829,609 $62,355 $14,095,487
Less:
Revenue, net income and assets of FKLA.................... 338,854 24,740 3,105,396
Revenue, net income and assets of ZLICA................... 57,233 2,193 398,786
Revenue, net loss and assets of Zurich Direct............. 8,042 (3,295) 1,655
-------- ------- -----------
Totals per the Company's consolidated financial
statements........................................ $425,480 $38,717 $10,589,650
======== ======= ===========
</TABLE>
(16) SUBSEQUENT EVENT
In February 2000, the Company announced that it had entered into an agreement to
purchase for $5.5 million the following related entities, all privately held New
York corporations:
- PMG Securities Corporation
- PMG Asset Management, Inc.
- PMG Life Agency, Inc., and
- PMG Marketing, Inc.
These companies were primarily purchased for their specialization in the target
market of the RSG SBU. The acquisition is expected to close at the end of the
first quarter 2000.
88
<PAGE> 91
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
</TABLE>
The following examples illustrate how the Market Value Adjustment 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.
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.
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:
.054 = .075 X 48 X (.065 - .05)
The Market Value Adjustment is a reduction of $2,268.00 from the Guarantee
Period Value:
2,268.00 = .054 X 42,000.00
The Market Adjusted Value would be:
$39,732.00 = $42,000.00 - $2,268.00
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:
$1,134.00 = .054 X $21,000.00
The Market Adjusted Value would be:
$19,866.00 = $21,000.00 - $1,134.00
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:
-.036 = .075 X 48 X (.04 - .05)
The Market Value Adjustment is an increase of $1,512.00 to the Guarantee Period
Value:
-$1,512.00 = $42,000.00 X -.036
The Market Adjusted Value would be:
$43,512.00 = $42,000.00 - (-$1,512.00)
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
-$756.00 = $21,000.00 X -.036
89
<PAGE> 92
The Market Adjusted Value of $21,000.00 would be:
$21,756.00 = $21,000.00 + $756.00
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
90
<PAGE> 93
APPENDIX B
KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND
VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT
This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of traditional Individual Retirement Annuities
(IRAs), Roth Individual Retirement Annuities (Roth IRAs) and Simple Individual
Retirement Annuities (SIMPLE IRAs). Internal Revenue Service regulations require
that this be given to each person desiring to establish an IRA, Roth IRA or a
SIMPLE IRA. Except where otherwise indicated, IRA discussion includes Simplified
Employee Pension IRAs (SEP IRAs). Further information can be obtained from
Kemper Investors Life Insurance Company and from any district office of the
Internal Revenue Service.
A. REVOCATION
Within 7 days of the date you signed your enrollment application, you may revoke
the Contract and receive back 100% of your money. To do so, wire Kemper
Investors Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049, or
call 1-800-621-5001.
B. STATUTORY REQUIREMENTS
This Contract is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), Section 408A of the Code for use as a Roth IRA, or
of Section 408(p) of the Code for use as a SIMPLE IRA, whichever is applicable.
The Contract has not been approved as to form for use as an IRA, Roth IRA or a
SIMPLE IRA by the Internal Revenue Service. Such approval by the Internal
Revenue Service is a determination only as to form of the Contract, and does not
represent a determination on the merits of the Contract.
1. The amount in your IRA, Roth IRA, and SIMPLE IRA, whichever is applicable,
must be fully vested at all times and the entire interest of the owner must be
nonforfeitable.
2. The Contract must be nontransferable by the owner.
3. The Contract must have flexible premiums.
4. For IRAs and SIMPLE IRAs, you must start receiving distributions on or before
April 1 of the year following the year in which you reach age 70 1/2 (the
required beginning date)(see "Required Distributions"). However, Section
401(a)(9)(A) of the Code (relating to minimum distributions required to commence
at age 70 1/2), and the incidental death benefit requirements of Section 401(a)
of the Code, do not apply to Roth IRAs.
If you die before your entire interest in your Contract is distributed, unless
otherwise permitted under applicable law, any remaining interest in the Contract
must be distributed to your beneficiary by December 31 of the calendar year
containing the fifth anniversary of your death; except that: (1) if the interest
is payable to an individual who is your designated beneficiary (within the
meaning of Section 401(a)(9) of the Code), the designated beneficiary may elect
to receive the entire interest over his or her life, or over a period certain
not extending beyond his or her life expectancy, commencing on or before
December 31 of the calendar year immediately following the calendar year in
which you die; and (2) if the designated beneficiary is your spouse, the
Contract will be treated as his or her own IRA, or, where applicable, Roth IRA.
5. Except in the case of a rollover contribution or a direct transfer (see
"Rollovers and Direct Transfers"), or a contribution made in accordance with the
terms of a Simplified Employee Pension (SEP), (1) all contributions to an IRA,
including a Roth IRA, must be cash contributions which do not exceed $2,000 for
any taxable year, and (2) all contributions to a SIMPLE IRA must be cash
contributions, including matching or nonelective employer contributions (see
"SIMPLE IRAs"), which do not exceed $6,000 for any year (as adjusted for
inflation).
6. The Contract must be for the exclusive benefit of you and your beneficiaries.
C. ROLLOVERS AND DIRECT TRANSFERS FOR IRAS AND SIMPLE IRAS
1. A rollover is a tax-free transfer from one retirement program to another that
you cannot deduct on your tax return. There are two kinds of tax-free rollover
payments under an IRA. In one, you transfer amounts from one IRA to another.
With the other, you transfer amounts from a qualified employee benefit plan or
tax-sheltered annuity to an IRA. Tax-free rollovers can be made from a SIMPLE
IRA to another SIMPLE IRA or to a SIMPLE Individual Retirement Account under
Section 408(p) of the Code. An individual can make a tax-free rollover to
91
<PAGE> 94
an IRA from a SIMPLE IRA after a two-year period has expired since the
individual first participated in a SIMPLE plan.
2. You must complete the transfer by the 60th day after the day you receive the
distribution from your IRA or other qualified employee benefit plan or SIMPLE
IRA.
3. A rollover distribution may be made to you only once a year. The one-year
period begins on the date you receive the rollover distribution, not on the date
you roll it over (reinvest it).
4. A direct transfer to an IRA of funds in an IRA from one trustee or insurance
company to another is NOT a rollover. It is a transfer that is not affected by
the one-year waiting period.
5. All or a part of the premium for this Contract used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or
tax-sheltered annuity, or from a direct transfer from another IRA. All or part
of the premium for this Contract used as a SIMPLE IRA may be paid from a
rollover from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the
extent permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE
Individual Retirement Account.
6. A distribution that is eligible for rollover treatment from a qualified
employee benefit plan or tax-sheltered annuity will be subject to twenty percent
(20%) withholding by the Internal Revenue Service even if you roll the
distribution over within the 60-day rollover period. One way to avoid this
withholding is to make the distribution as a direct transfer to the IRA trustee
or insurance company.
D. CONTRIBUTION LIMITS AND ALLOWANCE OF DEDUCTION FOR IRAS
1. In general, the amount you can contribute each year to an IRA is the lesser
of $2,000 or your taxable compensation for the year. If you have more than one
IRA, the limit applies to the total contributions made to your own IRAs for the
year. Generally, if you work the amount that you earn is compensation. Wages,
salaries, tips, professional fees, bonuses and other amounts you receive for
providing personal services are compensation. If you own and operate your own
business as a sole proprietor, your net earnings reduced by your deductible
contributions on your behalf to self-employed retirement plans is compensation.
If you are an active partner in a partnership and provide services to the
partnership, your share of partnership income reduced by deductible
contributions made on your behalf to qualified retirement plans is compensation.
All taxable alimony and separate maintenance payments received under a decree of
divorce or separate maintenance is compensation.
2. In the case of a married couple filing a joint return, up to $2,000 can be
contributed to each spouse's IRA, even if one spouse has little or no
compensation. This means that the total combined contributions that can be made
to both IRAs can be as much as $4,000 for the year. Previously, if one spouse
had no compensation or elected to be treated as having no compensation, the
total combined contributions to both IRAs could not be more than $2,250.
3. In the case of a married couple with unequal compensation who file a joint
return, the limit on the deductible contributions to the IRA of the spouse with
less compensation is the smaller of:
a. $2,000 or
b. The total compensation of both spouses, reduced by any deduction allowed
for contributions to IRAs of the spouse with more compensation.
The deduction for contributions to both spouses' IRAs may be further limited if
either spouse is covered by an employer retirement plan.
4. Even if your spouse is covered by an employer retirement plan, you may be
able to deduct your contributions to an IRA if you are not covered by an
employer plan. The deduction is limited to $2,000 and it must be reduced if your
adjusted gross income on a joint return is more than $150,000 but less than
$160,000. Your deduction is eliminated if your income on a joint return is
$160,000 or more.
5. Contributions to your IRA can be made at any time. If you make the
contribution between January 1 and April 15, however, you may elect to treat the
contribution as made either in that year or in the preceding year. You may file
a tax return claiming a deduction for your IRA contribution before the
contribution is actually made. You must, however, make the contribution by the
due date of your return not including extensions.
6. You cannot make a contribution other than a rollover contribution to your IRA
for the year in which you reach age 70 1/2 or thereafter.
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E. SEP IRAs
1. SEP IRA rules concerning eligibility and contributions are governed by Code
Section 408(k). The maximum deductible contribution for a SEP IRA is the lesser
of $30,000 or 15% of compensation.
2. A SEP must be established and maintained by an employer (corporation,
partnership, sole proprietor). Information about the Kemper SEP is available
upon request.
F. SIMPLE IRAs
1. A SIMPLE IRA must be established with your employer using a qualified salary
reduction agreement.
2. You may elect to have your employer contribute to your SIMPLE IRA, under a
qualified salary reduction agreement, an amount (expressed as a percentage of
your compensation) not to exceed $6,000 (as adjusted for inflation) for the
year. In addition to these employee elective contributions, your employer is
required to make each year either (1) a matching contribution equal to up to 3
percent, and not less than 1 percent, of your SIMPLE IRA contribution for the
year, or (2) a nonelective contribution equal to 2 percent of your compensation
for the year (up to $150,000 of compensation, as adjusted for inflation). No
other contributions may be made to a SIMPLE IRA.
3. Employee elective contributions and employer contributions (I.E., matching
contributions and nonelective contributions) to your SIMPLE IRA are excluded
from your gross income.
4. To the extent an individual with a SIMPLE IRA is no longer participating in a
SIMPLE plan (E.G., the individual has terminated employment), and two years has
passed since the individual first participated in the plan, the individual may
treat the SIMPLE IRA as an IRA.
G. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS FOR IRAs AND SIMPLE IRAs
1. Earnings of your IRA annuity contract are not taxed until they are
distributed to you.
2. In general, taxable distributions are included in your gross income in the
year you receive them.
3. Distributions under your IRA are non-taxable to the extent they represent a
return of non-deductible contributions (if any). The non-taxable percentage of a
distribution is determined by dividing your total undistributed, non-deductible
IRA contributions by the value of all your IRAs (including SEPs and rollovers).
4. You cannot choose the special five-year or ten-year averaging that may apply
to lump sum distributions from qualified employer plans.
H. REQUIRED DISTRIBUTIONS FOR IRAs AND SIMPLE IRAs
You must start receiving minimum distributions required under the Contract and
Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum
distribution for a particular year must be received by December 31 of that year.
However, you may delay the required minimum distribution for the year you reach
age 70 1/2 until April 1 of the following year (I.E., the required beginning
date).
Annuity payments which begin by April 1 of the year following your 70 1/2 year
satisfy the minimum distribution requirement if they provide for non-increasing
payments over the life or the lives of you and your spouse, provided that, if
installments are guaranteed, the guaranty period does not exceed the lesser of
20 years or the applicable life expectancy.
The applicable life expectancy is your remaining life expectancy or the
remaining joint life and last survivor expectancy of you and your designated
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." To
obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS
toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your
area as shown in your income tax return instructions.
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.
If the actual distribution from your Contract is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
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accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. ROTH IRAs
1. If your Contract is a special type of individual retirement plan known as
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to an "IRA"
are to an "individual retirement plan," within the meaning of Section
7701(a)(37) of the Code, other than a Roth IRA.) Roth IRAs are treated the same
as other IRAs, except as described here. However, the provisions of the Code
governing Roth IRAs may be modified by pending legislation. We will notify you
of any such changes.
2. The IRS is not presently accepting submissions for opinion letters approving
annuities as Roth IRAs, but will issue in the future procedures for requesting
such opinion letters. We will apply for approval as soon as possible after the
IRS issues its procedures on this matter. Such approval will be a determination
only as to the form of the annuity, and will not represent a determination of
the merits of the annuity.
3. If your Contract is a Roth IRA, we will send you a Roth IRA endorsement to be
attached to, and to amend, your Contract after we obtain approval of the
endorsement from the IRS and your state insurance department. We reserve the
right to amend the Contract as necessary or advisable from time to time to
comply with future changes in the Internal Revenue Code, regulations or other
requirements imposed by the IRS to obtain or maintain its approval of the
annuity as a Roth IRA.
4. Earnings in your Roth IRA are not taxed until they are distributed to you,
and will not be taxed if they are paid as a "qualified distribution," as
described to you in section L, below.
J. ELIGIBILITY AND CONTRIBUTIONS FOR ROTH IRAs
1. Generally, you are eligible to establish or make a contribution to your Roth
IRA only if you meet certain income limits. No deduction is allowed for
contributions to your Roth IRA. Contributions to your Roth IRA may be made even
after you attain age 70 1/2.
2. The aggregate amount of contributions for any taxable year to all IRAs,
including all Roth IRAs, maintained for your benefit (the "contribution limit")
generally is the lesser of $2,000 and 100% of your compensation for the taxable
year. However, if you file a joint return and receive less compensation for the
taxable year than your spouse, the contribution limit for the taxable year is
the lesser of $2,000 and the sum of (1) your compensation for the taxable year,
and (2) your spouse's compensation for the taxable year reduced by any
deductible contributions to an IRA of your spouse, and by any contributions to a
Roth IRA for your spouse, for the taxable year.
The contribution limit for any taxable year is reduced (but not below zero) by
the amount which bears the same ratio to such amount as:
(a) the excess of (i) your adjusted gross income for the taxable year, over
(ii) the "applicable dollar amount", bears to
(b) $15,000 (or $10,000 if you are married).
For this purpose, "adjusted gross income" is determined in accordance with
Section 219(g)(3) of the Code and (1) excludes any amount included in gross
income as a result of any rollover from, transfer from, or conversion of an IRA
to a Roth IRA, and (2) is reduced by any deductible IRA contribution. In
addition, the "applicable dollar amount" is equal to $150,000 for a married
individual filing a joint return, $0 for a married individual filing a separate
return, and $95,000 for any other individual.
A "qualified rollover contribution" (discussed in section K, below), and a
non-taxable transfer from another Roth IRA, are not taken into account for
purposes of determining the contribution limit.
K. ROLLOVERS, TRANSFERS AND CONVERSIONS TO ROTH IRAs
1. Rollovers and Transfers -- A rollover may be made to a Roth IRA only if it is
a "qualified rollover contribution." A "qualified rollover contribution" is a
rollover to a Roth IRA from another Roth IRA or from an
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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 generally not apply unless the amounts rolled over or
transferred are withdrawn within the five-year period beginning with the taxable
year in which such contribution was made.
3. Transfers of Excess IRA Contributions to Roth IRAs -- If, before the due date
of your federal income tax return for any taxable year (not including
extensions), you transfer, from an IRA, contributions for such taxable year (and
earnings thereon) to a Roth IRA, such amounts will not be includible in gross
income to the extent that no deduction was allowed with respect to such amount.
4. Taxation of Conversions of IRAs to Roth IRAs -- All or part of amounts in an
IRA maintained for your benefit may be converted into a Roth IRA maintained for
your benefit. The conversion of an IRA to a Roth IRA is treated as a special
type of qualified rollover contribution. Hence, you must be eligible to make a
qualified rollover contribution in order to convert an IRA to a Roth IRA. A
conversion typically will result in the inclusion of some or all of your IRA's
value in gross income, as described above.
A conversion of an IRA to a Roth IRA can be made without taking an actual
distribution from your IRA. For example, an individual may make a conversion by
notifying the IRA issuer or trustee, whichever is applicable.
UNDER SOME CIRCUMSTANCES, IT MIGHT NOT BE ADVISABLE TO ROLLOVER, TRANSFER, OR
CONVERT ALL OR PART OF AN IRA TO A ROTH IRA. WHETHER YOU SHOULD DO SO WILL
DEPEND ON YOUR PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING, BUT NOT LIMITED
TO, SUCH FACTORS AS WHETHER YOU QUALIFY TO MAKE SUCH A ROLLOVER, TRANSFER, OR
CONVERSION, YOUR FINANCIAL SITUATION, AGE, CURRENT AND FUTURE INCOME NEEDS,
YEARS TO RETIREMENT, CURRENT AND FUTURE TAX RATES, YOUR ABILITY AND DESIRE TO
PAY CURRENT INCOME TAXES WITH RESPECT TO AMOUNTS ROLLED OVER, TRANSFERRED, OR
CONVERTED, AND WHETHER SUCH TAXES MIGHT NEED TO BE PAID WITH WITHDRAWALS FROM
YOUR ROTH IRA (SEE DISCUSSION BELOW OF "NONQUALIFIED DISTRIBUTIONS"). YOU SHOULD
CONSULT A QUALIFIED TAX ADVISER BEFORE ROLLING OVER, TRANSFERRING, OR CONVERTING
ALL OR PART OF AN IRA TO A ROTH IRA.
5. Separate Roth IRAs -- Due to the complexity of, and proposed changes to, the
tax law, it may be advantageous to maintain amounts rolled over, transferred, or
converted from an IRA in separate Roth IRAs from those containing regular Roth
IRA contributions. For the same reason, you should consider maintaining a
separate Roth IRA for each amount rolled over, transferred, or converted from an
IRA. These considerations should be balanced against the additional costs you
may incur from maintaining multiple Roth IRAs. You should consult your tax
adviser if you intend to contribute rollover, transfer, or conversion amounts to
your Contract or if you intend to roll over or transfer amounts from your
Contract to another Roth IRA maintained for your benefit.
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L. INCOME TAX CONSEQUENCES OF ROTH IRAs
1. Qualified Distributions -- Any "qualified distribution" from a Roth IRA is
excludible from gross income. A "qualified distribution" is a payment or
distribution which satisfies two requirements. First, the payment or
distribution must be (a) made after you attain 59 1/2, (b) made after your
death, (c) attributable to your being disabled, or (d) a "qualified special
purpose distribution" (I.E., a qualified first-time homebuyer distribution under
Section 72(t)(2)(F) of the Code). Second, the payment or distribution must be
made in a taxable year that is at least five years after (1) the first taxable
year for which a contribution was made to any Roth IRA established for you, or
(2) in the case of a rollover from, or a conversion of, an IRA to a Roth IRA,
the taxable year in which the rollover or conversion was made if the payment or
distribution is allocable (as determined in the manner set forth in guidance
issued by the IRS) to the rollover contribution or conversion (or to income
allocable thereto).
2. Nonqualified Distributions -- A distribution from a Roth IRA which is not a
qualified distribution is taxed under Section 72 (relating to annuities), except
that such distribution is treated as made first from contributions to the Roth
IRA to the extent that such distribution, when added to all previous
distributions from the Roth IRA, does not exceed the aggregate amount of
contributions to the Roth IRA. For purposes of determining the amount taxed, (a)
all Roth IRAs established for you will be treated as one contract, (b) all
distributions during any taxable year from Roth IRAs established for you will be
treated as one distribution, and (c) the value of the contract, income on the
contract, and investment in the contract, if applicable, will be computed as of
the close of the calendar year in which the taxable year begins.
An additional tax of 10% is imposed on nonqualified distributions (including
amounts deemed distributed as the result of a prohibited loan or use of your
Roth IRA as security for a loan) made before the benefited individual has
attained age 59 1/2, unless one of the exceptions discussed in Section N
applies.
M. TAX ON EXCESS CONTRIBUTIONS
1. You must pay a 6% excise tax each year on excess contributions that remain in
your Contract. Generally, an excess contribution is the amount contributed to
your Contract that is more than you can contribute. The excess is taxed for the
year of the excess contribution and for each year after that until you correct
it.
2. You will not have to pay the 6% excise tax if you withdraw the excess amount
by the date your tax return is due including extensions for the year of the
contribution. You do not have to include in your gross income an excess
contribution that you withdraw from your Contract before your tax return is due
if the income earned on the excess was also withdrawn and no deduction was
allowed for the excess contribution. You must include in your gross income the
income earned on the excess contribution.
N. TAX ON PREMATURE DISTRIBUTIONS
There is an additional tax on premature distributions from your IRA, Roth IRA or
SIMPLE IRA, equal to 10% of the taxable amount. For premature distributions from
a SIMPLE IRA made within the first 2 years you participate in a SIMPLE plan, the
additional tax is equal to 25% of the amount of the premature distribution that
must be included in gross income. Premature distributions are generally amounts
you withdraw before you are age 59 1/2. However, the tax on premature
distributions does not apply:
1. To amounts that are rolled over tax free;
2. To a distribution which is made on or after your death, or on account of you
being disabled within the meaning of Code Section 72(m)(7);
3. To a distribution which is part of a series of substantially equal periodic
payments (made at least annually) over your life or your life expectancy or the
joint life or joint life expectancy of you and your beneficiary; or
4. To a distribution which is used for qualified first-time homebuyer expenses,
qualified high education expenses, certain medical expenses, or by an unemployed
individual to pay health insurance premiums.
O. IRA EXCISE TAX REPORTING
Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA, Roth IRA or SIMPLE IRA excise taxes,
you do not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
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P. BORROWING
If you borrow money against your Contract or use it as security for a loan, the
Contract will lose its classification as an IRA, Roth IRA or SIMPLE IRA ,
whichever is applicable, and you must include in gross income the fair market
value of the Contract as of the first day of your tax year. In addition, you may
be subject to the tax on premature distributions described above. (Note: This
Contract does not allow borrowings against it, nor may it be assigned or pledged
as collateral for a loan.)
Q. REPORTING
We will provide you with any reports required by the Internal Revenue Service.
R. ESTATE TAX
Generally, the value of your IRA, including your Roth IRA, is included in your
gross estate for federal estate tax purposes.
S. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
AND MVA OPTION.
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.25% per annum.
2. An annual records maintenance charge of $30.00 will be assessed against the
Separate Account Value each Contract Year. If no values are in the Subaccounts,
the charge will be assessed against Guarantee Period Value.
3. Withdrawal and early annuitization charges will be assessed based on the
Contract Years elapsed since the Contract was issued as described in the
prospectus under the heading "Withdrawal Charge."
Withdrawals, transfers and early annuitizations of Guarantee Period Value may be
subject to a Market Value Adjustment as described in the prospectus under the
heading "Market Value Adjustment."
4. The method used to compute and allocate the annual earnings is contained in
the prospectus under the heading "Accumulation Unit Value" for Separate Account
Value and under the headings "Guarantee Periods of the MVA Option" and
"Establishment of Guaranteed Interest Rates" for Guarantee Period Value.
5. The growth in value of your Contract is neither guaranteed nor projected but
is based on the investment experience of the Subaccounts or rates of interest as
declared by Kemper Investors Life Insurance Company.
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STATEMENT OF ADDITIONAL INFORMATION
JUNE 23, 2000
--------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED
DEFERRED ANNUITY CONTRACTS
--------------------------------------------------------------------------------
ZURICH PREFERRED
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated June 23, 2000. The Prospectus may be obtained from Kemper
Investors Life Insurance Company by writing or calling the address or telephone
number listed above.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services to the Separate Account............................ B-1
Performance Information of Subaccounts...................... B-1
State Regulation............................................ B-3
Experts..................................................... B-3
Financial Statements........................................ B-3
Report of Independent Accountants........................... B-5
Financial Statements of the Separate Account................ B-6
Appendix A Table of Historical Hypothetical Accumulation
Unit Values and Performance Information................... B-38
Appendix B State Premium Tax Chart.......................... B-47
</TABLE>
<PAGE> 101
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 accountants for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the years ended December 31, 1999, 1998 and 1997.
The firm performed the annual audit of the financial statements of the Separate
Account and KILICO for the years ended December 31, 1999, 1998 and 1997.
The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Contracts are distributed
through the principal underwriter for the Separate Account, Investors Brokerage
Services, Inc. ("IBS"), a wholly-owned subsidiary of KILICO, which enters into
selling group agreements with the affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to nine tenths of one percent (.90%) of
Purchase Payments.
PERFORMANCE INFORMATION OF SUBACCOUNTS
As described in the Prospectus, a Subaccount's historical performance may be
shown in the form of standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, Kemper Investment Grade Bond Subaccount and Kemper Government
Securities Subaccount; and "yield" and "effective yield" information may be
provided in the case of the Kemper Money Market Subaccount #1 (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 recurring charges and fees applicable under the Contract
to all Contract Owner accounts. Premium taxes are not included in the term
charges. The redeemable value is then divided by the initial investment and this
quotient is taken to the Nth root (N represents the number of years in the
period) and 1 is subtracted from the result, which is then expressed as a
percentage. Standardized average annual total return figures are annualized and,
therefore, represent the average annual percentage change in the value of a
Subaccount over the applicable period.
No standard formula has been prescribed for calculating total return
performance. Nonstandardized total return performance for a specific period is
calculated by first taking an investment (assumed to be $40,000 below) in each
Subaccount's units on the first day of the period at the maximum offering price,
which is the Accumulation Unit Value per unit ("initial investment") and
computing the ending value ("ending value") of that investment at the end of the
period. Premium taxes and Records Maintenance Charges 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 change in the value
of a Subaccount over the applicable period while nonannualized (cumulative)
figures represent the actual percentage change over the applicable period.
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover
B-1
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periods of one, three, five and ten years, if applicable, and a period covering
the time the underlying Portfolio has been held in a Subaccount (life of
Subaccount). Nonstandardized total return will cover periods of one, three, five
and ten years, if applicable, and a period covering the time the underlying
Portfolio held in a Subaccount has been in existence (life of Portfolio). For
those underlying Portfolios which have not been held as Subaccounts within the
Separate Account for one of the quoted periods, the nonstandardized total return
quotations will show the investment performance such underlying Portfolios would
have achieved had they been held as Subaccounts within the Separate Account for
the period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper Money Market Subaccount, Kemper Total Return Subaccount and
Kemper High Yield Subaccount, and for periods from December 9, 1983 (inception)
for the Kemper Growth Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount, the Kemper Investment Grade Bond
Subaccount and the Kemper Government Securities Subaccount is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The yields for the Kemper High Yield Subaccount, the Kemper
Government Securities Subaccount and the Kemper Investment Grade Bond
Subaccount, based upon the one month period ended March 31, 2000 were 10.74%,
5.04% and 5.48%, 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
premium taxes.
The Kemper Money Market Subaccount's yield is computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit Value during
the period is divided by the Accumulation Unit Value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Account's portfolio are not included in the calculation. The
yield for the seven-day period ended March 31, 2000 was 4.30% for the Kemper
Money Market Subaccount. The average portfolio maturity was 23 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 effective yield for the seven-day period ended March
31, 2000 was 4.39% for the Kemper Money Market Subaccount.
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
B-2
<PAGE> 103
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. Standardized average annual total returns include the deduction
of all expenses and fees, including a prorated portion of the Records
Maintenance Charge. Standardized average annual total returns do not reflect the
effect of any applicable premium tax. Yield, effective yield and nonstandardized
total returns include the deduction of all expenses and fees except the effect
of premium taxes that may be imposed upon the redemption of units and the
prorated portion of the Records Maintenance Charge.
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes described in the
Prospectus. In addition, the Subaccounts may provide performance analysis
rankings of Lipper Analytical Services, Inc., the VARDS Report, MORNINGSTAR,
INC., Ibbotson Associates or Micropal. From time to time, the Separate Account
may quote information from publications such as MORNINGSTAR, INC., THE WALL
STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE,
USA TODAY, INSTITUTIONAL INVESTOR, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE,
BROKER WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
The tables in Appendix A include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1999.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
EXPERTS
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1999 and the related statements of
operations for the year then ended and the statements of changes in contract
owners' equity for the years ended December 31, 1999 and 1998 have been included
herein in reliance upon the report of PricewaterhouseCoopers LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
FINANCIAL STATEMENTS
This Statement of Additional Information contains financial statements for the
Separate Account which reflect assets attributable to the Contracts and also
reflect assets attributable to other variable annuity contracts offered by
KILICO through the Separate Account.
B-3
<PAGE> 104
(This page intentionally left blank)
B-4
<PAGE> 105
REPORT OF INDEPENDENT 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, Kemper Technology Growth Subaccount, Kemper Total
Return Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount,
Kemper Government Securities Subaccount, Kemper Small Cap Growth Subaccount,
Kemper Investment Grade Bond Subaccount, (investment options within the Kemper
Variable Series, formerly Investors Fund Series), Scudder VLIF Capital Growth
Subaccount, Scudder VLIF International Subaccount, Scudder VLIF Bond Subaccount,
(investment options within the Scudder Variable Life Investment Fund), Alger
American Growth Subaccount, Alger American Small Capitalization Subaccount
(investment options within The Alger American Fund), Janus Aspen Growth
Subaccount, Janus Aspen Aggressive Growth Subaccount, Janus Aspen Worldwide
Growth Subaccount, Janus Aspen Balanced Subaccount (investment options within
the Janus Aspen Series), Fidelity VIP Equity-Income Subaccount, Fidelity VIP
Growth Subaccount (investment options within the Fidelity Variable Insurance
Products Fund), Fidelity VIP II Index 500 Subaccount, Fidelity VIP II Contrafund
Subaccount (investment options within the Fidelity Variable Insurance Products
Fund II), American Century VP Income & Growth Subaccount, American Century VP
Value Subaccount (investment options within the American Century Variable
Portfolios, Inc.), J.P. Morgan Small Company Subaccount (investment option
within the J.P. Morgan Series Trust II), Warburg Pincus Emerging Markets
Subaccount (investment option within the Warburg Pincus Trust), Dreyfus Socially
Responsible Growth Subaccount (investment option within The Dreyfus Socially
Responsible Growth Fund, Inc.), thereof at December 31, 1999, and the results of
their operations for the period presented and the changes in their contract
owners' equity for each of the two years then ended, except for the Scudder VLIF
Bond Subaccount as to which the period is April 7, 1999 (commencement of
operations) to December 31, 1999, the Kemper Technology Growth Subaccount, the
Alger American Growth Subaccount, the Alger American Small Capitalization
Subaccount, the American Century VP Income & Growth Subaccount, the American
Century VP Value Subaccount, the J.P. Morgan Small Company Subaccount and the
Dreyfus Socially Responsible Growth Subaccount as to which the period is May 3,
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-5
<PAGE> 106
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY TECHNOLOGY TOTAL KEMPER KEMPER GOVERNMENT
MARKET GROWTH RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio
funds, at current values............... $140,045 19,583 716,720 218,357 574,900 71,783
Dividends and other receivables.......... 443 -- 36 31 1 --
-------- ------ ------- ------- ------- ------
Total assets...................... 140,488 19,583 716,756 218,388 574,901 71,783
-------- ------ ------- ------- ------- ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and
administrative charges............... 120 -- 731 225 586 68
Other payables......................... 1 -- 217 445 282 6
-------- ------ ------- ------- ------- ------
Total liabilities................. 121 -- 948 670 868 74
-------- ------ ------- ------- ------- ------
Contract owners' equity.................. $140,367 19,583 715,808 217,718 574,033 71,709
======== ====== ======= ======= ======= ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess (deficiency) of proceeds from
units sold over payments for units
redeemed............................... $ 61,506 15,263 (6,653) 1,825 9,349 34,942
Accumulated net investment income
(loss)................................. 78,861 12 466,966 220,219 275,309 37,352
Accumulated net realized gain on sales of
investments............................ -- 111 138,146 3,970 100,375 346
Unrealized appreciation (depreciation) of
investments............................ -- 4,197 117,349 (8,296) 189,000 (931)
-------- ------ ------- ------- ------- ------
Contract owners' equity.................. $140,367 19,583 715,808 217,718 574,033 71,709
======== ====== ======= ======= ======= ======
</TABLE>
---------------
* Formerly Investors Fund Series
See accompanying notes to financial statements.
B-6
<PAGE> 107
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES* SCUDDER VARIABLE LIFE INVESTMENT FUND THE ALGER AMERICAN FUND
----------------------- ------------------------------------------- -------------------------------
KEMPER KEMPER SCUDDER VLIF ALGER AMERICAN
SMALL CAP INVESTMENT CAPITAL SCUDDER VLIF SCUDDER VLIF ALGER AMERICAN SMALL
GROWTH GRADE BOND GROWTH INTERNATIONAL BOND GROWTH CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------ ------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
166,144 18,607 13,725 27,586 176 10,920 2,149
67 290 -- 1 -- 3 --
------- ------ ------ ------ --- ------ -----
166,211 18,897 13,725 27,587 176 10,923 2,149
------- ------ ------ ------ --- ------ -----
155 11 -- 3 -- 11 2
-- 6 -- 2 -- 1 4
------- ------ ------ ------ --- ------ -----
155 17 -- 5 -- 12 6
------- ------ ------ ------ --- ------ -----
166,056 18,880 13,725 27,582 176 10,911 2,143
======= ====== ====== ====== === ====== =====
65,173 18,577 11,279 21,253 174 9,538 1,538
23,953 312 188 728 (1) (32) (10)
25,083 368 36 2,930 2 42 255
51,847 (377) 2,222 2,671 1 1,363 360
------- ------ ------ ------ --- ------ -----
166,056 18,880 13,725 27,582 176 10,911 2,143
======= ====== ====== ====== === ====== =====
</TABLE>
B-7
<PAGE> 108
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
-----------------------------------------------------
JANUS ASPEN JANUS ASPEN
JANUS ASPEN AGGRESSIVE WORLDWIDE JANUS ASPEN
GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio funds, at
current values................................. $240,663 158,602 329,390 144,185
Dividends and other receivables.................. 23 42 121 66
-------- ------- ------- -------
Total assets.............................. 240,686 158,644 329,511 144,251
-------- ------- ------- -------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and administrative
charges...................................... 159 154 332 151
Other payables................................. 28 97 163 7
-------- ------- ------- -------
Total liabilities......................... 187 251 495 158
-------- ------- ------- -------
Contract owners' equity.......................... $240,499 158,393 329,016 144,093
======== ======= ======= =======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of proceeds from units sold over payments
for units redeemed............................. $167,597 78,989 166,827 108,887
Accumulated net investment income (loss)......... 1,903 659 940 2,457
Accumulated net realized gain (loss) on sales of
investments.................................... 6,108 3,986 8,485 2,244
Unrealized appreciation (depreciation) of
investments.................................... 64,891 74,759 152,764 30,505
-------- ------- ------- -------
Contract owners' equity.......................... $240,499 158,393 329,016 144,093
======== ======= ======= =======
<CAPTION>
FIDELITY VARIABLE INSURANCE
PRODUCTS FUND
---------------------------
FIDELITY VIP
EQUITY- FIDELITY VIP
INCOME GROWTH
SUBACCOUNT SUBACCOUNT
------------ ------------
<S> <C> <C>
ASSETS
Investments in underlying portfolio funds, at
current values................................. 45,335 91,361
Dividends and other receivables.................. -- 63
------ ------
Total assets.............................. 45,335 91,424
------ ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and administrative
charges...................................... 50 95
Other payables................................. 56 27
------ ------
Total liabilities......................... 106 122
------ ------
Contract owners' equity.......................... 45,229 91,302
====== ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of proceeds from units sold over payments
for units redeemed............................. 36,821 62,171
Accumulated net investment income (loss)......... 3,108 5,541
Accumulated net realized gain (loss) on sales of
investments.................................... 1,884 2,043
Unrealized appreciation (depreciation) of
investments.................................... 3,416 21,547
------ ------
Contract owners' equity.......................... 45,229 91,302
====== ======
</TABLE>
---------------
See accompanying notes to financial statements.
B-8
<PAGE> 109
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE AMERICAN CENTURY VARIABLE J.P. MORGAN SERIES WARBURG PINCUS
PRODUCTS FUND II PORTFOLIOS, INC. TRUST II TRUST
--------------------------------- ----------------------------------- ------------------ --------------
AMERICAN CENTURY WARBURG PINCUS
FIDELITY VIP II FIDELITY VIP II VP INCOME & AMERICAN CENTURY J.P. MORGAN EMERGING
INDEX 500 CONTRAFUND GROWTH VP VALUE SMALL COMPANY MARKETS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------- --------------- ---------------- ---------------- ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
170,471 78,493 2,727 581 370 3,042
5 -- -- -- -- 3
------- ------ ----- --- --- -----
170,476 78,493 2,727 581 370 3,045
------- ------ ----- --- --- -----
180 82 3 1 -- --
17 15 -- -- -- --
------- ------ ----- --- --- -----
197 97 3 1 -- --
------- ------ ----- --- --- -----
170,279 78,396 2,724 580 370 3,045
======= ====== ===== === === =====
123,271 50,097 2,487 633 301 2,414
750 2,348 (13) (2) 6 93
11,070 8,444 11 (3) 19 64
35,188 17,507 239 (48) 44 474
------- ------ ----- --- --- -----
170,279 78,396 2,724 580 370 3,045
======= ====== ===== === === =====
<CAPTION>
THE DREYFUS
SOCIALLY RESPONSIBLE
GROWTH FUND, INC.
--------------------
DREYFUS
SOCIALLY RESPONSIBLE
GROWTH
SUBACCOUNT
--------------------
<S> <C>
2,809
61
-----
2,870
-----
3
--
-----
3
-----
2,867
=====
2,481
87
31
268
-----
2,867
=====
</TABLE>
B-9
<PAGE> 110
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
-------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY TECHNOLOGY TOTAL HIGH
MARKET GROWTH RETURN YIELD
SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Dividends and capital gains distributions................. $5,806 -- 60,683 24,402
EXPENSES
Mortality and expense risk and administrative charges..... 1,426 (12) 9,543 3,256
------ ----- ------ -------
Net investment income (loss)................................ 4,380 12 51,140 21,146
------ ----- ------ -------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on sales of investments.......... -- 111 29,197 (6,838)
Change in unrealized appreciation (depreciation) of
investments............................................. -- 4,197 8,683 (10,902)
------ ----- ------ -------
Net realized and unrealized gain (loss) on investments...... -- 4,308 37,880 (17,740)
------ ----- ------ -------
Net increase (decrease) in contract owners' equity resulting
from operations........................................... $4,380 4,320 89,020 3,406
====== ===== ====== =======
</TABLE>
---------------
*Formerly Investors Fund Series
(a) For the period (commencement of operations) May 3, 1999 to December 31,
1999.
See accompanying notes to financial statements.
B-10
<PAGE> 111
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
-------------------------------------------------
KEMPER KEMPER KEMPER
KEMPER GOVERNMENT SMALL CAP INVESTMENT
GROWTH SECURITIES GROWTH GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
-- 3,826 -- 465
7,131 1,011 1,739 214
------- ------ ------ ----
(7,131) 2,815 (1,739) 251
------- ------ ------ ----
30,772 (611) 9,762 (16)
134,497 (2,754) 32,251 (733)
------- ------ ------ ----
165,269 (3,365) 42,013 (749)
------- ------ ------ ----
158,138 (550) 40,274 (498)
======= ====== ====== ====
</TABLE>
B-11
<PAGE> 112
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
----------------------------------------------
SCUDDER VLIF
CAPITAL SCUDDER VLIF SCUDDER VLIF
GROWTH INTERNATIONAL BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT(A)
------------ ------------- -------------
<S> <C> <C> <C>
REVENUE
Dividends and capital gains distributions................. $ 244 737 --
EXPENSES
Mortality and expense risk and administrative charges..... 54 4 1
------ ----- --
Net investment income (loss)................................ 190 733 (1)
------ ----- --
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on sales of investments................. 49 2,937 2
Change in unrealized appreciation of investments.......... 2,162 2,620 1
------ ----- --
Net realized and unrealized gain on investments............. 2,211 5,557 3
------ ----- --
Net increase in contract owners' equity resulting from
operations................................................ $2,401 6,290 2
====== ===== ==
</TABLE>
---------------
(a) For the period (commencement of operations): April 7, 1999 -- Scudder VLIF
Bond Subaccount; May 3, 1999 -- Alger American Growth Subaccount and Alger
American Small Capitalization Subaccount to December 31, 1999.
See accompanying notes to financial statements.
B-12
<PAGE> 113
<TABLE>
<CAPTION>
THE ALGER AMERICAN FUND
-------------------------------------
ALGER AMERICAN ALGER AMERICAN
GROWTH SMALL CAPITALIZATION
SUBACCOUNT(A) SUBACCOUNT(A)
-------------- --------------------
<S> <C> <C>
15 1
47 11
----- ---
(32) (10)
----- ---
42 255
1,363 360
----- ---
1,405 615
----- ---
1,373 605
===== ===
</TABLE>
B-13
<PAGE> 114
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
-------------------------------------------------
JANUS JANUS
JANUS ASPEN ASPEN JANUS
ASPEN AGGRESSIVE WORLDWIDE ASPEN
GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Dividends and capital gains distributions................... $ 997 2,287 385 2,622
EXPENSES
Mortality and expense risk and administrative charges..... 1,735 946 2,942 1,342
------- ------ ------- ------
Net investment income (loss)................................ (738) 1,341 (2,557) 1,280
------- ------ ------- ------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on sales of investments.......... 3,417 2,697 4,592 1,371
Change in unrealized appreciation (depreciation) of
investments............................................. 51,260 65,836 119,130 20,883
------- ------ ------- ------
Net realized and unrealized gain (loss) on investments...... 54,677 68,533 123,722 22,254
------- ------ ------- ------
Net increase (decrease) in contract owners' equity resulting
from operations........................................... $53,939 69,874 121,165 23,534
======= ====== ======= ======
</TABLE>
---------------
(a) For the period (commencement of operations) May 3, 1999 to December 31,
1999.
See accompanying notes to financial statements.
B-14
<PAGE> 115
<TABLE>
<CAPTION>
FIDELITY VARIABLE FIDELITY VARIABLE INSURANCE AMERICAN CENTURY VARIABLE J.P. MORGAN
INSURANCE PRODUCTS FUND PRODUCTS FUND II PORTFOLIOS, INC. SERIES TRUST II
----------------------- --------------------------------- ----------------------------------- ---------------
FIDELITY
VIP FIDELITY AMERICAN CENTURY
EQUITY- VIP FIDELITY VIP II FIDELITY VIP II VP INCOME & AMERICAN CENTURY J.P. MORGAN
INCOME GROWTH INDEX 500 CONTRAFUND GROWTH VP VALUE SMALL COMPANY
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- --------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
2,030 4,962 2,006 2,128 -- -- 7
623 857 1,892 881 13 2 1
----- ------ ------ ------ --- --- ---
1,407 4,105 114 1,247 (13) (2) 6
----- ------ ------ ------ --- --- ---
1,480 1,734 4,761 4,962 11 (3) 19
(945) 15,088 19,511 7,841 239 (48) 44
----- ------ ------ ------ --- --- ---
535 16,822 24,272 12,803 250 (51) 63
----- ------ ------ ------ --- --- ---
1,942 20,927 24,386 14,050 237 (53) 69
===== ====== ====== ====== === === ===
<CAPTION>
THE DREYFUS
SOCIALLY
WARBURG PINCUS RESPONSIBLE
TRUST GROWTH FUND, INC.
-------------- --------------------
WARBURG PINCUS DREYFUS
EMERGING SOCIALLY RESPONSIBLE
MARKETS GROWTH
SUBACCOUNT SUBACCOUNT(A)
-------------- --------------------
<S> <C> <C>
100 93
7 6
--- ---
93 87
--- ---
65 31
472 268
--- ---
537 299
--- ---
630 386
=== ===
</TABLE>
B-15
<PAGE> 116
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
----------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY TECHNOLOGY TOTAL HIGH
MARKET GROWTH RETURN YIELD
SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss).............................. $ 4,380 12 51,140 21,146
Net realized gain (loss) on sales of investments.......... -- 111 29,197 (6,838)
Change in unrealized appreciation (depreciation) of
investments............................................. -- 4,197 8,683 (10,902)
-------- ------ -------- -------
Net increase (decrease) in contract owners' equity
resulting from operations............................. 4,380 4,320 89,020 3,406
-------- ------ -------- -------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold.................................. 48,137 9,935 42,169 22,709
Net transfers (to) from affiliate and subaccounts......... 14,016 5,358 (49,778) (27,431)
Payments for units redeemed............................... (37,977) (30) (101,982) (43,328)
-------- ------ -------- -------
Net increase (decrease) in contract owners' equity from
account unit transactions............................. 24,176 15,263 (109,591) (48,050)
-------- ------ -------- -------
Total increase (decrease) in contract owners' equity........ 28,556 19,583 (20,571) (44,644)
Beginning of period......................................... 111,811 -- 736,379 262,362
-------- ------ -------- -------
End of period............................................... $140,367 19,583 715,808 217,718
======== ====== ======== =======
</TABLE>
---------------
* Formerly Investors Fund Series
(a) For the period (commencement of operations) May 3, 1999 to December 31,
1999.
See accompanying notes to financial statements.
B-16
<PAGE> 117
<TABLE>
<CAPTION>
KEMPER VARIABLE SERIES*
-------------------------------------------------
KEMPER KEMPER KEMPER
KEMPER GOVERNMENT SMALL CAP INVESTMENT
GROWTH SECURITIES GROWTH GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C>
(7,131) 2,815 (1,739) 251
30,772 (611) 9,762 (16)
134,497 (2,754) 32,251 (733)
-------- ------- ------- ------
158,138 (550) 40,274 (498)
-------- ------- ------- ------
25,447 12,331 17,628 6,620
(66,997) (4,399) (22,588) 3,501
(80,300) (14,018) (13,139) (2,364)
-------- ------- ------- ------
(121,850) (6,086) (18,099) 7,757
-------- ------- ------- ------
36,288 (6,636) 22,175 7,259
537,745 78,345 143,881 11,621
-------- ------- ------- ------
574,033 71,709 166,056 18,880
======== ======= ======= ======
</TABLE>
B-17
<PAGE> 118
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
------------------------------------------------
SCUDDER VLIF
CAPITAL SCUDDER VLIF SCUDDER VLIF
GROWTH INTERNATIONAL BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT(A)
------------ ------------- -------------
<S> <C> <C> <C>
OPERATIONS
Net investment income (loss).............................. $ 190 733 (1)
Net realized gain on sales of investments................. 49 2,937 2
Change in unrealized appreciation of investments.......... 2,162 2,620 1
------- ------ ---
Net increase in contract owners' equity resulting
from operations.................................. 2,401 6,290 2
------- ------ ---
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold.................................. 7,470 8,107 46
Net transfers from affiliate and subaccounts.............. 3,461 12,443 130
Payments for units redeemed............................... (211) (127) (2)
------- ------ ---
Net increase in contract owners' equity from
account unit transactions........................ 10,720 20,423 174
------- ------ ---
Total increase in contract owners' equity................... 13,121 26,713 176
Beginning of period......................................... 604 869 --
------- ------ ---
End of period............................................... $13,725 27,582 176
======= ====== ===
</TABLE>
---------------
(a) For the period (commencement of operations): April 7, 1999 -- Scudder VLIF
Bond Subaccount; May 3, 1999 -- Alger American Growth Subaccount and Alger
American Small Capitalization Subaccount; to December 31, 1999.
See accompanying notes to financial statements.
B-18
<PAGE> 119
<TABLE>
<CAPTION>
THE ALGER AMERICAN FUND
-------------------------------
ALGER AMERICAN
ALGER AMERICAN SMALL
GROWTH CAPITALIZATION
SUBACCOUNT(A) SUBACCOUNT(A)
-------------- --------------
<S> <C> <C>
(32) (10)
42 255
1,363 360
------ -----
1,373 605
------ -----
1,752 435
8,014 1,123
(228) (20)
------ -----
9,538 1,538
------ -----
10,911 2,143
-- --
------ -----
10,911 2,143
====== =====
</TABLE>
B-19
<PAGE> 120
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
-----------------------------------------------------
JANUS ASPEN JANUS ASPEN
JANUS ASPEN AGGRESSIVE WORLDWIDE JANUS ASPEN
GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss).............................. $ (738) 1,341 (2,557) 1,280
Net realized gain (loss) on sales of investments.......... 3,417 2,697 4,592 1,371
Change in unrealized appreciation (depreciation) of
investments............................................. 51,260 65,836 119,130 20,883
-------- ------- ------- -------
Net increase (decrease) in contract owners' equity
resulting from operations............................. 53,939 69,874 121,165 23,534
-------- ------- ------- -------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold.................................. 57,097 10,948 30,001 22,203
Net transfers (to) from affiliate and subaccounts......... 77,006 52,502 23,985 51,714
Payments for units redeemed............................... (7,417) (4,293) (11,997) (6,532)
-------- ------- ------- -------
Net increase in contract owners' equity from account
unit transactions..................................... 126,686 59,157 41,989 67,385
-------- ------- ------- -------
Total increase in contract owners' equity................... 180,625 129,031 163,154 90,919
Beginning of period....................................... 59,874 29,362 165,862 53,174
-------- ------- ------- -------
End of period............................................. $240,499 158,393 329,016 144,093
======== ======= ======= =======
</TABLE>
---------------
(a) For the period (commencement of operations) May 3, 1999 to December 31,
1999.
See accompanying notes to financial statements.
B-20
<PAGE> 121
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE FIDELITY VARIABLE INSURANCE AMERICAN CENTURY VARIABLE J.P. MORGAN
PRODUCTS FUND PRODUCTS FUND II PORTFOLIOS, INC. SERIES TRUST II
--------------------------------- --------------------------------- ----------------------------------- ---------------
AMERICAN AMERICAN
FIDELITY VIP CENTURY CENTURY J.P. MORGAN
EQUITY- FIDELITY VIP FIDELITY VIP II FIDELITY VIP II VP INCOME & VP SMALL
INCOME GROWTH INDEX 500 CONTRAFUND GROWTH VALUE COMPANY
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
--------------- ------------ --------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1,407 4,105 114 1,247 (13) (2) 6
1,480 1,734 4,761 4,962 11 (3) 19
(945) 15,088 19,511 7,841 239 (48) 44
------ ------ ------- ------ ----- --- ---
1,942 20,927 24,386 14,050 237 (53) 69
------ ------ ------- ------ ----- --- ---
5,940 12,390 25,337 11,021 718 59 69
(2,461) 27,143 18,897 7,273 1,864 574 234
(3,126) (3,092) (8,265) (3,468) (95) -- (2)
------ ------ ------- ------ ----- --- ---
353 36,441 35,969 14,826 2,487 633 301
------ ------ ------- ------ ----- --- ---
2,295 57,368 60,355 28,876 2,724 580 370
42,934 33,934 109,924 49,520 -- -- --
------ ------ ------- ------ ----- --- ---
45,229 91,302 170,279 78,396 2,724 580 370
====== ====== ======= ====== ===== === ===
<CAPTION>
THE DREYFUS
WARBURG SOCIALLY
PINCUS RESPONSIBLE
TRUST GROWTH FUND, INC.
-------------- --------------------
WARBURG DREYFUS
PINCUS SOCIALLY
EMERGING RESPONSIBLE
MARKETS GROWTH
SUBACCOUNT SUBACCOUNT(A)
---------- -------------
<S> <C> <C>
93 87
65 31
472 268
----- -----
630 386
----- -----
1,366 1,363
1,000 1,127
(10) (9)
----- -----
2,356 2,481
----- -----
2,986 2,867
59 --
----- -----
3,045 2,867
===== =====
</TABLE>
B-21
<PAGE> 122
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
MONEY TOTAL HIGH KEMPER
MARKET RETURN YIELD GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss).............................. $ 3,432 114,564 17,149 79,715
Net realized gain (loss) on sales of investments.......... -- 20,649 4,283 8,570
Change in unrealized appreciation (depreciation) of
investments............................................. -- (41,076) (17,978) (20,871)
-------- -------- ------- -------
Net increase in contract owners' equity resulting from
operations............................................ 3,432 94,137 3,454 67,414
-------- -------- ------- -------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold.................................. 28,080 35,608 27,800 29,595
Net transfers (to) from affiliate and subaccounts......... 21,839 (47,643) (40,100) (26,086)
Payments for units redeemed............................... (21,688) (88,507) (34,613) (60,278)
-------- -------- ------- -------
Net increase (decrease) in contract owners' equity from
account unit transactions............................. 28,231 (100,542) (46,913) (56,769)
-------- -------- ------- -------
Total increase (decrease) in contract owners' equity........ 31,663 (6,405) (43,459) 10,645
Beginning of period....................................... 80,148 742,784 305,821 527,100
-------- -------- ------- -------
End of period............................................. $111,811 736,379 262,362 537,745
======== ======== ======= =======
</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-22
<PAGE> 123
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE
KEMPER VARIABLE SERIES* INVESTMENT FUND
------------------------------------ ------------------------------
KEMPER KEMPER KEMPER
GOVERNMENT SMALL CAP INVESTMENT SCUDDER VLIF SCUDDER VLIF
SECURITIES GROWTH GRADE BOND CAPITAL GROWTH INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
3,569 18,381 98 (2) (5)
(67) 4,201 311 (13) (7)
553 (2,782) 78 60 51
------- ------- ------ --- ---
4,055 19,800 487 45 39
------- ------- ------ --- ---
10,692 17,275 2,850 559 731
5,342 2,566 3,781 19 99
(14,565) (8,623) (955) (19) --
------- ------- ------ --- ---
1,469 11,218 5,676 559 830
------- ------- ------ --- ---
5,524 31,018 6,163 604 869
72,821 112,863 5,458 -- --
------- ------- ------ --- ---
78,345 143,881 11,621 604 869
======= ======= ====== === ===
</TABLE>
B-23
<PAGE> 124
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
-----------------------------------------------------
JANUS ASPEN JANUS ASPEN
JANUS ASPEN AGGRESSIVE WORLDWIDE JANUS ASPEN
GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss).............................. $ 1,973 (338) 3,219 884
Net realized gain on sales of investments................. 1,775 1,084 1,984 615
Change in unrealized appreciation of investments.......... 9,281 6,612 23,208 7,717
------- ------ ------- ------
Net increase in contract owners' equity resulting from
operations............................................ 13,029 7,358 28,411 9,216
------- ------ ------- ------
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold.................................. 9,559 3,981 26,915 8,429
Net transfers (to) from affiliate and subaccounts......... 10,386 (176) 25,114 22,838
Payments for units redeemed............................... (2,747) (1,761) (5,974) (1,464)
------- ------ ------- ------
Net increase in contract owners' equity from account
unit transactions..................................... 17,198 2,044 46,055 29,803
------- ------ ------- ------
Total increase in contract owners' equity................... 30,227 9,402 74,466 39,019
Beginning of period....................................... 29,647 19,960 91,396 14,155
------- ------ ------- ------
End of period............................................. $59,874 29,362 165,862 53,174
======= ====== ======= ======
</TABLE>
---------------
(a) For the period June 1, 1998 (commencement of operations) to December 31,
1998.
See accompanying notes to financial statements.
B-24
<PAGE> 125
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE FIDELITY VARIABLE INSURANCE
PRODUCTS FUND PRODUCTS FUND II WARBURG PINCUS TRUST
--------------------------- --------------------------------- ---------------------
FIDELITY VIP
EQUITY- FIDELITY VIP FIDELITY VIP II FIDELITY VIP II WARBURG PINCUS
INCOME GROWTH INDEX 500 CONTRAFUND EMERGING MARKETS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A)
------------ ------------ --------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
1,183 1,409 731 1,031 --
344 255 5,669 2,232 (1)
1,560 5,035 11,176 6,651 2
------ ------ ------- ------ --
3,087 6,699 17,576 9,914 1
------ ------ ------- ------ --
9,818 4,184 20,110 9,117 58
7,688 11,823 36,674 6,996 --
(1,505) (583) (5,493) (1,390) --
------ ------ ------- ------ --
16,001 15,424 51,291 14,723 58
------ ------ ------- ------ --
19,088 22,123 68,867 24,637 59
23,846 11,811 41,057 24,883 --
------ ------ ------- ------ --
42,934 33,934 109,924 49,520 59
====== ====== ======= ====== ==
</TABLE>
B-25
<PAGE> 126
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-26
<PAGE> 127
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.............................. 140,045 $ 140,045
Kemper Technology Growth Subaccount......................... 11,020 15,386
Kemper Total Return Subaccount.............................. 248,650 599,371
Kemper High Yield Subaccount................................ 190,485 226,653
Kemper Growth Subaccount.................................... 141,800 385,900
Kemper Government Securities Subaccount..................... 62,065 72,714
Kemper Small Cap Growth Subaccount.......................... 62,603 114,297
Kemper Investment Grade Bond Subaccount..................... 16,897 18,984
SCUDDER VARIABLE LIFE INVESTMENT FUND:
Scudder VLIF Capital Growth Subaccount...................... 471 11,503
Scudder VLIF International Subaccount....................... 1,356 24,915
Scudder VLIF Bond Subaccount................................ 27 175
THE ALGER AMERICAN FUND:
Alger American Growth Subaccount............................ 170 9,557
Alger American Small Capitalization Subaccount.............. 39 1,789
JANUS ASPEN SERIES:
Janus Aspen Growth Subaccount............................... 7,152 175,772
Janus Aspen Aggressive Growth Subaccount.................... 2,657 83,843
Janus Aspen Worldwide Growth Subaccount..................... 6,898 176,626
Janus Aspen Balanced Subaccount............................. 5,164 113,680
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
Fidelity VIP Equity-Income Subaccount....................... 1,763 41,919
Fidelity VIP Growth Subaccount.............................. 1,663 69,814
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Fidelity VIP II Index 500 Subaccount........................ 1,018 135,283
Fidelity VIP II Contrafund Subaccount....................... 2,693 60,986
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. :
American Century VP Income & Growth Subaccount.............. 341 2,488
American Century VP Value Subaccount........................ 98 629
J.P. MORGAN SERIES TRUST II:
J.P. Morgan Small Company Subaccount........................ 22 326
WARBURG PINCUS TRUST:
Warburg Pincus Emerging Markets Subaccount.................. 215 2,568
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
Dreyfus Socially Responsible Growth Subaccount.............. 72 2,541
----------
TOTAL INVESTMENTS AT COST........................... $2,487,764
==========
</TABLE>
B-27
<PAGE> 128
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
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.
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 TOTAL RETURN SUBACCOUNT: This subaccount invests in the Kemper Total
Return Portfolio of the Kemper Variable Series. The Portfolio seeks high total
return, a combination of income and capital appreciation.
KEMPER HIGH YIELD SUBACCOUNT: This subaccount invests in the Kemper High Yield
Portfolio of the Kemper Variable Series. The Portfolio seeks to provide a high
level of current income.
KEMPER GROWTH SUBACCOUNT: This subaccount invests in the Kemper Growth Portfolio
of the Kemper Variable Series. The Portfolio seeks maximum appreciation of
capital.
KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests in the Kemper
Government Securities Portfolio of the Kemper Variable Series. The Portfolio
seeks high current income consistent with preservation of capital.
KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount invests in the Kemper Small
Cap Growth Portfolio of the Kemper Variable Series. The Portfolio seeks maximum
appreciation of investors' capital.
KEMPER INVESTMENT GRADE BOND SUBACCOUNT: This subaccount invests in the Kemper
Investment Grade Bond Portfolio of the Kemper Variable Series. The Portfolio
seeks high current income.
SCUDDER VARIABLE LIFE INVESTMENT FUND
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.
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.
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH SUBACCOUNT: This subaccount invests in the Alger American
Growth Portfolio of The Alger American Fund. The Portfolio seeks long-term
capital appreciation.
ALGER AMERICAN SMALL CAPITALIZATION SUBACCOUNT: This subaccount invests in the
Alger American Small Capitalization Portfolio of The Alger American Fund. The
Portfolio seeks long-term capital appreciation.
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.
B-28
<PAGE> 129
JANUS ASPEN AGGRESSIVE GROWTH SUBACCOUNT: This subaccount invests in the Janus
Aspen Aggressive Growth Portfolio of the Janus Aspen Series. The Portfolio seeks
long-term growth of capital.
JANUS ASPEN WORLDWIDE GROWTH SUBACCOUNT: This subaccount invests in the Janus
Aspen Worldwide 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 BALANCED SUBACCOUNT: This subaccount invests in the Janus Aspen
Balanced Portfolio of the Janus Aspen Series. The Portfolio seeks long-term
capital growth, consistent with preservation of capital and balanced by current
income.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VIP EQUITY-INCOME SUBACCOUNT: This subaccount invests in the Fidelity
VIP Equity-Income Portfolio of the Fidelity Variable Insurance Products Fund.
The Portfolio seeks reasonable income.
FIDELITY VIP GROWTH SUBACCOUNT: The subaccount invests in the Fidelity VIP
Growth Portfolio of the Fidelity Variable Insurance Products Fund. The Portfolio
seeks capital appreciation.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY VIP II INDEX 500 SUBACCOUNT: This subaccount invests in the Fidelity
VIP II Index 500 Portfolio of the Fidelity Variable Insurance Products Fund II.
The Portfolio seeks investment results that correspond to the total return of
common stocks publicly traded in the United States as represented by the S&P
500.
FIDELITY VIP II CONTRAFUND SUBACCOUNT: This subaccount invests in the Fidelity
VIP II Contrafund Portfolio of the Fidelity Variable Insurance Products Fund II.
The Portfolio seeks long-term capital appreciation.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AMERICAN CENTURY VP INCOME & GROWTH SUBACCOUNT: This subaccount invests in the
American Century VP Income & Growth Portfolio of the American Century Variable
Portfolios, Inc. The Portfolio seeks dividend growth, current income and capital
appreciation.
AMERICAN CENTURY VP VALUE SUBACCOUNT: This subaccount invests in the American
Century VP Value Portfolio of the American Century Variable Portfolios, Inc. The
Portfolio seeks long-term capital growth.
J.P. MORGAN SERIES TRUST II
J.P. MORGAN SMALL COMPANY SUBACCOUNT: This subaccount invests in the J.P. Morgan
Small Company Portfolio of the J.P. Morgan Series Trust II. The Portfolio seeks
to provide a high total return from a portfolio of small company stocks.
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.
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 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.
(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
B-29
<PAGE> 130
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 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 for The Alger American
Fund. Janus Capital is the investment manager of the Janus Aspen Series.
Fidelity Management & Research Company is the investment manager for the
Fidelity Variable Insurance Products Fund and the Fidelity Variable Insurance
Products Fund II. American Century Investment Management, Inc. is the investment
manager of the American Century Variable Portfolios, Inc. J.P. Morgan Investment
Management, Inc. is the investment manager of the J.P. Morgan Series Trust II.
Credit Suisse Asset Management LLC is the investment manager of the Warburg
Pincus Trust. The
B-30
<PAGE> 131
Dreyfus Corporation is the investment manager of The Dreyfus Socially
Responsible Growth Fund, Inc. 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
----------
KEMPER TOTAL RETURN SUBACCOUNT
Flexible Payment, Qualified............................... 656 8.425 5,525
Flexible Payment, Nonqualified............................ 2,817 7.800 21,972
Periodic Payment, Qualified............................... 60,736 7.993 485,467
Periodic Payment, Nonqualified............................ 9,110 7.447 67,848
----------
580,812
----------
KEMPER HIGH YIELD SUBACCOUNT
Flexible Payment, Qualified............................... 197 6.442 1,268
Flexible Payment, Nonqualified............................ 1,138 6.168 7,018
Periodic Payment, Qualified............................... 15,887 6.112 97,105
Periodic Payment, Nonqualified............................ 4,245 5.954 25,274
----------
130,665
----------
KEMPER GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 153 9.858 1,509
Flexible Payment, Nonqualified............................ 823 9.824 8,084
Periodic Payment, Qualified............................... 40,027 9.401 376,285
Periodic Payment, Nonqualified............................ 6,263 9.387 58,790
----------
444,668
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Flexible Payment, Qualified............................... 145 1.823 264
Flexible Payment, Nonqualified............................ 779 1.823 1,421
Periodic Payment, Qualified............................... 15,187 1.769 26,859
Periodic Payment, Nonqualified............................ 7,529 1.769 13,315
----------
41,859
----------
</TABLE>
B-31
<PAGE> 132
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 SMALL CAP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 127 $ 3.498 $ 443
Flexible Payment, Nonqualified............................ 396 3.498 1,384
Periodic Payment, Qualified............................... 31,772 3.440 109,283
Periodic Payment, Nonqualified............................ 3,242 3.440 11,152
----------
122,262
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Flexible Payment, Qualified............................... 24 1.151 28
Flexible Payment, Nonqualified............................ 227 1.151 261
Periodic Payment, Qualified............................... 2,396 1.139 2,728
Periodic Payment, Nonqualified............................ 968 1.139 1,103
----------
4,120
----------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
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
----------
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
----------
THE ALGER AMERICAN FUND:
ALGER AMERICAN GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... -- 71.618 --
Flexible Payment, Nonqualified............................ 1 70.710 78
Periodic Payment, Qualified............................... 130 70.571 9,202
Periodic Payment, Nonqualified............................ 23 70.571 1,631
----------
10,911
----------
ALGER AMERICAN SMALL CAPITALIZATION SUBACCOUNT
Flexible Payment, Qualified............................... -- 64.873 --
Flexible Payment, Nonqualified............................ -- 64.873 --
Periodic Payment, Qualified............................... 30 62.523 1,852
Periodic Payment, Nonqualified............................ 5 62.523 291
----------
2,143
----------
</TABLE>
B-32
<PAGE> 133
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- -------- ----------
<S> <C> <C> <C>
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
----------
JANUS ASPEN AGGRESSIVE GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 4 60.590 241
Flexible Payment, Nonqualified............................ 17 60.590 1,011
Periodic Payment, Qualified............................... 2,360 59.822 141,193
Periodic Payment, Nonqualified............................ 267 59.822 15,948
----------
158,393
----------
JANUS ASPEN WORLDWIDE GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 11 49.181 527
Flexible Payment, Nonqualified............................ 36 49.181 1,781
Periodic Payment, Qualified............................... 6,003 48.558 291,479
Periodic Payment, Nonqualified............................ 726 48.558 35,229
----------
329,016
----------
JANUS ASPEN BALANCED SUBACCOUNT
Flexible Payment, Qualified............................... 11 30.378 338
Flexible Payment, Nonqualified............................ 52 30.378 1,569
Periodic Payment, Qualified............................... 4,206 29.993 126,147
Periodic Payment, Nonqualified............................ 535 29.993 16,039
----------
144,093
----------
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
FIDELITY VIP EQUITY-INCOME SUBACCOUNT
Flexible Payment, Qualified............................... 1 30.830 26
Flexible Payment, Nonqualified............................ 8 30.830 261
Periodic Payment, Qualified............................... 1,258 30.497 38,364
Periodic Payment, Nonqualified............................ 216 30.497 6,578
----------
45,229
----------
FIDELITY VIP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 4 71.079 296
Flexible Payment, Nonqualified............................ 17 71.079 1,230
Periodic Payment, Qualified............................... 1,132 70.305 79,601
Periodic Payment, Nonqualified............................ 145 70.305 10,175
----------
91,302
----------
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
FIDELITY VIP II INDEX 500 SUBACCOUNT
Flexible Payment, Qualified............................... 2 176.352 272
Flexible Payment, Nonqualified............................ 14 176.352 2,435
Periodic Payment, Qualified............................... 833 174.446 145,342
Periodic Payment, Nonqualified............................ 127 174.446 22,230
----------
170,279
----------
</TABLE>
B-33
<PAGE> 134
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)
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II (CONTINUED):
FIDELITY VIP II CONTRAFUND SUBACCOUNT
Flexible Payment, Qualified............................... 5 $ 32.012 $ 147
Flexible Payment, Nonqualified............................ 12 32.012 385
Periodic Payment, Qualified............................... 2,175 31.666 68,874
Periodic Payment, Nonqualified............................ 284 31.666 8,990
----------
78,396
----------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. :
AMERICAN CENTURY VP INCOME & GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... -- 7.834 --
Flexible Payment, Nonqualified............................ 14 7.947 109
Periodic Payment, Qualified............................... 303 7.932 2,403
Periodic Payment, Nonqualified............................ 27 7.932 212
----------
2,724
----------
AMERICAN CENTURY VP VALUE SUBACCOUNT
Flexible Payment, Qualified............................... -- 5.898 --
Flexible Payment, Nonqualified............................ 1 5.911 5
Periodic Payment, Qualified............................... 85 5.899 499
Periodic Payment, Nonqualified............................ 13 5.899 76
----------
580
----------
J.P. MORGAN SERIES TRUST II:
J.P. MORGAN SMALL COMPANY SUBACCOUNT
Flexible Payment, Qualified............................... 4 16.998 66
Flexible Payment, Nonqualified............................ -- 16.998 --
Periodic Payment, Qualified............................... 13 16.965 228
Periodic Payment, Nonqualified............................ 4 16.965 76
----------
370
----------
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
----------
TOTAL KEMPER ADVANTAGE III CONTRACT OWNERS' EQUITY..... $2,610,614
==========
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
----------
</TABLE>
B-34
<PAGE> 135
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- -------- ----------
<S> <C> <C> <C>
KEMPER MONEY MARKET SUBACCOUNT #2
Qualified................................................. 324 $ 1.424 $ 462
Nonqualified.............................................. 670 1.424 954
----------
1,416
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified................................................. 11,261 2.173 24,475
Nonqualified.............................................. 36,480 2.173 79,286
----------
103,761
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................. 7,927 1.903 15,088
Nonqualified.............................................. 27,992 1.903 53,278
----------
68,366
----------
KEMPER GROWTH SUBACCOUNT
Qualified................................................. 9,649 3.181 30,699
Nonqualified.............................................. 27,217 3.181 86,590
----------
117,289
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 3,318 1.429 4,740
Nonqualified.............................................. 11,272 1.429 16,103
----------
20,843
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 2,345 3.449 8,089
Nonqualified.............................................. 6,735 3.449 23,230
----------
31,319
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 1,056 1.141 1,206
Nonqualified.............................................. 3,599 1.141 4,105
----------
5,311
----------
TOTAL KEMPER PASSPORT CONTRACT OWNERS' EQUITY.......... $ 376,938
==========
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 TECHNOLOGY GROWTH SUBACCOUNT
Qualified................................................. 576 17.605 10,144
Nonqualified.............................................. 536 17,605 9,439
----------
19,583
----------
</TABLE>
B-35
<PAGE> 136
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 TOTAL RETURN SUBACCOUNT
Qualified................................................. 1,224 $ 11.936 $ 14,608
Nonqualified.............................................. 1,393 11.936 16,627
----------
31,235
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................. 778 9.717 7,563
Nonqualified.............................................. 1,145 9.717 11,124
----------
18,687
----------
KEMPER GROWTH SUBACCOUNT
Qualified................................................. 407 13.532 5,512
Nonqualified.............................................. 485 13.532 6,564
----------
12,076
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 263 10.259 2,700
Nonqualified.............................................. 594 10.259 6,090
----------
8,790
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 394 14.691 5,793
Nonqualified.............................................. 449 14.691 6,602
----------
12,395
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 422 10.062 4,243
Nonqualified.............................................. 518 10.062 5,206
----------
9,449
----------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT
Qualified................................................. 443 14.435 6,394
Nonqualified.............................................. 473 14.435 6,823
----------
13,217
----------
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Qualified................................................. 541 14.990 8,109
Nonqualified.............................................. 1,112 14.990 16,665
----------
24,774
----------
JANUS ASPEN SERIES:
JANUS ASPEN GROWTH SUBACCOUNT
Qualified................................................. 2,556 16.958 43,343
Nonqualified.............................................. 2,530 16.958 42,904
----------
86,247
----------
</TABLE>
B-36
<PAGE> 137
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- -------- ----------
<S> <C> <C> <C>
WARBURG PINCUS TRUST:
WARBURG PINCUS EMERGING MARKETS SUBACCOUNT
Qualified................................................. 109 $ 14.302 $ 1,558
Nonqualified.............................................. 104 14.302 1,487
----------
3,045
----------
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. :
DREYFUS SOCIALLY RESPONSIBLE GROWTH SUBACCOUNT
Qualified................................................. 21 11.289 241
Nonqualified.............................................. 1 11.289 12
----------
253
----------
TOTAL KEMPER DESTINATIONS CONTRACT OWNERS' EQUITY...... $ 257,595
==========
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
----------
SCUDDER VARIABLE LIFE INVESTMENT FUND:
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
----------
TOTAL FARMERS VARIABLE ANNUITY I CONTRACT OWNERS'
EQUITY................................................ $ 337
==========
</TABLE>
B-37
<PAGE> 138
APPENDIX A
TABLE OF HISTORICAL HYPOTHETICAL* ACCUMULATION UNIT VALUES
AND PERFORMANCE INFORMATION
The historical accumulation unit values are for the life of the Separate Account
in its present organization as a unit investment trust and in its prior
organization as several managed separate accounts based on current deductions
and charges applicable to the Contracts. The Contracts will be initially offered
June 23, 2000. Values may vary had assets actually been allocated to the
Separate Account under the Contracts.
HISTORICAL HYPOTHETICAL ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
KEMPER MONEY MARKET SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- --------
<S> <C> <C>
04/06/82 ................... 0.521904
12/31/82 ................... 0.561706
12/31/83 ................... 0.605415
12/31/84 ................... 0.661060
12/31/85 ................... 0.705934
12/31/86 ................... 0.743260
12/31/87 ................... 0.782353
12/31/88 ................... 0.830274
12/31/89 ................... 0.894703
12/31/90 ................... 0.955536
12/31/91 ................... 0.999459
12/31/92 ................... 1.021027
12/31/93 ................... 1.037409
12/31/94 ................... 1.065127
12/31/95 ................... 1.111573
12/31/96 ................... 1.153353
12/31/97 ................... 1.199008
12/31/98 ................... 1.245376
12/31/99 ................... 1.289616
</TABLE>
<TABLE>
<S> <C> <C>
<CAPTION>
KEMPER TECHNOLOGY GROWTH SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- --------
05/03/99 ................... 1.011330
12/31/99 ................... 1.781256
</TABLE>
<TABLE>
<S> <C> <C>
<CAPTION>
KEMPER TOTAL RETURN SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- --------
<S> <C> <C>
04/06/82 ................... 0.361270
12/31/82 ................... 0.445813
12/31/83 ................... 0.517707
12/31/84 ................... 0.486169
12/31/85 ................... 0.616524
12/31/86 ................... 0.700564
12/31/87 ................... 0.696104
12/31/88 ................... 0.769714
12/31/89 ................... 0.941950
12/31/90 ................... 0.976810
12/31/91 ................... 1.329312
12/31/92 ................... 1.334707
12/31/93 ................... 1.477517
12/31/94 ................... 1.320578
12/31/95 ................... 1.647623
12/31/96 ................... 1.892979
12/31/97 ................... 2.242103
12/31/98 ................... 2.549273
12/31/99 ................... 2.890516
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- --------
<S> <C> <C>
04/06/82 ................... 0.187818
12/31/82 ................... 0.232184
12/31/83 ................... 0.262971
12/31/84 ................... 0.292260
12/31/85 ................... 0.351032
12/31/86 ................... 0.407882
12/31/87 ................... 0.426436
12/31/88 ................... 0.487628
12/31/89 ................... 0.475366
12/31/90 ................... 0.396944
12/31/91 ................... 0.594634
12/31/92 ................... 0.691199
12/31/93 ................... 0.818751
12/31/94 ................... 0.790430
12/31/95 ................... 0.917169
12/31/96 ................... 1.031688
12/31/97 ................... 1.137098
12/31/98 ................... 1.139361
12/31/99 ................... 1.149523
</TABLE>
<TABLE>
<S> <C> <C>
<CAPTION>
KEMPER GROWTH SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- --------
12/09/83 ................... 0.432185
12/31/83 ................... 0.444709
12/31/84 ................... 0.486485
12/31/85 ................... 0.600835
12/31/86 ................... 0.648011
12/31/87 ................... 0.650640
12/31/88 ................... 0.644956
12/31/89 ................... 0.816396
12/31/90 ................... 0.810794
12/31/91 ................... 1.275971
12/31/92 ................... 1.304738
12/31/93 ................... 1.476428
12/31/94 ................... 1.399228
12/31/95 ................... 1.843829
12/31/96 ................... 2.205205
12/31/97 ................... 2.641862
12/31/98 ................... 3.002570
12/31/99 ................... 4.065674
</TABLE>
<TABLE>
<S> <C> <C>
<CAPTION>
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- --------
<S> <C> <C>
09/03/87 ................... 0.707787
12/31/87 ................... 0.710087
12/31/88 ................... 0.723278
12/31/89 ................... 0.811610
12/31/90 ................... 0.881949
12/31/91 ................... 1.004106
12/31/92 ................... 1.050227
12/31/93 ................... 1.104499
12/31/94 ................... 1.060977
12/31/95 ................... 1.246817
12/31/96 ................... 1.262885
12/31/97 ................... 1.358996
12/31/98 ................... 1.436583
12/31/99 ................... 1.428559
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
05/02/94 .................. 1.000000
12/31/94 .................. 1.030937
12/31/95 .................. 1.324483
12/31/96 .................. 1.674797
12/31/97 .................. 2.219929
12/31/98 .................. 2.595291
12/31/99 .................. 3.449240
</TABLE>
<TABLE>
<S> <C> <C>
<CAPTION>
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
05/01/96 .................. 1.000000
12/31/96 .................. 1.027174
12/31/97 .................. 1.106151
12/31/98 .................. 1.179189
12/31/99 .................. 1.140652
</TABLE>
<TABLE>
<S> <C> <C>
<CAPTION>
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
07/16/85 .................. 3.373682
12/31/85 .................. 3.702192
12/31/86 .................. 4.469588
12/31/87 .................. 4.327671
12/31/88 .................. 5.215251
12/31/89 .................. 6.319865
12/31/90 .................. 5.773129
12/31/91 .................. 7.953793
12/31/92 .................. 8.355733
12/31/93 .................. 9.970717
12/31/94 .................. 8.893713
12/31/95 .................. 11.294994
12/31/96 .................. 13.394571
12/31/97 .................. 17.952109
12/31/98 .................. 21.843114
12/31/99 .................. 29.171654
</TABLE>
B-38
<PAGE> 139
<TABLE>
<CAPTION>
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
05/01/87 .................. 4.800672
12/31/87 .................. 4.253568
12/31/88 .................. 4.901841
12/31/89 .................. 6.667569
12/31/90 .................. 6.079088
12/31/91 .................. 6.688930
12/31/92 .................. 6.400425
12/31/93 .................. 8.706182
12/31/94 .................. 8.523833
12/31/95 .................. 9.351127
12/31/96 .................. 10.596037
12/31/97 .................. 11.410892
12/31/98 .................. 13.349849
12/31/99 .................. 20.369117
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF BOND SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
07/16/85 .................. 2.649013
12/31/85 .................. 2.832913
12/31/86 .................. 3.141441
12/31/87 .................. 3.140537
12/31/88 .................. 3.271253
12/31/89 .................. 3.607564
12/31/90 .................. 3.850331
12/31/91 .................. 4.472995
12/31/92 .................. 4.727384
12/31/93 .................. 5.247591
12/31/94 .................. 4.934563
12/31/95 .................. 5.760325
12/31/96 .................. 5.848931
12/31/97 .................. 6.302649
12/31/98 .................. 6.633979
12/31/99 .................. 6.490000
</TABLE>
<TABLE>
<CAPTION>
ALGER AMERICAN GROWTH SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
01/06/89 .................. 7.615836
12/31/89 .................. 9.278294
12/31/90 .................. 9.542816
12/31/91 .................. 13.231532
12/31/92 .................. 14.685475
12/31/93 .................. 17.762808
12/31/94 .................. 17.797215
12/31/95 .................. 23.970143
12/31/96 .................. 26.833830
12/31/97 .................. 33.326535
12/31/98 .................. 48.738495
12/31/99 .................. 64.380000
</TABLE>
<TABLE>
<CAPTION>
ALGER AMERICAN SMALL CAPITALIZATION
SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
09/20/88 .................. 7.490566
12/31/88 .................. 7.214533
12/31/89 .................. 11.720095
12/31/90 .................. 12.584087
12/31/91 .................. 19.581205
12/31/92 .................. 20.021931
12/31/93 .................. 22.400810
12/31/94 .................. 21.155938
12/31/95 .................. 30.143676
12/31/96 .................. 31.015217
12/31/97 .................. 34.121974
12/31/98 .................. 38.934543
12/31/99 .................. 55.150000
</TABLE>
<TABLE>
<CAPTION>
ALGER AMERICAN MIDCAP GROWTH SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
04/30/93 .................. 8.030653
12/31/93 .................. 11.043665
12/31/94 .................. 10.739470
12/31/95 .................. 15.322151
12/31/96 .................. 16.931846
12/31/97 .................. 19.232161
12/31/98 .................. 24.750205
12/31/99 .................. 32.230000
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN GROWTH SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
09/14/93 .................. 9.289421
12/31/93 .................. 9.577944
12/31/94 .................. 9.717771
12/31/95 .................. 12.487572
12/31/96 .................. 14.601944
12/31/97 .................. 17.694825
12/31/98 .................. 23.700428
12/31/99 .................. 33.698128
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN AGGRESSIVE GROWTH SUBACCOUNT
------------------------------------------
UNIT
DATE VALUES
--------- ----------
<S> <C> <C>
09/14/93 .................. 10.058510
12/31/93 .................. 11.828277
12/31/94 .................. 13.583769
12/31/95 .................. 17.095585
12/31/96 .................. 18.217911
12/31/97 .................. 20.263048
12/31/98 .................. 26.858448
12/31/99 .................. 59.775168
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN WORLDWIDE GROWTH SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
09/14/93 .................. 10.071714
12/31/93 .................. 11.948847
12/31/94 .................. 11.978063
12/31/95 .................. 15.061088
12/31/96 .................. 19.183727
12/31/97 .................. 23.134431
12/31/98 .................. 29.447482
12/31/99 .................. 47.818224
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN BALANCED SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
09/14/93 .................. 9.301417
12/31/93 .................. 9.932977
12/31/94 .................. 9.890478
12/31/95 .................. 12.184339
12/31/96 .................. 13.974814
12/31/97 .................. 16.846179
12/31/98 .................. 22.335975
12/31/99 .................. 27.959944
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ----------
<S> <C> <C>
10/09/86 ................. 5.058723
12/31/86 ................. 5.054117
12/31/87 ................. 4.933384
12/31/88 ................. 5.975275
12/31/89 ................. 6.898237
12/31/90 ................. 5.789773
12/31/91 ................. 7.510977
12/31/92 ................. 8.666311
12/31/93 ................. 10.120201
12/31/94 ................. 10.698425
12/31/95 ................. 14.266674
12/31/96 ................. 16.097355
12/31/97 ................. 20.360180
12/31/98 ................. 22.445356
12/31/99 ................. 23.572070
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP GROWTH SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ----------
<S> <C> <C>
10/09/86 ................. 5.979806
12/31/86 ................. 5.980235
12/31/87 ................. 6.119937
12/31/88 ................. 6.982605
12/31/89 ................. 9.064323
12/31/90 ................. 7.898969
12/31/91 ................. 11.344503
12/31/92 ................. 12.242847
12/31/93 ................. 14.426636
12/31/94 ................. 14.241418
12/31/95 ................. 19.030309
12/31/96 ................. 21.549582
12/31/97 ................. 26.270404
12/31/98 ................. 36.180188
12/31/99 ................. 49.104273
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP II INDEX 500 SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ----------
<S> <C> <C>
08/27/92 ................. 44.491901
12/31/92 ................. 47.087233
12/31/93 ................. 51.014329
12/31/94 ................. 50.893957
12/31/95 ................. 68.923833
12/31/96 ................. 83.569009
12/31/97 ................. 109.482296
12/31/98 ................. 138.726232
12/31/99 ................. 165.105913
</TABLE>
B-39
<PAGE> 140
<TABLE>
<CAPTION>
FIDELITY VIP II CONTRAFUND
SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
01/03/95 .................. 7.990759
12/31/95 .................. 11.022515
12/31/96 .................. 13.190283
12/31/97 .................. 16.166785
12/31/98 .................. 20.748445
12/31/99 .................. 25.460201
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY VP INCOME & GROWTH
SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
10/30/97 .................. 5.091776
12/31/97 .................. 5.477406
12/31/98 .................. 6.863205
12/31/99 .................. 8.000000
</TABLE>
<TABLE>
<CAPTION>
AMERICAN CENTURY VP VALUE
SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
05/01/96 .................. 4.232809
12/31/96 .................. 4.713472
12/31/97 .................. 5.869530
12/31/98 .................. 6.076015
12/31/99 .................. 5.950000
</TABLE>
<TABLE>
<CAPTION>
J.P. MORGAN SMALL COMPANY
SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
12/31/94 .................. 6.974820
12/31/95 .................. 9.072020
12/31/96 .................. 10.466142
12/31/97 .................. 12.626343
12/31/98 .................. 11.763486
12/31/99 .................. 16.772360
</TABLE>
<TABLE>
<CAPTION>
WARBURG PINCUS EMERGING MARKETS
SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
12/31/97 .................. 9.724709
12/31/98 .................. 7.940705
12/31/99 .................. 14.215790
</TABLE>
<TABLE>
<CAPTION>
DREYFUS SOCIALLY RESPONSIBLE
GROWTH SUBACCOUNT
---------------------------------------
UNIT
DATE VALUES
-------- ---------
<S> <C> <C>
10/07/93 .................. 11.029578
12/31/93 .................. 11.805367
12/31/94 .................. 11.829811
12/31/95 .................. 15.717686
12/31/96 .................. 18.814027
12/31/97 .................. 23.861168
12/31/98 .................. 30.487832
12/31/99 .................. 39.168446
</TABLE>
B-40
<PAGE> 141
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
YEAR TO DATE ----------------------- ------------
(%) ENDING CUMULATIVE ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) (%) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET SUBACCOUNT(7).................... 3.55%
Life of Subaccount (from 04/06/82)................. $ 98,839 147.10% 5.24% 5.22%
Life of Portfolio (from 04/06/82).................. 98,839 147.10 5.24 5.22
Ten Years.......................................... 57,655 44.14 3.72 3.69
Five Years......................................... 48,430 21.08 3.90 3.86
Three Years........................................ 44,725 11.81 3.79 3.75
One Year........................................... 41,420 3.55 3.55 3.51
KEMPER TECHNOLOGY GROWTH SUBACCOUNT.................. N/A
Life of Subaccount (from 05/03/99)................. N/A N/A N/A N/A
Life of Portfolio (from 05/03/99).................. 70,452 76.13 N/A N/A
KEMPER TOTAL RETURN SUBACCOUNT....................... 13.39
Life of Subaccount (from 04/06/82)................. 320,039 700.10 12.45 12.44
Life of Portfolio (from 04/06/82).................. 320,039 700.10 12.45 12.44
Ten Years.......................................... 122,746 206.87 11.87 11.85
Five Years......................................... 87,553 118.88 16.96 16.94
Three Years........................................ 61,079 52.70 15.15 15.12
One Year........................................... 45,354 13.39 13.39 13.34
KEMPER HIGH YIELD SUBACCOUNT(6)...................... 0.89
Life of Subaccount (from 04/06/82)................. 244,816 512.04 10.76 10.75
Life of Portfolio (from 04/06/82).................. 244,816 512.04 10.76 10.75
Ten Years.......................................... 96,727 141.82 9.23 9.21
Five Years......................................... 58,172 45.43 7.78 7.74
Three Years........................................ 44,569 11.42 3.67 3.63
One Year........................................... 40,356 0.89 0.89 0.85
KEMPER GROWTH SUBACCOUNT............................. 35.41
Life of Subaccount (from 12/09/83)................. 376,290 840.73 14.98 14.97
Life of Portfolio (from 12/09/83).................. 376,290 840.73 14.98 14.97
Ten Years.......................................... 199,201 398.00 17.41 17.40
Five Years......................................... 116,226 190.57 23.78 23.76
Three Years........................................ 73,747 84.37 22.62 22.59
One Year........................................... 54,162 35.41 35.41 35.36
KEMPER GOVERNMENT SECURITIES SUBACCOUNT.............. -0.56
Life of Subaccount (from 11/03/89)................. 70,971 77.43 5.81 5.78
Life of Portfolio (from 09/03/87).................. 80,734 101.83 5.86 5.84
Ten Years.......................................... 70,406 76.02 5.81 5.79
Five Years......................................... 53,858 34.65 6.13 6.09
Three Years........................................ 45,247 13.12 4.19 4.15
One Year........................................... 39,776 -0.56 -0.56 -0.60
KEMPER SMALL CAP GROWTH SUBACCOUNT................... 32.90
Life of Subaccount (from 05/02/94)................. 137,696 244.92 24.41 24.40
Life of Portfolio (from 05/02/94).................. 137,696 244.92 24.41 24.40
Five Years......................................... 133,829 234.57 27.29 27.27
Three Years........................................ 82,379 105.95 27.23 27.20
One Year........................................... 53,161 32.90 32.90 32.86
</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-45 for additional information.
B-41
<PAGE> 142
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
YEAR TO DATE ----------------------- ------------
(%) ENDING CUMULATIVE ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) (%) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER INVESTMENT GRADE BOND SUBACCOUNT.............. -3.27%
Life of Subaccount (from 05/01/96)................. $ 45,626 14.07% 3.65% 3.61%
Life of Portfolio (from 05/01/96).................. 45,626 14.07 3.65 3.61
Three Years........................................ 44,419 11.05 3.55 3.51
One Year........................................... 38,692 -3.27 -3.27 -3.31
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT............... 33.55
Life of Subaccount (from 05/01/98)................. 56,128 40.32 22.51 22.47
Life of Portfolio (from 07/16/85).................. 345,873 764.68 16.08 N/A
Ten Years.......................................... 184,634 361.59 16.53 N/A
Five Years......................................... 131,201 228.00 26.82 N/A
Three Years........................................ 87,114 117.79 29.62 N/A
One Year........................................... 53,420 33.55 33.55 33.51
SCUDDER VLIF INTERNATIONAL SUBACCOUNT(5)............. 52.58
Life of Subaccount (from 05/01/98)................. 60,981 52.45 28.75 28.72
Life of Portfolio (from 05/01/87).................. 169,718 324.30 12.06 N/A
Ten Years.......................................... 122,198 205.50 11.82 N/A
Five Years......................................... 95,586 138.97 19.03 N/A
Three Years........................................ 76,893 92.23 24.34 N/A
One Year........................................... 61,031 52.58 52.58 52.53
SCUDDER VLIF BOND SUBACCOUNT......................... N/A
Life of Subaccount (from 05/03/99)................. N/A N/A N/A N/A
Life of Portfolio (from 07/16/85).................. 97,998 145.00 6.39 N/A
Ten Years.......................................... 71,959 79.90 6.05 N/A
Five Years......................................... 52,608 31.52 5.63 N/A
Three Years........................................ 44,384 10.96 3.53 N/A
One Year........................................... 39,131 -2.17 -2.17 N/A
ALGER AMERICAN GROWTH SUBACCOUNT..................... N/A
Life of Subaccount (from 05/03/99)................. N/A N/A N/A N/A
Life of Portfolio (from 01/06/89).................. 383,138 745.34 21.44 N/A
Ten Years.......................................... 277,551 593.88 21.37 N/A
Five Years......................................... 144,696 261.74 29.32 N/A
Three Years........................................ 95,968 139.92 33.87 N/A
One Year........................................... 52,837 32.09 32.09 N/A
ALGER AMERICAN SMALL CAPITALIZATION SUBACCOUNT....... N/A
Life of Subaccount (from 05/03/99)................. N/A N/A N/A N/A
Life of Portfolio (from 09/20/88).................. 294,503 636.26 19.35 N/A
Ten Years.......................................... 188,223 370.56 16.75 N/A
Five Years......................................... 104,273 160.68 21.12 N/A
Three Years........................................ 71,126 77.82 21.15 N/A
One Year........................................... 56,659 41.65 41.65 N/A
ALGER AMERICAN MIDCAP GROWTH SUBACCOUNT.............. N/A
Life of Portfolio (from 04/30/93).................. 160,534 301.34 23.15 N/A
Five Years......................................... 120,043 200.11 24.58 N/A
Three Years........................................ 76,141 90.35 23.93 N/A
One Year........................................... 52,088 30.22 30.22 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-45 for additional information.
B-42
<PAGE> 143
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
YEAR TO DATE ----------------------- ------------
(%) ENDING CUMULATIVE ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) (%) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
JANUS ASPEN GROWTH SUBACCOUNT........................ 42.18%
Life of Subaccount (from 09/13/95)................. $111,539 178.85% 26.92% 26.90%
Life of Portfolio (from 09/14/93).................. 145,103 262.76 22.70 N/A
Five Years......................................... 138,707 246.77 28.24 N/A
Three Years........................................ 92,311 130.78 32.15 32.12
One Year........................................... 56,873 42.18 42.18 42.14
JANUS ASPEN AGGRESSIVE GROWTH SUBACCOUNT............. 122.56
Life of Subaccount (from 09/13/95)................. 147,685 269.21 35.48 35.47
Life of Portfolio (from 09/14/93).................. 237,709 494.27 32.70 N/A
Five Years......................................... 176,019 340.05 34.49 N/A
Three Years........................................ 131,244 228.11 48.60 48.58
One Year........................................... 89,022 122.56 122.56 122.51
JANUS ASPEN WORLDWIDE GROWTH SUBACCOUNT(5)........... 62.38
Life of Subaccount (from 09/13/95)................. 132,472 231.18 32.10 32.08
Life of Portfolio (from 09/14/93).................. 189,910 374.78 28.06 N/A
Five Years......................................... 159,686 299.21 31.90 N/A
Three Years........................................ 99,705 149.26 35.59 35.56
One Year........................................... 64,953 62.38 62.38 62.34
JANUS ASPEN BALANCED SUBACCOUNT...................... 25.18
Life of Subaccount (from 09/13/95)................. 96,833 142.08 22.82 22.80
Life of Portfolio (from 09/14/93).................. 120,329 200.60 19.09 N/A
Five Years......................................... 113,078 182.70 23.10 N/A
Three Years........................................ 80,029 100.07 26.01 25.98
One Year........................................... 50,071 25.18 25.18 25.13
FIDELITY VIP EQUITY-INCOME SUBACCOUNT................ 5.02
Life of Subaccount (from 05/01/96)................. 62,669 56.67 13.02 12.99
Life of Portfolio (from 10/09/86).................. 186,387 365.97 12.33 N/A
Ten Years.......................................... 136,684 241.71 13.07 N/A
Five Years......................................... 88,132 120.33 17.12 N/A
Three Years........................................ 58,573 46.43 13.56 13.52
One Year........................................... 42,007 5.02 5.02 4.97
FIDELITY VIP GROWTH SUBACCOUNT....................... 35.72
Life of Subaccount (from 05/01/96)................. 94,405 136.01 26.37 26.35
Life of Portfolio (from 10/09/86).................. 328,467 721.17 17.24 N/A
Ten Years.......................................... 215,693 441.73 18.40 N/A
Five Years......................................... 137,919 244.80 28.09 N/A
Three Years........................................ 91,146 127.87 31.59 31.56
One Year........................................... 54,288 35.72 35.72 35.68
FIDELITY VIP II INDEX 500 SUBACCOUNT(8).............. 19.02
Life of Subaccount (from 05/01/96)................. 89,902 124.75 24.70 24.68
Life of Portfolio (from 08/27/92).................. 148,437 271.09 19.54 N/A
Five Years......................................... 129,764 224.41 26.54 N/A
Three Years........................................ 79,027 97.57 25.48 25.45
One Year........................................... 47,606 19.02 19.02 18.97
</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-45 for additional information.
B-43
<PAGE> 144
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1999)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
YEAR TO DATE ----------------------- ------------
(%) ENDING CUMULATIVE ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) (%) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FIDELITY VIP CONTRAFUND SUBACCOUNT................... 22.71%
Life of Subaccount (from 05/01/96)................. $ 86,120 115.30% 23.25% 23.22%
Life of Portfolio (from 01/03/95).................. 127,448 218.62 26.11 N/A
Three Years........................................ 77,208 93.02 24.51 24.48
One Year........................................... 49,083 22.71 22.71 22.66
AMERICAN CENTURY VP INCOME & GROWTH SUBACCOUNT....... N/A
Life of Subaccount (from 05/03/99)................. N/A N/A N/A N/A
Life of Portfolio (from 10/30/97).................. 62,847 57.12 23.15 N/A
One Year........................................... 46,625 16.56 16.56 N/A
AMERICAN CENTURY VP VALUE SUBACCOUNT................. N/A
Life of Subaccount (from 05/03/99)................. N/A N/A N/A N/A
Life of Portfolio (from 05/01/96).................. 56,227 40.57 9.73 N/A
Three Years........................................ 50,493 26.23 8.08 N/A
One Year........................................... 39,170 -2.07 -2.07 N/A
J.P. MORGAN SMALL COMPANY SUBACCOUNT................. N/A
Life of Subaccount (from 05/03/99)................. N/A N/A N/A N/A
Life of Portfolio (from 12/31/94).................. 96,188 140.47 19.18 N/A
Five Years......................................... 96,188 140.47 19.18 N/A
Three Years........................................ 64,101 60.25 17.02 N/A
One Year........................................... 57,032 42.58 42.58 N/A
WARBURG PINCUS EMERGING MARKETS SUBACCOUNT(5)........ 79.02
Life of Subaccount (from 05/01/98)................. 49,035 22.59 12.98 12.94
Life of Portfolio (from 12/31/97).................. 58,473 46.18 20.91 N/A
One Year........................................... 71,609 79.02 79.02 78.98
DREYFUS SOCIALLY RESPONSIBLE GROWTH SUBACCOUNT....... N/A
Life of Subaccount (from 05/03/99)................. N/A N/A N/A N/A
Life of Portfolio (from 10/07/93).................. 142,048 255.12 22.54 N/A
Five Years......................................... 132,440 231.10 27.05 N/A
Three Years........................................ 83,275 108.19 27.69 N/A
One Year........................................... 51,389 28.47 28.47 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-45 for additional information.
B-44
<PAGE> 145
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Nonstandardized Total Return figures quoted are based on a hypothetical
$40,000 initial investment and assumes the deduction of all recurring
charges and fees applicable under the Contract except any charge for
applicable premium taxes which may be imposed in certain states and a
prorated portion of the Records Maintenance Charge.
(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 a
prorated portion of the Records Maintenance Charge. Premium taxes are not
reflected.
(3) The Year to Date percentage return figures quoted are based on the change in
unit values for the period January 1, 1999 through December 31, 1999.
(4) The Ending Values quoted are based on a $40,000 initial investment and
assumes the deduction of all recurring charges and fees applicable under the
Contract except 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 this Subaccount reflects 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.
(8) Returns are based on historical results for Initial Class Shares.
B-45
<PAGE> 146
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
--------------------------------
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- -------------- -----------------------
<S> <C> <C> <C>
10 Years.............. $107,946 $ 86,448 $ 81,693
20 Years.............. 233,048 165,137 133,476
30 Years.............. 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Certificates. Income
on Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10%
tax penalty may apply to early withdrawals. See "Federal Income Taxes" in the
Prospectus. The chart does not reflect the following charges and expenses under
Kemper Passport: 1.10% mortality and expense risk; .15% administration charges;
6% maximum deferred withdrawal charge; and $30 annual records maintenance
charge. The tax-deferred accumulation would be reduced if these charges were
reflected. No implication is intended by the use of these assumptions that the
return shown is guaranteed in any way or that the return shown represents an
average or expected rate of return over the period of the Contracts.
[IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
B-46
<PAGE> 147
APPENDIX B
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
-------------------------------
QUALIFIED NON-QUALIFIED
STATE PLANS PLANS
----- --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Contract Value.
B-47
