<PAGE> 1
SUPPLEMENT DATED NOVEMBER 21, 1997
PROSPECTUS DATED MAY 1, 1997 FOR
PERIODIC PAYMENT VARIABLE ANNUITY CONTRACTS
KEMPER ADVANTAGE III
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
This Supplement updates certain information contained in your Prospectus. Please
read it carefully and keep it with your Prospectus for future reference.
The section "Performance Information" on page 15 of the Prospectus is hereby
deleted in its entirety and replaced with the following:
PERFORMANCE INFORMATION
From time to time, the Separate Account may advertise several types of
performance information for the Subaccounts. All Subaccounts may advertise
"average annual total return" and "total return." The IFS High Yield Subaccount,
IFS Government Securities Subaccount, IFS Investment Grade Bond Subaccount and
Janus Short-Term Bond Subaccount may also advertise 'yield'. The IFS Money
Market Subaccount may advertise "yield" and "effective yield." Each of these
figures is based upon historical earnings and is not necessarily representative
of the future performance of a Subaccount. Average annual total return and total
return calculations measure the net income of a Subaccount plus the effect of
any realized or unrealized appreciation or depreciation of the underlying
investments in the Subaccount for the period in question. Average annual total
return and total return will be quoted for periods of at least one year, three
years, five years and ten years, if applicable, and the life of the Portfolio,
ending with the most recent calendar quarter for average annual total return and
the most recent calendar month for total return. Average annual total return
will also be quoted for periods covering the life of the Subaccount offered
under the Contracts. Average annual total return figures are annualized, and,
therefore, represent the average annual percentage change in the value of an
investment in a Subaccount over the applicable period. 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 IFS 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 which
is compounded on a semi-annual basis. The effective yield for the IFS Money
Market Subaccount is calculated similarly but includes the effect of assumed
compounding calculated under rules prescribed by the Securities and Exchange
Commission. The IFS Money Market Subaccount's effective yield will be slightly
higher than its yield due to this compounding effect. The Subaccounts' units are
sold at Accumulation Unit value. The Subaccounts' performance figures and
Accumulation Unit values will fluctuate. Units of the Subaccounts are redeemable
by an investor at Accumulation Unit value, which may be more or less than
original cost. The performance figures include the deduction of all expenses and
fees, including a prorated portion of the Records Maintenance Charge.
Redemptions within the first six years after purchase may be subject to a
Withdrawal Charge that ranges from 6% the first year to 0% after six years;
however, the aggregate Withdrawal Charge will not exceed 7.25% of aggregate
Purchase Payments under the Contract. Yield, effective yield and total return
figures do not include the effect of any Withdrawal Charge that may be imposed
upon the redemption of units, and thus may be higher than if such charges were
deducted. Average annual total return figures include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period in
question. Additional information concerning a Subaccount's performance appears
in the Statement of Additional Information. The Subaccounts may be compared to
relevant indices and performance data from independent sources. Additional
information concerning these indices and independent sources is provided in the
Statement of Additional Information. 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.
<PAGE> 2
SUPPLEMENT DATED MAY 1, 1997
PROSPECTUS DATED MAY 1, 1997 FOR
PERIODIC PAYMENT VARIABLE ANNUITY CONTRACTS
KEMPER ADVANTAGE III
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
Effective March 1, 1997, Kemper Investors Life Insurance Company ("KILICO") has
revised or endorsed the Contracts that are issued as Individual Retirement
Annuities (IRAs), Simplified Employee Pensions (SEPs) or Non-Qualified Plan
Contracts (Non-Qualified). Contracts issued as IRAs, SEPs or Non-Qualified are
being changed to provide for: 1) waiver of the Records Maintenance Charge for
Contracts with a Contract Value equaling or exceeding $50,000; and 2) revision
of the death benefit payable upon the death of the Owner or Annuitant (subject
to state approval). These changes are described below with references to those
parts of the Prospectus that are modified by this Supplement.
RECORDS MAINTENANCE CHARGE
The following sentence is added to the first paragraph under "1. Records
Maintenance Charge" appearing on page 21 of the Prospectus:
"For Contracts issued on or after March 1, 1997 as Individual Retirement
Annuities, Simplified Employee Pensions or Non-Qualified Plan Contracts,
the Records Maintenance Charge will be waived for Contracts with a Contract
Value equaling or exceeding $50,000 on the date of assessment."
DEATH BENEFIT
The following paragraph is added at the end of section "6. Death Benefit"
appearing on page 20 of the Prospectus:
"For Contracts issued on or after March 1, 1997 as Individual Retirement
Annuities, Simplified Employee Pensions or Non-Qualified Plan Contracts,
subject to state approval, the death benefit will be determined as follows.
If death occurs prior to the deceased's attainment of age 90, the death
benefit will be the greater of (a) the total amount of Purchase Payments
less Debt and less the aggregate amount of all previous partial
withdrawals, (b) the Contract Value as of the day written proof of death is
received by KILICO, less Debt or (c) the Greatest Anniversary Value
immediately preceding the date of death, less Debt. For purposes of this
paragraph, the Greatest Anniversary Value is equal to the highest
Anniversary Value determined from the following. An Anniversary Value is
calculated for each contract anniversary prior to the deceased's attainment
of age 81. The Anniversary Value is equal to the Contract Value on a
contract anniversary, increased by the dollar amount of any Purchase
Payments made since that anniversary and reduced by any withdrawals since
that anniversary. If death occurs on or after the deceased's attainment of
age 90, the death benefit will be the Contract Value as of the day written
proof of death is received by KILICO, less Debt."
<PAGE> 3
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
(AS AMENDED NOVEMBER 21, 1997)
- --------------------------------------------------------------------------------
PERIODIC PAYMENT
VARIABLE ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
KEMPER ADVANTAGE III
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 1997. 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-16
Experts..................................................... B-17
Financial Statements........................................ B-17
</TABLE>
ADV-02C
<PAGE> 4
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Fund by
each of the Subaccounts. All expenses incurred in the operations of the Separate
Account, except the charge for mortality and expense risk and administrative
expenses, and records maintenance charge (as described in the Prospectus) are
borne by KILICO.
The independent auditors for the Separate Account are KPMG Peat Marwick LLP,
Chicago, Illinois for the periods through December 31, 1996. The firm performed
the annual audit of the financial statements of the Separate Account and KILICO
for the periods through December 31, 1996.
The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Contracts are distributed
through the principal underwriter for the Separate Account, Investors Brokerage
Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into
selling group agreements with affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments. During 1996, 1995 and 1994 KILICO incurred gross commissions payable
of approximately $9,049,000, $10,006,000 and $13,085,000 respectively, to
licensed insurance agents.
PERFORMANCE INFORMATION OF SUBACCOUNTS
As described in the prospectus, a Subaccount's historical performance may be
shown in the form of "average annual total return" and "total return"
calculations in the case of all Subaccounts; "yield" information may be provided
in the case of the IFS High Yield Subaccount, IFS Investment Grade Bond
Subaccount, the IFS Government Securities Subaccount and the Janus Short-Term
Bond Subaccount; and "yield" and "effective yield" information may be provided
in the case of the IFS Money Market Subaccount. These various measures of
performance are described below.
A Subaccount's average annual total return quotation is computed in accordance
with a standard method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Subaccount for a specific
period is found by first taking a hypothetical $1,000 investment in each of the
Subaccount's units on the first day of the period at the maximum offering price,
which is the Accumulation Unit value per unit ("initial investment") and
computing the ending redeemable value ("redeemable value") of that investment at
the end of the period. The redeemable value reflects the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period as
well as all other recurring charges and fees applicable under the Contract to
all Contract Owner accounts. Premium taxes are not included in the term charges.
The redeemable value is then divided by the initial investment and this quotient
is taken to the Nth root (N represents the number of years in the period) and 1
is subtracted from the result, which is then expressed as a percentage. 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. Total return performance for a specific period is calculated by
first taking an investment (assumed to be $10,000 below) in each Subaccount's
units on the first day of the period at the maximum offering price, which is the
Accumulation Unit Value per unit ("initial investment") and computing the ending
value ("ending value") of that investment at the end of the period. The ending
value does not include the effect of the applicable Withdrawal Charge that may
be imposed at the end of the period, and thus may be higher than if such charge
were deducted. Premium taxes are not included in the term charges. The 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 $10,000 was
chosen because that approximates the size of a typical account. The account size
used affects the performance figure because the Records Maintenance Charge is a
fixed per account charge. Both annualized and nonannualized (cumulative) total
return figures may be provided. Annualized total return figures represent the
average annual percentage change in the value of a
B-1
<PAGE> 5
Subaccount over the applicable period while nonannualized (cumulative) figures
represent the actual percentage change over the applicable period.
Average annual total return quotations will be current to the last day of the
calendar quarter and 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. Average annual total return and total return will be based on
rolling calendar quarters and calendar months, respectively, and both 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). Average annual total return will also quote a period
covering the time the underlying Portfolio has been held in a Subaccount offered
under the Contracts (life of Subaccount). For those underlying Portfolios which
have not been held as Subaccounts within the Separate Account for one of the
quoted periods, the average annual total return and total return quotations will
show the investment performance such underlying Portfolios would have achieved
(reduced by the applicable charges) had they been held as Subaccounts within the
Separate Account for the period quoted.
Performance information will be shown for periods from March 5, 1982 (inception)
for the IFS Money Market Subaccount, IFS Total Return Subaccount and IFS High
Yield Subaccount, and for periods from December 9, 1983 (inception) for the IFS
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 IFS Fund. In
addition, on that date the IFS Government Securities Subaccount was added to the
Separate Account to invest in the IFS Fund's Government Securities Portfolio.
For the IFS Government Securities Subaccount, performance figures will reflect
investment experience as if the IFS Government Securities Subaccount had been
available under the Contracts since September 3, 1987, the inception date of the
IFS Government Securities Portfolio.
The yield for the IFS High Yield Subaccount, the IFS Investment Grade Bond
Subaccount, the IFS Government Securities Subaccount, and the Janus Short-Term
Bond Subaccount is computed in accordance with a standard method prescribed by
rules of the Securities and Exchange Commission. The yields for the IFS High
Yield Subaccount, the IFS Government Securities Subaccount and the IFS
Investment Grade Bond Subaccount, based upon the one month period ended
September 30, 1997 were 7.04%, 5.16%, and 4.80%, 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>
<CAPTION>
<S> <C> <C>
a - b
-------
YIELD = 2[( +1)(6) - 1]
cd
</TABLE>
a = net dividends and interest earned during the period by the Fund attributable
to the Subaccount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
withdrawal charges or premium taxes.
The IFS 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
IFS Money Market Subaccount's yield for the seven-day period ended September 30,
1997 was 3.81% and average portfolio maturity was 22 days.
The IFS 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 IFS Money Market Subaccount's effective yield for the
seven day period ended September 30, 1997 was 3.88%.
B-2
<PAGE> 6
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years;
however, the aggregate Withdrawal Charge will not exceed 7.25% of aggregate
Purchase Payments under the Contract. Yield, effective yield and total return do
not reflect the effect of the Withdrawal Charge or premium taxes that may be
imposed upon the redemption of units. Average annual total return reflects the
effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the period in question.
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes, including the
Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, the
Consumer Price Index, the CDA Certificate of Deposit Index, the Salomon Brothers
High Grade Corporate Bond Index, the Lehman Brothers Government/Corporate Bond
Index, the Merrill Lynch Government/Corporate Master Index, the Lehman Brothers
Long Government/Corporate Bond Index, the Lehman Brothers Government/Corporate
1-3 Year Bond Index, the Standard & Poor's Midcap 400 Index, the NASDAQ
Composite Index, the Russell 2000 Index and the Morgan Stanley Capital
International Europe, Australia, Far East Index. In addition, the Subaccounts
may provide performance analysis rankings of Lipper Analytical Services, Inc.,
the VARDS Report, Morningstar, Inc., Ibbotson Associates or Micropal. Please
note the differences and similarities between the investments which a Subaccount
may purchase and the investments measured by the indexes which are described
below. In particular, it should be noted that certificates of deposit may offer
fixed or variable yields and principal is guaranteed and may be insured. The
units of the Subaccounts are not insured. Also, the value of the Subaccounts
will fluctuate. From time to time, the Separate Account may quote information
from publications such as Morningstar, Inc., The Wall Street Journal, Money
Magazine, Forbes, Barron's, Fortune, The Chicago Tribune, USA Today,
Institutional Investor, National Underwriter, Selling Life Insurance, Broker
World, Registered Representative, Investment Advisor and VARDS.
The following tables include average annual total return and total return
quotations for various periods as of June 30, 1997, and compares these
quotations to various indexes.
B-3
<PAGE> 7
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ----------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
IFS VALUE SUBACCOUNT.................................... 14.63%
Life of Subaccount (from 05/01/96).................... 22.19%
Life of Portfolio (from 05/01/96)..................... $13,323.09 33.23% 27.94% 22.19%
One Year.............................................. $13,115.41 31.15% 30.96% 22.74%
IFS VALUE+GROWTH SUBACCOUNT............................. 12.80%
Life of Subaccount (from 05/01/96).................... 17.76%
Life of Portfolio (from 05/01/96)..................... $12,800.76 28.01% 23.62% 17.76%
One Year.............................................. $12,643.04 26.43% 26.27% 18.22%
IFS HORIZON 20+ SUBACCOUNT.............................. 10.17%
Life of Subaccount (from 05/01/96).................... 15.10%
Life of Portfolio (from 05/01/96)..................... $12,574.72 25.75% 21.75% 15.10%
One Year.............................................. $12,443.65 24.44% 24.29% 15.36%
JANUS GROWTH SUBACCOUNT................................. 12.55%
Life of Subaccount (from 09/15/95).................... 14.27%
Life of Portfolio (from 09/13/93)..................... $17,634.86 76.35% 16.13% 14.46%
Three Year............................................ $17,549.53 75.50% 20.62% 18.26%
One Year.............................................. $11,936.61 19.37% 19.37% 11.43%
FIDELITY EQUITY INCOME SUBACCOUNT....................... 15.65%
Life of Subaccount (from 05/01/96).................... 13.91%
Life of Portfolio (from 10/09/86)..................... $36,580.23 265.80% 12.85% 12.58%
Ten Years............................................. $20,892.69 108.93% 7.64% 6.78%
Five Years............................................ $20,588.66 105.89% 15.54% 14.41%
Three Years........................................... $17,005.32 70.05% 19.36% 17.06%
One Year.............................................. $12,384.93 23.85% 23.85% 15.58%
FIDELITY VIP GROWTH SUBACCOUNT.......................... 13.10%
Life of Subaccount (from 05/01/96).................... 8.71%
Life of Portfolio (from 10/09/86)..................... $40,547.74 305.48% 13.93% 13.44%
Ten Years............................................. $28,594.37 185.94% 11.07% 10.44%
Five Years............................................ $22,274.69 122.75% 17.37% 16.32%
Three Years........................................... $19,645.98 96.46% 25.24% 22.98%
One Year.............................................. $11,622.39 16.22% 16.22% 8.48%
FIDELITY INDEX 500 SUBACCOUNT........................... 19.44%
Life of Subaccount (from 05/01/96).................... 23.58%
Life of Portfolio (from 08/27/92)..................... $22,355.45 123.55% 18.07% 16.90%
Three Years........................................... $20,094.07 100.94% 26.19% 23.84%
One Year.............................................. $13,213.97 32.14% 32.14% 5.79%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-4
<PAGE> 8
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------------------------------
DOW JONES DOW JONES STANDARD & STANDARD & CONSUMER CONSUMER
INDUSTRIAL(5) INDUSTRIAL(5) POOR'S 500(6) POOR'S 500(6) PRICE INDEX(7) PRICE INDEX(7)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
------------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
IFS VALUE SUBACCOUNT
Life of Portfolio (from
05/01/96)................. 37.62% 31.56% 35.22% 29.58% 2.69% 2.31%
One Year.................... 35.69% 35.69% 31.99% 31.99% 2.30% 2.30%
IFS VALUE+GROWTH SUBACCOUNT
Life of Portfolio (from
05/01/96)................. 37.62% 31.56% 35.22% 29.58% 2.69% 2.31%
One Year.................... 35.69% 35.69% 31.99% 31.99% 2.30% 2.30%
IFS HORIZON 20+ SUBACCOUNT
Life of Portfolio (from
05/01/96)................. 37.62% 31.56% 35.22% 29.58% 2.69% 2.31%
One Year.................... 35.69% 35.69% 31.99% 31.99% 2.30% 2.30%
JANUS GROWTH SUBACCOUNT
Life of Portfolio (from
09/13/93)................. 111.13% 21.77% 91.56% 18.69% 10.55% 2.68%
Three Year.................. 111.67% 28.40% 99.23% 25.83% 8.31% 2.70%
One Year.................... 35.69% 35.69% 31.99% 31.99% 2.30% 2.30%
FIDELITY EQUITY INCOME
SUBACCOUNT
Life of Portfolio (from
10/09/86)................. 327.02% 14.50% 275.30% 13.13% 45.59% 3.56%
Ten Years................... 217.25% 12.24% 191.16% 11.28% 41.11% 3.50%
Five Years.................. 131.21% 18.25% 116.87% 16.75% 14.34% 2.72%
Three Years................. 111.67% 28.40% 99.23% 25.83% 8.31% 2.70%
One Year.................... 35.69% 35.69% 31.99% 31.99% 2.30% 2.30%
FIDELITY VIP GROWTH SUBACCOUNT
Life of Portfolio (from
10/09/86)................. 327.02% 14.50% 275.30% 13.13% 45.59% 3.56%
Ten Years................... 217.25% 12.24% 191.16% 11.28% 41.11% 3.50%
Five Years.................. 131.21% 18.25% 116.87% 16.75% 14.34% 2.72%
Three Years................. 111.67% 28.40% 99.23% 25.83% 8.31% 2.70%
One Year.................... 35.69% 35.69% 31.99% 31.99% 2.30% 2.30%
FIDELITY INDEX 500
SUBACCOUNT.................. 135.75% 19.39% 114.04% 17.03% 13.77% 2.70%
Life of Portfolio (from
08/27/92)................. 37.62% 31.56% 35.22% 29.58% 2.69% 2.31%
Three Years................. 111.67% 28.40% 99.23% 25.83% 8.31% 2.70%
One Year.................... 35.69% 35.69% 31.99% 31.99% 2.30% 2.30%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-5
<PAGE> 9
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
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>
IFS MONEY MARKET SUBACCOUNT(20)........ 1.88%
Life of Subaccount (from 04/06/82)... 4.62%
Life of Portfolio (from 04/06/82).... $22,152.56 121.53% 5.36% 4.62%
Ten Years............................ $15,207.88 52.08% 4.28% 3.13%
Five Years........................... $11,450.59 14.51% 2.75% 0.10%
Three Years.......................... $11,115.63 11.16% 3.59% (0.07)%
One Year............................. $10,343.99 3.44% 3.44% (4.75)%
IFS HIGH YIELD SUBACCOUNT(19).......... 4.67%
Life of Subaccount (from 04/06/82)... 11.81%
Life of Portfolio (from 04/06/82).... $55,213.67 472.14% 12.14% 11.81%
Ten Years............................ $25,164.21 151.64% 9.67% 8.80%
Five Years........................... $15,924.01 59.24% 9.75% 7.72%
Three Years.......................... $13,583.05 35.83% 10.75% 7.62%
One Year............................. $11,324.49 13.24% 13.24% 5.11%
IFS GOVT. SECURITIES SUBACCOUNT........ 2.88%
Life of Subaccount (from 11/03/89)... 5.29%
Life of Portfolio (from 09/03/87).... $18,212.84 82.13% 6.29% 5.59%
Five Years........................... $12,740.30 27.40% 4.96% 2.98%
Three Years.......................... $12,143.30 21.43% 6.69% 3.73%
One Year............................. $10,677.42 6.77% 6.77% (0.86)%
IFS INVESTMENT GRADE BOND SUBACCOUNT... 2.27%
Life of Subaccount (from 05/01/96)... (0.87)%
Life of Portfolio (from 05/01/96).... $10,488.11 4.88% 4.18% (0.87)%
One Year............................. $10,444.42 4.44% 4.42% (2.34)%
JANUS SHORT-TERM BOND SUBACCOUNT....... 2.55%
Life of Subaccount (from 09/15/95)... 0.47%
Life of Portfolio (from 09/13/93).... $11,325.85 13.26% 3.34% 1.76%
Three Year........................... $10,871.68 8.72% 2.83% 0.67%
One Year............................. $10,548.22 5.48% 5.48% (1.30)%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-6
<PAGE> 10
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------------------------------------------------------------------------
SALOMON BROS SALOMON BROS LEHMAN BROS.
CDA CERT CDA CERT HIGH GRADE HIGH GRADE GOVT/CORP
CONSUMER CONSUMER OF DEPOSIT OF DEPOSIT CORP BOND CORP BOND BOND
PRICE INDEX(7) PRICE INDEX(7) INDEX(8) INDEX(8) INDEX(9) INDEX(9) INDEX(10)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE %
RETURN RETURN RETURN RETURN RETURN RETURN RETURN
-------------- -------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
IFS MONEY MARKET
SUBACCOUNT(20)
Life of Portfolio
(from
04/06/82)........ 69.27% 3.50% 183.05% 7.03% 625.44% 13.81% N/A
Ten Years.......... 41.11% 3.50% 82.24% 6.18% 173.73% 10.59% N/A
Five Years......... 14.34% 2.72% 26.65% 4.84% 58.51% 9.65% N/A
Three Years........ 8.31% 2.70% 18.29% 5.76% 41.34% 12.22% N/A
One Year........... 2.30% 2.30% 5.64% 5.64% 15.11% 15.11% N/A
IFS HIGH YIELD
SUBACCOUNT(19)
Life of Portfolio
(from
04/06/82)........ 69.27% 3.50% N/A N/A N/A N/A 1,098.42%
Ten Years.......... 41.11% 3.50% N/A N/A N/A N/A 181.71%
Five Years......... 14.34% 2.72% N/A N/A N/A N/A 50.49%
Three Years........ 8.31% 2.70% N/A N/A N/A N/A 32.13%
One Year........... 2.30% 2.30% N/A N/A N/A N/A 8.92%
IFS GOVT SECURITIES
SUBACCOUNT
Life of Portfolio
(from
09/03/87)........ 58.56% 3.46% N/A N/A 179.11% 11.01% 182.59%
Five Years......... 14.34% 2.72% N/A N/A 58.51% 9.65% 50.49%
Three Years........ 8.31% 2.70% N/A N/A 41.34% 12.22% 32.13%
One Year........... 2.30% 2.30% N/A N/A 15.11% 15.11% 8.92%
IFS INVESTMENT GRADE
BOND SUBACCOUNT
Life of Portfolio
(from
05/01/96)........ 2.69% 2.31% N/A N/A 17.15% 14.58% 10.40%
One Year........... 2.30% 2.30% N/A N/A 15.11% 15.11% 8.92%
JANUS SHORT-TERM BOND
Life of Portfolio
(from
09/13/93)........ 10.55% 2.68% N/A N/A 30.85% 7.34% N/A
Three Year......... 8.31% 2.70% N/A N/A 41.34% 12.22% 32.13%
One Year........... 2.30% 2.30% N/A N/A 15.11% 15.11% 8.92%
<CAPTION>
COMPARED TO
------------
LEHMAN BROS.
GOVT/CORP
BOND
INDEX(10)
ANNUALIZED %
RETURN
------------
<S> <C>
IFS MONEY MARKET
SUBACCOUNT(20)
Life of Portfolio
(from
04/06/82)........ N/A
Ten Years.......... N/A
Five Years......... N/A
Three Years........ N/A
One Year........... N/A
IFS HIGH YIELD
SUBACCOUNT(19)
Life of Portfolio
(from
04/06/82)........ 17.60%
Ten Years.......... 10.91%
Five Years......... 8.52%
Three Years........ 9.73%
One Year........... 8.92%
IFS GOVT SECURITIES
SUBACCOUNT
Life of Portfolio
(from
09/03/87)........ 11.15%
Five Years......... 8.52%
Three Years........ 9.73%
One Year........... 8.92%
IFS INVESTMENT GRADE
BOND SUBACCOUNT
Life of Portfolio
(from
05/01/96)........ 8.88%
One Year........... 8.92%
JANUS SHORT-TERM BOND
Life of Portfolio
(from
09/13/93)........ N/A
Three Year......... 9.73%
One Year........... 8.92%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-7
<PAGE> 11
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
--------------------------------------------------------------------------------------
LEHMAN BROS
MERRILL LYNCH MERRILL LYNCH LEHMAN BROS LEHMAN BROS GOVT/CORP
GOVT/CORP GOVT/CORP LONG GOVT LONG GOVT 1-3 YEAR
MASTER INDEX(11) MASTER INDEX(11) BOND INDEX(12) BOND INDEX(12) BOND INDEX(13)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE %
RETURN RETURN RETURN RETURN RETURN
---------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
IFS MONEY MARKET SUBACCOUNT(20)
Life of Portfolio (from
04/06/82)........................ N/A N/A N/A N/A N/A
Ten Years.......................... N/A N/A N/A N/A N/A
Five Years......................... N/A N/A N/A N/A N/A
Three Years........................ N/A N/A N/A N/A N/A
One Year........................... N/A N/A N/A N/A N/A
IFS HIGH YIELD SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)........................ 412.46% 11.25% N/A N/A N/A
Ten Years.......................... 131.13% 8.74% N/A N/A N/A
Five Years......................... 42.09% 7.28% N/A N/A N/A
Three Years........................ 27.40% 8.30% N/A N/A N/A
One Year........................... 4.94% 4.94% N/A N/A N/A
IFS GOVT SECURITIES SUBACCOUNT
Life of Portfolio (from
09/03/87)........................ 133.37% 9.01% N/A N/A N/A
Five Years......................... 42.09% 7.28% 74.40% 11.78% N/A
Three Years........................ 27.40% 8.30% 47.05% 13.72% N/A
One Year........................... 4.94% 4.94% 15.24% 15.24% N/A
IFS INVESTMENT GRADE BOND SUBACCOUNT
Life of Portfolio (from
05/01/96)........................ 9.01% 7.70% N/A N/A N/A
One Year........................... 4.94% 4.94% N/A N/A N/A
JANUS SHORT-TERM BOND
Life of Portfolio (from
09/13/93)........................ N/A N/A 28.14% 6.76% 26.49%
Three Year......................... 27.40% 8.30% 47.05% 13.72% 26.20%
One Year........................... 4.94% 4.94% 15.24% 15.24% 7.96%
<CAPTION>
COMPARED TO
--------------
LEHMAN BROS
GOVT/CORP
1-3 YEAR
BOND INDEX(13)
ANNUALIZED %
RETURN
--------------
<S> <C>
IFS MONEY MARKET SUBACCOUNT(20)
Life of Portfolio (from
04/06/82)........................ N/A
Ten Years.......................... N/A
Five Years......................... N/A
Three Years........................ N/A
One Year........................... N/A
IFS HIGH YIELD SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)........................ N/A
Ten Years.......................... N/A
Five Years......................... N/A
Three Years........................ N/A
One Year........................... N/A
IFS GOVT SECURITIES SUBACCOUNT
Life of Portfolio (from
09/03/87)........................ N/A
Five Years......................... N/A
Three Years........................ N/A
One Year........................... N/A
IFS INVESTMENT GRADE BOND SUBACCOUNT
Life of Portfolio (from
05/01/96)........................ N/A
One Year........................... N/A
JANUS SHORT-TERM BOND
Life of Portfolio (from
09/13/93)........................ 6.39%
Three Year......................... 8.07%
One Year........................... 7.96%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-8
<PAGE> 12
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
------------------------ ----------
CUMULATIVE ANNUALIZED ANNUALIZED
YEAR TO DATE(%) (%) (%) (%)
RETURN(3) ENDING VALUE(4) RETURN RETURN RETURN
--------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
IFS GROWTH SUBACCOUNT.......................... 9.87%
Life of Subaccount (from 12/09/83)........... 13.16%
Life of Portfolio (from 12/09/83)............ $55,803.15 458.03% 13.52% 13.16%
Ten Years.................................... $29,665.89 196.66% 11.49% 10.72%
Five Years................................... $21,189.50 111.89% 16.20% 14.24%
Three Years.................................. $18,170.12 81.70% 22.03% 18.80%
One Year..................................... $11,987.96 19.88% 19.88% 11.19%
FIDELITY CONTRA FUND SUBACCOUNT................ 10.92%
Life of Subaccount (from 05/01/96)........... 14.14%
Life of Portfolio (from 01/03/95)............ $18,280.37 82.80% 27.41% 24.84%
One Year..................................... $12,330.17 23.30% 23.30% 15.31%
LEXINGTON NATURAL RESOURCES SUBACCOUNT......... 2.91%
Life of Subaccount (from 09/15/95)........... 11.57%
Life of Portfolio (10/14/91)................. $15,747.76 57.48% 8.27% 7.36%
Five Year.................................... $16,387.25 63.87% 10.38% 9.30%
Three Year................................... $15,279.36 52.79% 15.18% 12.99%
One Year..................................... $11,758.15 17.58% 17.58% 10.25%
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
--------------------------------------------------------------------------------------------
STANDARD & STANDARD &
STANDARD & CONSUMER POOR'S POOR'S
STANDARD & POOR'S 500 CONSUMER PRICE INDEX MIDCAP MIDCAP
POOR'S 500 (5) (6) PRICE INDEX (7) (7) INDEX (14) INDEX (14)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
-------------- ------------ --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
IFS GROWTH SUBACCOUNT
Life of Portfolio
(from 12/09/83)..... 436.16% 13.19% 58.56% 3.46% N/A N/A
Ten Years............. 191.16% 11.28% 41.11% 3.50% N/A N/A
Five Years............ 116.87% 16.75% 14.34% 2.72% 104.95% 15.44%
Three Years........... 99.23% 25.83% 8.31% 2.70% 74.14% 20.32%
One Year.............. 31.99% 31.99% 2.30% 2.30% 21.46% 21.46%
FIDELITY CONTRA FUND
SUBACCOUNT
Life of Portfolio
(from 01/03/95)..... 92.79% 30.16% 6.65% 2.62% 70.58% 23.95%
One Year.............. 31.99% 31.99% 2.30% 2.30% 21.46% 21.46%
LEXINGTON NATURAL
RESOURCES SUBACCOUNT
Life of Portfolio
(from 10/14/91)..... 129.03% 15.62% 16.84% 2.76% 119.94% 14.80%
Five Year............. 116.87% 16.75% 14.34% 2.72% 104.95% 15.44%
Three Year............ 99.23% 25.83% 8.31% 2.70% 74.14% 20.32%
One Year.............. 31.99% 31.99% 2.30% 2.30% 21.46% 21.46%
<CAPTION>
COMPARED TO
---------------------------
NASDAQ NASDAQ
COMPOS (15) COMPOS (15)
CUMULATIVE % ANNUALIZED %
RETURN RETURN
------------ ------------
<S> <C> <C>
IFS GROWTH SUBACCOUNT
Life of Portfolio
(from 12/09/83)..... 414.09% 12.54%
Ten Years............. 239.57% 13.00%
Five Years............ 155.87% 20.67%
Three Years........... 104.28% 26.90%
One Year.............. 21.69% 21.69%
FIDELITY CONTRA FUND
SUBACCOUNT
Life of Portfolio
(from 01/03/95)..... 93.94% 30.52%
One Year.............. 21.69% 21.69%
LEXINGTON NATURAL
RESOURCES SUBACCOUNT
Life of Portfolio
(from 10/14/91)..... 174.34% 19.33%
Five Year............. 155.87% 20.67%
Three Year............ 104.28% 26.90%
One Year.............. 21.69% 21.69%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-9
<PAGE> 13
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ----------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
IFS SMALL CAP GROWTH.................................... 14.11%
Life of Subaccount (from 05/01/94).................... 20.42%
Life of Portfolio (from 05/01/94)..................... $19,026.54 90.27% 22.54% 20.42%
Three Years........................................... $19,477.30 94.77% 24.86% 22.23%
One Year.............................................. $12,514.99 25.15% 25.15% 16.98%
IFS SMALL CAP VALUE SUBACCOUNT.......................... 13.36%
Life of Subaccount (from 05/01/96).................... 6.87%
Life of Portfolio (from 05/01/96)..................... $11,434.04 14.34% 12.20% 6.87%
One Year.............................................. $12,327.17 23.27% 23.13% 15.38%
JANUS AGGRESSIVE GROWTH SUBACCOUNT...................... 1.98%
Life of Subaccount (from 09/15/95).................... 3.81%
Life of Portfolio (from 09/13/93)..................... $18,419.55 84.20% 17.47% 15.88%
Three Year............................................ $16,827.31 68.27% 18.94% 16.65%
One Year.............................................. $ 9,760.79 (2.39)% (2.39)% (9.03)%
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------------------------
CONSUMER PRICE CONSUMER PRICE RUSSELL 2000 RUSSELL 2000 NASDAQ NASDAQ
INDEX(7) INDEX(7) INDEX(16) INDEX(16) COMPOS(15) COMPOS(15)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
-------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
IFS SMALL CAP GROWTH
Life of Portfolio (from
05/01/94)..................... 8.83% 2.71% 56.03% 15.12% 94.70% 23.47%
Three Years..................... 8.31% 2.70% 64.95% 18.16% 104.28% 26.90%
One Year........................ 2.30% 2.30% 14.36% 14.36% 21.69% 21.69%
IFS SMALL CAP VALUE SUBACCOUNT
Life of Portfolio (from
05/01/96)..................... 2.69% 2.31% 13.16% 11.20% 20.21% 17.12%
One Year........................ 2.30% 2.30% 14.36% 14.36% 21.69% 21.69%
JANUS AGGRESSIVE GROWTH SUBACCOUNT
Life of Portfolio (from
09/13/93)..................... 10.55% 2.68% 60.84% 13.34% 94.79% 19.21%
Three Year...................... 8.31% 2.70% 64.95% 18.16% 104.28% 26.90%
One Year........................ 2.30% 2.30% 14.36% 14.36% 21.69% 21.69%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-10
<PAGE> 14
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
--------------------------------- ----------
YEAR TO DATE(%) CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED
RETURN(3) ENDING VALUE(4) RETURN RETURN (%) RETURN
--------------- --------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
IFS INTERNATIONAL SUBACCOUNT(18)...... 11.63%
Life of Subaccount (from
01/06/92)......................... 9.24%
Life of Portfolio (from 01/06/92)... $17,379.69 73.80% 10.60% 9.24%
Five Years.......................... $16,948.26 69.48% 11.12% 9.39%
Three Years......................... $14,131.60 41.32% 12.22% 9.43%
One Year............................ $11,608.03 16.08% 16.08% 8.19%
JANUS WORLD WIDE GROWTH
SUBACCOUNT(18)...................... 18.16%
Life of Subaccount (from
09/15/95)......................... 23.94%
Life of Portfolio (from 09/13/93)... $22,448.18 124.48% 23.75% 22.11%
Three Year.......................... $19,870.43 98.70% 25.72% 23.31%
One Year............................ $12,153.60 21.54% 21.54% 13.53%
LEXINGTON EMERGING MARKETS(18)
SUBACCOUNT.......................... 14.35%
Life of Subaccount (from
09/15/95)......................... 4.36%
Life of Portfolio (from 03/30/94)... $11,193.53 11.94% 3.52% 1.68%
Three Year.......................... $11,714.80 17.15% 5.41% 3.11%
One Year............................ $10,789.73 7.90% 7.90% 1.01%
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------------------------
STANDARD & STANDARD & CONSUMER PRICE CONSUMER PRICE
POOR'S 500(6) POOR'S 500(6) INDEX(7) INDEX(7)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
IFS INTERNATIONAL SUBACCOUNT(18)
Life of Portfolio (from 01/06/92).................... 112.13% 14.71% 15.19% 2.73%
Five Years........................................... 116.87% 16.75% 14.34% 2.72%
Three Years.......................................... 99.23% 25.83% 8.31% 2.70%
One Year............................................. 31.99% 31.99% 2.30% 2.30%
JANUS WORLD WIDE GROWTH SUBACCOUNT(18)
Life of Portfolio (from 09/13/93).................... 91.56% 18.69% 10.55% 2.68%
Three Year........................................... 99.23% 25.83% 8.31% 2.70%
One Year............................................. 31.99% 31.99% 2.30% 2.30%
LEXINGTON EMERGING MARKETS SUBACCOUNT(18)
Life of Portfolio (from 03/30/94).................... 98.66% 23.50% 8.97% 2.68%
Three Year........................................... 99.23% 25.83% 8.31% 2.70%
One Year............................................. 31.99% 31.99% 2.30% 2.30%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-11
<PAGE> 15
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------
MORGAN STANLEY MORGAN STANLEY
MORGAN STANLEY MORGAN STANLEY INTER'L WORLD INTER'L WORLD
EAFE INDEX (17) EAFE INDEX (17) INDEX (21) INDEX (21)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
IFS INTERNATIONAL SUBACCOUNT(18)
Life of Portfolio (from 01/06/92).......... 67.33% 9.85% 72.92% 10.51%
Five Years................................. 85.60% 13.17% 89.69% 13.66%
Three Years................................ 31.09% 9.44% 52.76% 15.18%
One Year................................... 13.16% 13.16% 20.45% 20.45%
JANUS WORLD WIDE GROWTH SUBACCOUNT(18)
Life of Portfolio (from 09/13/93).......... 42.49% 9.78% 56.45% 12.52%
Three Year................................. 31.09% 9.44% 52.76% 15.18%
One Year................................... 13.16% 13.16% 20.45% 20.45%
LEXINGTON EMERGING MARKETS SUBACCOUNT(18)
Life of Portfolio (from 03/30/94).......... 37.87% 10.38% 56.25% 14.71%
Three Year................................. 31.09% 9.44% 52.76% 15.18%
One Year................................... 13.16% 13.16% 20.45% 20.45%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-12
<PAGE> 16
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
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>
IFS TOTAL RETURN SUBACCOUNT(19)......... 11.59%
Life of Subaccount (from 04/06/82).... 11.56%
Life of Portfolio (from 04/06/82)..... $57,907.13 479.07% 12.23% 11.56%
Ten Years............................. $24,902.33 149.02% 9.55% 8.12%
Five Years............................ $16,894.58 68.95% 11.06% 8.46%
Three Years........................... $15,970.73 59.71% 16.89% 13.12%
One Year.............................. $12,231.06 22.31% 22.31% 12.84%
IFS HORIZON 10+ SUBACCOUNT.............. 8.42%
Life of Subaccount (from 05/01/96).... 10.43%
Life of Portfolio (from 05/01/96)..... $11,949.55 19.50% 16.53% 10.43%
One Year.............................. $11,852.03 18.52% 18.41% 10.20%
IFS HORIZON 5 SUBACCOUNT................ 5.83%
Life of Subaccount (from 05/01/96).... 6.21%
Life of Portfolio (from 05/01/96)..... $11,471.28 14.71% 12.51% 6.21%
One Year.............................. $11,381.60 13.82% 13.74% 5.38%
JANUS BALANCED SUBACCOUNT............... 11.61%
Life of Subaccount (from 09/15/95).... 14.03%
Life of Portfolio (from 09/13/93)..... $16,716.82 67.17% 14.50% 12.92%
Three Year............................ $15,678.35 56.78% 16.17% 13.92%
One Year.............................. $12,075.10 20.75% 20.75% 12.77%
FIDELITY ASSET MANAGER SUBACCOUNT....... 10.50%
Life of Subaccount (from 05/01/96).... 11.40%
Life of Portfolio (from 09/06/89)..... $23,222.53 132.23% 11.38% 10.77%
Five Years............................ $15,226.95 52.27% 8.77% 7.58%
Three Years........................... $14,210.12 42.10% 12.43% 10.13%
One Year.............................. $11,870.02 18.70% 18.70% 10.58%
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------------------------------------------------------------
CONSUMER CONSUMER LEHMAN BROS LEHMAN BROS
STANDARD & STANDARD & PRICE PRICE GOVT/CORP 1-3 GOVT/CORP 1-3
POOR'S 500(6) POOR'S 500(6) INDEX(7) INDEX(7) YEAR BOND(13) YEAR BOND(13)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
------------- ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
IFS TOTAL RETURN SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)................... 709.53% 14.63% 69.27% 3.50% N/A N/A
Ten Years..................... 191.16% 11.28% 41.11% 3.50% N/A N/A
Five Years.................... 116.87% 16.75% 14.34% 2.72% 39.31% 6.86%
Three Years................... 99.23% 25.83% 8.31% 2.70% 26.20% 8.07%
One Year...................... 31.99% 31.99% 2.30% 2.30% 7.96% 7.96%
IFS HORIZON 10+ SUBACCOUNT
Life of Portfolio (from
05/01/96)................... 35.22% 29.58% 2.69% 2.31% 9.21% 7.86%
One Year...................... 31.99% 31.99% 2.30% 2.30% 7.96% 7.96%
IFS HORIZON 5 SUBACCOUNT
Life of Portfolio (from
05/01/96)................... 35.22% 29.58% 2.69% 2.31% 9.21% 7.86%
One Year...................... 31.99% 31.99% 2.30% 2.30% 7.96% 7.96%
JANUS BALANCED SUBACCOUNT
Life of Portfolio (from
09/13/93)................... 91.56% 18.69% 10.55% 2.68% 26.49% 6.39%
Three Year.................... 99.23% 25.83% 8.31% 2.70% 26.20% 8.07%
One Year...................... 31.99% 31.99% 2.30% 2.30% 7.96% 7.96%
FIDELITY ASSET MANAGER
SUBACCOUNT
Life of Portfolio (from
09/06/89)................... 153.45% 12.64% 28.55% 3.27% N/A N/A
Five Years.................... 116.87% 16.75% 14.34% 2.72% 39.31% 6.86%
Three Years................... 99.23% 25.83% 8.31% 2.70% 26.20% 8.07%
One Year...................... 31.99% 31.99% 2.30% 2.30% 7.96% 7.96%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-13
<PAGE> 17
PERFORMANCE FIGURES
(AS OF JUNE 30, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------
MERRILL LYNCH MERRILL LYNCH LEHMAN BROS LEHMAN BROS
GOVT/CORP GOVT/CORP GOVT/CORP GOVT/CORP
MASTER INDEX (11) MASTER INDEX (11) BOND INDEX (10) BOND INDEX (10)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
IFS TOTAL RETURN SUBACCOUNT(19)
Life of Portfolio (from 04/06/82)....... 412.46% 11.25% 1,098.42% 17.60%
Ten Years............................... 131.13% 8.74% 181.71% 10.91%
Five Years.............................. 42.09% 7.28% 50.49% 8.52%
Three Years............................. 27.40% 8.30% 32.13% 9.73%
One Year................................ 4.94% 4.94% 8.92% 8.92%
IFS HORIZON 10+ SUBACCOUNT
Life of Portfolio (from 05/01/96)....... 9.01% 7.70% 10.40% 8.88%
One Year................................ 4.94% 4.94% 8.92% 8.92%
IFS HORIZON 5 SUBACCOUNT
Life of Portfolio (from 05/01/96)....... 9.01% 7.70% 10.40% 8.88%
One Year................................ 4.94% 4.94% 8.92% 8.92%
JANUS BALANCED SUBACCOUNT
Life of Portfolio (from 09/13/93)....... N/A N/A N/A N/A
Three Year.............................. 27.40% 8.30% 32.13% 9.73%
One Year................................ 4.94% 4.94% 8.92% 8.92%
FIDELITY ASSET MANAGER SUBACCOUNT
Life of Portfolio (from 09/06/89)....... N/A N/A N/A N/A
Five Years.............................. 42.09% 7.28% 50.49% 8.52%
Three Years............................. 27.40% 8.30% 32.13% 9.73%
One Year................................ 4.94% 4.94% 8.92% 8.92%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-14
<PAGE> 18
PERFORMANCE FIGURES--NOTES
* N/A Not Available
(1) The Total Return figures quoted are based on a hypothetical $10,000 initial
investment and assumes the deduction of all recurring charges and fees
applicable under the Contract except for the Withdrawal Charge and any
charge for applicable premium taxes which may be imposed in certain states.
(2) The Average Annual Total Return figures quoted are based on a hypothetical
$1,000 initial investment and assumes the deduction of all recurring
charges and fees applicable under the Contract including the applicable
Withdrawal Charge that may be imposed at the end of the quoted period.
Premium taxes are not reflected.
(3) The Year to Date percentage return figures quoted are based on the change
in unit values.
(4) The Ending Values quoted are based on a $10,000 initial investment and
assumes the deduction of all recurring charges and fees applicable under
the Contract except for the Withdrawal Charge and any charge for applicable
premium taxes which may be imposed in certain states.
(5) The Dow Jones Industrial Average is an unmanaged unweighted average of
thirty blue chip industrial corporations listed on the New York Stock
Exchange. Assumes reinvestment of dividends.
(6) The Standard & Poor's 500 Stock Index is an unmanaged weighted average of
500 stocks, over 95% of which are listed on the New York Stock Exchange.
Assumes reinvestment of dividends.
(7) The Consumer Price Index, published by the U.S. Bureau of Labor Statistics,
is a statistical measure of change, over time, in the prices of goods and
services in major expenditure groups.
(8) The CDA Certificate of Deposit Index is provided by CDA Investment
Technologies, Inc., Silver Spring, Maryland, and is based upon a
statistical sampling of the yield of 30-day certificates of deposit of
major commercial banks. Yield is based upon a monthly compounding of
interest.
(9) The Salomon Brothers High Grade Corporate Bond Index is on a total return
basis with all dividends reinvested and is comprised of high grade
long-term industrial and utility bonds rated in the top two rating
categories.
(10) The Lehman Brothers Government/Corporate Bond Index is on a total return
basis and is comprised of all publicly issued, non-convertible, domestic
debt of the U.S. Government or any agency thereof, quasi-Federal
corporation, or corporate debt guaranteed by the U.S. Government and all
publicly issued, fixed-rate, non-convertible, domestic debt of the three
major corporate classifications: industrial, utility, and financial. Only
notes and bonds with a minimum outstanding principal amount of $1,000,000
and a minimum of one year are included. Bonds included must have a rating
of at least Baa by Moody's Investors Service, BBB by Standard & Poor's
Corporation or in the case of bank bonds not rated by either Moody's or
Standard & Poor's, BBB by Fitch Investors Service.
(11) The Merrill Lynch Government/Corporate Master Index is based upon the total
returns with all dividends reinvested of 4,000 corporate and 300 government
bonds issued with an intermediate average maturity and an average quality
rating of Aa (Moody's Investors Service, Inc.) /AA (Standard & Poor's
Corporation).
(12) The Lehman Brothers Long Government/Corporate Bond Index is composed of all
bonds covered by the Lehman Brothers Government/Corporate Bond Index with
maturities of 10 years or greater. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are balanced monthly by market capitalization.
(13) The Lehman Brothers Government/Corporate 1-3 Year Bond Index is composed of
all bonds covered by the Lehman Brothers Government/Corporate Bond Index
with maturities between one and three years.
(14) The Standard & Poor's Midcap 400 Index is a capitalization-weighted index
that measures the performance of the mid-range sector of the U.S. stock
market where the median market capitalization is approximately $700
million. The index was developed with a base level of 100 as of December
31, 1990.
(15) The NASDAQ Composite Index is a broad-based capitalization-weighted index
of all NASDAQ stocks. The index was developed with a base level of 100 as
of February 5, 1971. (23) From May 1, 1996 to December 31, 1996.
(16) The Russell 2000 Index is comprised of the smallest 2000 companies in the
Russell 3000 Index, representing approximately 11% of the Russell 3000
total market capitalization. The index was developed with a base value of
135.00 as of December 31, 1986.
(17) The Morgan Stanley EAFE is the Morgan Stanley Capital International Europe,
Australia, Far East index. This index is an unmanaged index that is
considered to be generally representative of major non-United States stock
markets.
(18) There are special risks associated with investing in non-U.S. companies,
including fluctuating foreign currency exchange rates, foreign governmental
regulations and differing degrees of liquidity that may adversely affect
portfolio securities.
(19) The high yield potential offered by these Subaccounts reflect the
substantial risks associated with investments in high-yield bonds.
(20) An investment in the IFS Money Market Subaccount is neither insured nor
guaranteed by the U.S. government. There can be no assurance that the Money
Market Portfolio will be able to maintain a stable net asset value of $1.00
per share.
(21) The Morgan Stanley International World Index is an arithmetic, market
value-weighted average of the performance of over 1,470 securities listed
on the stock exchanges of Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New
Zealand, Norway, Singapore/Malaysia, South Africa Gold, Spain, Switzerland,
United Kingdom, and the United States. The index is calculated on a total
return basis, which includes reinvestment of gross dividends before
deduction of withholding taxes. The index covers about 60% of the issues
listed on the exchanges of the countries included.
B-15
<PAGE> 19
The following tables illustrate an assumed $10,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from commencement of operations of the Subaccount to December 31, 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IFS TOTAL RETURN SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <S> <C> <C>
1982 .................... $12,336 $11,769
1983 .................... 14,313 13,211
1984 .................... 13,427 12,508
1985 .................... 17,019 15,853
1986 .................... 19,328 18,003
1987 .................... 19,188 17,872
1988 .................... 21,207 19,752
1989 .................... 25,945 24,164
1990 .................... 26,889 25,043
1991 .................... 36,583 34,069
1992 .................... 36,703 34,179
1993 .................... 40,598 37,805
1994 .................... 36,253 33,758
1995 .................... 45,056 41,953
1996 .................... 51,903 48,327
</TABLE>
<TABLE>
<CAPTION>
IFS HIGH YIELD SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <S> <C> <C>
1982 .................... $12,363 $11,920
1983 .................... 14,000 13,427
1984 .................... 15,557 15,155
1985 .................... 18,686 18,203
1986 .................... 21,710 21,149
1987 .................... 22,693 22,105
1988 .................... 25,944 25,273
1989 .................... 25,278 24,624
1990 .................... 21,092 20,546
1991 .................... 31,597 30,778
1992 .................... 36,712 35,760
1993 .................... 43,466 42,338
1994 .................... 41,931 40,843
1995 .................... 48,576 47,315
1996 .................... 54,699 53,249
</TABLE>
<TABLE>
<CAPTION>
IFS INTERNATIONAL SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C> <C>
1992 .................... $ 9,803
1993 .................... 12,836
1994 .................... 12,187
1995 .................... 13,559
1996 .................... 15,576
</TABLE>
<TABLE>
<CAPTION>
IFS SMALL CAP GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C> <C>
1994 .................... $10,296
1995 .................... 13,208
1996 .................... 16,680
</TABLE>
<TABLE>
<CAPTION>
IFS GROWTH SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <S> <C> <C>
1983 .................... $10,290 $10,271
1984 .................... 11,254 11,237
1985 .................... 13,898 13,877
1986 .................... 14,986 14,965
1987 .................... 15,043 15,022
1988 .................... 14,908 14,887
1989 .................... 18,871 18,844
1990 .................... 18,736 18,709
1991 .................... 29,479 29,437
1992 .................... 30,123 30,080
1993 .................... 34,063 34,011
1994 .................... 32,261 32,215
1995 .................... 42,330 42,269
1996 .................... 50,798 50,725
</TABLE>
<TABLE>
<CAPTION>
IFS MONEY MARKET SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C> <C>
1982 .................... $10,747
1983 .................... 11,575
1984 .................... 12,630
1985 .................... 13,479
1986 .................... 14,185
1987 .................... 14,922
1988 .................... 15,827
1989 .................... 17,045
1990 .................... 18,195
1991 .................... 19,003
1992 .................... 19,385
1993 .................... 19,661
1994 .................... 20,157
1995 .................... 21,001
1996 .................... 21,755
</TABLE>
<TABLE>
<CAPTION>
IFS GOVERNMENT SECURITIES
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C> <C>
1987 .................... $10,030
1988 .................... 10,232
1989 .................... 11,437
1990 .................... 12,396
1991 .................... 14,084
1992 .................... 14,708
1993 .................... 15,559
1994 .................... 14,925
1995 .................... 17,511
1996 .................... 17,711
</TABLE>
B-16
<PAGE> 20
<TABLE>
<CAPTION>
IFS VALUE SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ 11,628
</TABLE>
<TABLE>
<CAPTION>
IFS INVESTMENT GRADE BOND
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ 10,260
</TABLE>
<TABLE>
<CAPTION>
IFS HORIZON 20+ SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ 11,422
</TABLE>
<TABLE>
<CAPTION>
IFS HORIZON 5 SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ 10,850
</TABLE>
<TABLE>
<CAPTION>
IFS SMALL CAP VALUE SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ 10,091
</TABLE>
<TABLE>
<CAPTION>
IFS VALUE + GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ 11,354
</TABLE>
<TABLE>
<CAPTION>
IFS HORIZON 10+ SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,028
</TABLE>
<TABLE>
<CAPTION>
JANUS GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ 10,327
1996 ................................ 12,062
<CAPTION>
JANUS WORLDWIDE GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1995 ................................ 10,425
1996 ................................ 13,266
<CAPTION>
JANUS SHORT-TERM BOND*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1995 ................................ 10,236
1996 ................................ 10,496
<CAPTION>
LEXINGTON EMERGING MARKETS*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1995 ................................ 9,547
1996 ................................ 10,111
<CAPTION>
JANUS AGGRESSIVE GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1995 ................................ 10,552
1996 ................................ 11,231
<CAPTION>
JANUS BALANCED*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1995 ................................ 10,547
1996 ................................ 12,082
<CAPTION>
LEXINGTON NATURAL RESOURCES*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1995 ................................ 10,032
1996 ................................ 12,556
<CAPTION>
FIDELITY VIP EQUITY-INCOME SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1996 ................................ 10,687
</TABLE>
B-17
<PAGE> 21
FIDELITY VIP II ASSET MANAGER SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
1996 ................................ 10,916
FIDELITY VIP II CONTRAFUND SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
1996 ................................ 11,145
FIDELITY VIP GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
1996 ................................ 10,347
FIDELITY VIP II INDEX 500 SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
1996 ................................ 11,366
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
TAX-DEFERRED NON-QUALIFIED
RETIREMENT ANNUITY ANNUITY CONVENTIONAL
BEFORE-TAX CONTRIBUTIONS AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- -------------------------------- CONTRIBUTIONS
TAXABLE LUMP TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
10 Years............... $ 36,256 $ 25,017 $ 25,017 $ 22,395 $ 21,974
20 Years............... 114,532 79,027 79,027 64,795 59,581
30 Years............... 283,522 195,630 195,630 150,385 123,940
</TABLE>
This chart compares the accumulation of monthly contributions into a
Tax-Deferred Retirement Annuity (such as a SIMPLE IRA or a Section 403(b)
annuity) through a payroll reduction program, a Non-Qualified Annuity and a
Conventional Savings Plan. Before-tax contributions to the Tax-Deferred
Retirement Annuity are $200 per month and the entire amount of a taxable lump
sum withdrawal will be subject to income tax. After-tax contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are $138 per month. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 31% federal marginal tax rate,
representative of the target market, and an 8% annual return. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts.
Tax-deferred retirement accumulations, as well as the income on Non-Qualified
Annuities, are 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 Advantage
III: 1.00% mortality and expense risk; .30% administration charges; 6% maximum
deferred withdrawal charge; and $36 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 tax-deferred retirement annuities and
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 tax-deferred
retirement annuity or Non-Qualified Annuity (and you have many different options
on how you receive your funds), they are subject to income tax. At the time of
receipt, if the person receiving the monies is retired, not working or has
additional tax exemptions, these monies may be taxed at a lesser rate.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
B-18
<PAGE> 22
EXPERTS
The consolidated balance sheets of KILICO as of December 31, 1996 and January 4,
1996 and the related consolidated statements of operations, stockholder's
equity, and cash flows for the periods from January 4, 1996 to December 31, 1996
and for each of the years in the two year period ended December 31, 1995 and the
statements of assets and liabilities and contract owners' equity of the Separate
Account as of December 31, 1996 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, 1996 and 1995 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP covering KILICO's financial statements contains an
explanatory paragraph that states as a result of the acquisition of its parent,
Kemper Corporation, the consolidated financial information for the periods after
the acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.
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-19
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying statements of assets and liabilities and
contract owners' equity of the Money Market Subaccount, Money Market Subaccount
#2, Total Return Account, High Yield Subaccount, Growth Subaccount, Government
Securities Subaccount, International Subaccount, Small Cap Growth Subaccount,
Investment Grade Bond Subaccount, Value Subaccount, Small Cap Value Subaccount,
Value+ Growth Subaccount, Horizon 20+ Subaccount, Horizon 10+ Subaccount, and
Horizon 5 Subaccount (investment options within the Investors Fund Series),
Short-Term Bond Subaccount, Growth Subaccount, Aggressive Growth Subaccount,
Worldwide Growth Subaccount, and Balanced Subaccount (investment options within
the Janus Aspen Series) Natural Resources Subaccount, Emerging Markets
Subaccount (investment options within the Lexington Funds), Equity Income
Subaccount, Growth Subaccount, Asset Manager Subaccount, Index 500 Subaccount,
Contrafund Subaccount (investment options within the Fidelity VIP Funds) of
KILICO Variable Annuity Separate Account (the Account) as of December 31, 1996
and the related statements of operations for the year then ended, and the
statements of changes in contract owners' equity for each of the years in the
two-year period then ended. These financial statements are the responsibility of
the Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments owned at December 31, 1996 by correspondence with
transfer agents. An audit also includes assessing the accounting principles used
and significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the subaccounts of KILICO
Variable Annuity Separate Account at December 31, 1996 and the results of their
operations, and changes in their contract owners' equity for the periods stated
in the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
March 26, 1997
B-20
<PAGE> 24
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL HIGH GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio
funds, at current values......... $59,117 8,476 693,657 286,846 484,754 79,836
Dividends and other receivables.... 296 19 19 2 2 --
------- ----- ------- ------- ------- ------
Total assets................ 59,413 8,495 693,676 286,848 484,756 79,836
------- ----- ------- ------- ------- ------
LIABILITIES AND CONTRACT OWNERS'
EQUITY
Liabilities:
Mortality and expense risk and
administrative charges......... 65 -- 2,187 304 520 87
Other............................ -- -- 78 47 42 62
------- ----- ------- ------- ------- ------
Total liabilities........... 65 -- 2,265 351 562 149
------- ----- ------- ------- ------- ------
Contract owners' equity............ $59,348 8,495 691,411 286,497 484,194 79,687
======= ===== ======= ======= ======= ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess (deficiency) of proceeds
from units sold over payments for
units redeemed................... (7,586) 7,692 273,270 105,550 234,859 51,794
Accumulated net investment income
(loss)........................... 66,934 803 203,402 161,848 97,528 25,750
Accumulated net realized gain
(loss) on sales of investments... -- -- 66,834 891 47,242 1,157
Unrealized appreciation of
investments...................... -- -- 147,905 18,208 104,565 986
------- ----- ------- ------- ------- ------
Contract owners' equity............ $59,348 8,495 691,411 286,497 484,194 79,687
======= ===== ======= ======= ======= ======
</TABLE>
See accompanying notes to financial statements.
B-21
<PAGE> 25
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------------------------------
SMALL CAP INVESTMENT SMALL CAP VALUE+ HORIZON HORIZON
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
163,108 68,928 1,975 20,977 12,986 10,003 3,532 5,688 2,482
2 -- -- 4 -- 2 1 1 --
------- ------ ----- ------ ------ ------ ----- ----- -----
163,110 68,928 1,975 20,981 12,986 10,005 3,533 5,689 2,482
------- ------ ----- ------ ------ ------ ----- ----- -----
178 72 2 20 13 10 3 5 2
24 6 100 102 102 100 100 100 100
------- ------ ----- ------ ------ ------ ----- ----- -----
202 78 102 122 115 110 103 105 102
------- ------ ----- ------ ------ ------ ----- ----- -----
162,908 68,850 1,873 20,859 12,871 9,895 3,430 5,584 2,380
======= ====== ===== ====== ====== ====== ===== ===== =====
123,259 52,058 1,852 19,213 12,229 9,229 3,184 5,238 2,268
1,147 27 (11) (77) (44) (63) (28) (30) (14)
8,369 2,894 2 12 (51) (1) 16 9 1
30,133 13,871 30 1,711 737 730 258 367 125
------- ------ ----- ------ ------ ------ ----- ----- -----
162,908 68,850 1,873 20,859 12,871 9,895 3,430 5,584 2,380
======= ====== ===== ====== ====== ====== ===== ===== =====
</TABLE>
B-22
<PAGE> 26
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
--------------------------------------------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE
BOND GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio funds, at
current values................................. $745 17,676 19,252 31,880 6,235
Dividends and other receivables.................. -- 1 -- 1 --
---- ------ ------ ------ ------
Total assets.............................. 745 17,677 19,252 31,881 6,235
---- ------ ------ ------ ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and administrative
charges...................................... 1 19 19 33 6
Other.......................................... -- -- 1 -- --
---- ------ ------ ------ ------
Total liabilities......................... 1 19 20 33 6
---- ------ ------ ------ ------
Contract owners' equity.......................... $744 17,658 19,232 31,848 6,229
==== ====== ====== ====== ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of proceeds from units sold over payments
for units redeemed............................. 724 16,145 19,029 28,936 5,588
Accumulated net investment income (loss)......... 26 239 (45) 107 78
Accumulated net realized gain (loss) on sales of
investments.................................... (4) 74 408 64 89
Unrealized appreciation (depreciation) of
investments.................................... (2) 1,200 (160) 2,741 474
---- ------ ------ ------ ------
Contract owners' equity.......................... $744 17,658 19,232 31,848 6,229
==== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
B-23
<PAGE> 27
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- --------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
4,955 5,273 6,271 4,080 1,004 5,725 8,819
-- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
4,955 5,273 6,271 4,080 1,004 5,725 8,819
----- ----- ----- ----- ----- ----- -----
5 5 7 4 1 6 10
-- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
5 5 7 4 1 6 10
----- ----- ----- ----- ----- ----- -----
4,950 5,268 6,264 4,076 1,003 5,719 8,809
===== ===== ===== ===== ===== ===== =====
4,320 5,379 5,886 3,976 935 5,345 8,129
(22) (55) (33) (21) (7) (42) (43)
60 71 13 (1) 12 24 15
592 (127) 398 122 63 392 708
----- ----- ----- ----- ----- ----- -----
4,950 5,268 6,264 4,076 1,003 5,719 8,809
===== ===== ===== ===== ===== ===== =====
</TABLE>
B-24
<PAGE> 28
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions........................ $3,384 243 43,040 24,635 63,740 6,220
Expenses:
Mortality and expense risk and
administrative charges............. 891 -- 9,244 3,534 6,193 1,238
------ --- ------ ------ ------ ------
Net investment income (loss)........... 2,493 243 33,796 21,101 57,547 4,982
------ --- ------ ------ ------ ------
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments........................ -- -- 17,341 4,321 11,516 117
Change in unrealized appreciation
(depreciation) of investments...... -- -- 42,597 5,924 10,026 (4,343)
------ --- ------ ------ ------ ------
Net realized and unrealized gain (loss)
on investments....................... -- -- 59,938 10,245 21,542 (4,226)
------ --- ------ ------ ------ ------
Net increase in contract owners' equity
resulting from operations............ $2,493 243 93,734 31,346 79,089 756
====== === ====== ====== ====== ======
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-25
<PAGE> 29
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------------------------------
SMALL CAP INVESTMENT SMALL CAP
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE VALUE+GROWTH HORIZON 20+
SUBACCOUNT SUBACCOUNT SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a)
------------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
3,133 1,209 -- -- -- -- --
2,191 731 11 77 44 63 28
------ ------ -- ----- --- --- ---
942 478 (11) (77) (44) (63) (28)
------ ------ -- ----- --- --- ---
5,409 2,710 2 12 (51) (1) 16
14,729 8,276 30 1,711 737 730 258
------ ------ -- ----- --- --- ---
20,138 10,986 32 1,723 686 729 274
------ ------ -- ----- --- --- ---
21,080 11,464 21 1,646 642 666 246
====== ====== == ===== === === ===
<CAPTION>
INVESTORS FUND SERIES
-----------------------------
HORIZON 10+ HORIZON 5
SUBACCOUNT(a) SUBACCOUNT(a)
------------- -------------
<S> <C> <C>
-- --
30 14
--- ---
(30) (14)
--- ---
9 1
367 125
--- ---
376 126
--- ---
346 112
=== ===
</TABLE>
B-26
<PAGE> 30
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
--------------------------------------------------------------
SHORT-TERM AGGRESSIVE
BOND GROWTH GROWTH WORLDWIDE BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions........................ $30 352 104 311 124
Expenses:
Mortality and expense risk and
administrative charges............. 7 152 155 205 57
--- ----- ---- ----- ---
Net investment income (loss)........... 23 200 (51) 106 67
--- ----- ---- ----- ---
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments........................ (4) 74 408 64 89
Change in unrealized appreciation
(depreciation) of investments...... -- 1,182 (267) 2,686 415
--- ----- ---- ----- ---
Net realized and unrealized gain (loss)
on investments....................... (4) 1,256 141 2,750 504
--- ----- ---- ----- ---
Net increase (decrease) in contract
owners' equity resulting from
operations........................... $19 1,456 90 2,856 571
=== ===== ==== ===== ===
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-27
<PAGE> 31
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- -----------------------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRA
SUBACCOUNT SUBACCOUNT SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a)
---------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
16 -- -- -- -- -- --
39 61 33 21 7 42 43
--- ---- --- --- --- --- ---
(23) (61) (33) (21) (7) (42) (43)
--- ---- --- --- --- --- ---
60 71 13 (1) 12 24 15
570 (138) 398 122 63 392 708
--- ---- --- --- --- --- ---
630 (67) 411 121 75 416 723
--- ---- --- --- --- --- ---
607 (128) 378 100 68 374 680
=== ==== === === === === ===
</TABLE>
B-28
<PAGE> 32
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)..................... $ 2,493 243 33,796 21,101 57,547 4,982
Net realized gain (loss) on sales of
investments.................................... -- -- 17,341 4,321 11,516 117
Change in unrealized appreciation (depreciation)
of investments................................. -- -- 42,597 5,924 10,026 (4,343)
-------- ------ ------- ------- ------- -------
Net increase in contract owners' equity
resulting from operations.................... 2,493 243 93,734 31,346 79,089 756
-------- ------ ------- ------- ------- -------
Account unit transactions:
Proceeds from units sold......................... 22,801 12,928 47,161 36,482 43,192 7,926
Net transfers (to) from affiliate and
subaccounts.................................... (7,498) (6,807) (27,829) (7,862) (9,293) (9,264)
Payments for units redeemed...................... (16,282) (184) (78,322) (28,503) (41,011) (10,724)
-------- ------ ------- ------- ------- -------
Net increase (decrease) in contract owners'
equity from account unit transactions........ (979) 5,937 (58,990) 117 (7,112) (12,062)
-------- ------ ------- ------- ------- -------
Total increase (decrease) in contract owners'
equity........................................... 1,514 6,180 34,744 31,463 71,977 (11,306)
Beginning of period.............................. 57,834 2,315 656,667 255,034 412,217 90,993
-------- ------ ------- ------- ------- -------
End of period.................................... $ 59,348 8,495 691,411 286,497 484,194 79,687
======== ====== ======= ======= ======= =======
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-29
<PAGE> 33
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------------------------------
SMALL CAP INVESTMENT SMALL CAP VALUE +
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE GROWTH HORIZON 20+
SUBACCOUNT SUBACCOUNT SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a)
------------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
942 478 (11) (77) (44) (63) (28)
5,409 2,710 2 12 (51) (1) 16
14,729 8,276 30 1,711 737 730 258
------- ------ ----- ------ ------ ----- -----
21,080 11,464 21 1,646 642 666 246
------- ------ ----- ------ ------ ----- -----
20,272 13,879 1,262 9,908 6,111 6,223 2,580
819 11,423 632 9,522 6,244 3,214 620
(13,606) (3,253) (42) (217) (126) (208) (16)
------- ------ ----- ------ ------ ----- -----
7,485 22,049 1,852 19,213 12,229 9,229 3,184
------- ------ ----- ------ ------ ----- -----
28,565 33,513 1,873 20,859 12,871 9,895 3,430
134,343 35,337 -- -- -- -- --
------- ------ ----- ------ ------ ----- -----
162,908 68,850 1,873 20,859 12,871 9,895 3,430
======= ====== ===== ====== ====== ===== =====
<CAPTION>
INVESTORS FUND SERIES
-----------------------------
HORIZON 10+ HORIZON 5
SUBACCOUNT(a) SUBACCOUNT(a)
------------- -------------
<S> <C> <C>
(30) (14)
9 1
367 125
----- -----
346 112
----- -----
4,108 1,453
1,206 887
(76) (72)
----- -----
5,238 2,268
----- -----
5,584 2,380
-- --
----- -----
5,584 2,380
===== =====
</TABLE>
B-30
<PAGE> 34
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
-----------------------------------------------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE
BOND GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)............................. $ 23 200 (51) 106 67
Net realized gain (loss) on sales of investments......... (4) 74 408 64 89
Change in unrealized appreciation (depreciation) of
investments............................................ -- 1,182 (267) 2,686 415
---- ------ ------ ------ -----
Net increase (decrease) in contract owners' equity
resulting from operations............................ 19 1,456 90 2,856 571
---- ------ ------ ------ -----
Account unit transactions:
Proceeds from units sold................................. 127 3,853 4,122 6,384 1,760
Net transfers (to) from affiliate and subaccounts........ 489 10,206 13,087 21,474 2,401
Payments for units redeemed.............................. (48) (445) (335) (477) (400)
---- ------ ------ ------ -----
Net increase in contract owners' equity from account
unit transactions.................................... 568 13,614 16,874 27,381 3,761
---- ------ ------ ------ -----
Total increase in contract owners' equity.................. 587 15,070 16,964 30,237 4,332
Beginning of period...................................... 157 2,588 2,268 1,611 1,897
---- ------ ------ ------ -----
End of period............................................ $744 17,658 19,232 31,848 6,229
==== ====== ====== ====== =====
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-31
<PAGE> 35
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- -----------------------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRA
SUBACCOUNT SUBACCOUNT SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a)
---------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(23) (61) (33) (21) (7) (42) (43)
60 71 13 (1) 12 24 15
570 (138) 398 122 63 392 708
----- ----- ----- ----- ----- ----- -----
607 (128) 378 100 68 374 680
----- ----- ----- ----- ----- ----- -----
593 1,057 1,035 998 61 763 1,565
3,294 3,734 5,040 3,000 1,055 4,601 6,767
(292) (191) (189) (22) (181) (19) (203)
----- ----- ----- ----- ----- ----- -----
3,595 4,600 5,886 3,976 935 5,345 8,129
----- ----- ----- ----- ----- ----- -----
4,202 4,472 6,264 4,076 1,003 5,719 8,809
748 796 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
4,950 5,268 6,264 4,076 1,003 5,719 8,809
===== ===== ===== ===== ===== ===== =====
</TABLE>
B-32
<PAGE> 36
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment
income (loss)... $ 2,985 140 9,834 18,691 20,654 4,658
Net realized gain
(loss) on sales
of
investments..... -- -- 5,320 1,290 5,966 (1)
Change in
unrealized
appreciation of
investments..... -- -- 119,468 15,252 67,323 10,500
-------- ------ -------- -------- ------- -------
Net increase
in contract
owners'
equity
resulting
from
operations... 2,985 140 134,622 35,233 93,943 15,157
-------- ------ -------- -------- ------- -------
Account unit
transactions:
Proceeds from
units sold...... 7,440 1,994 47,745 21,167 35,473 5,546
Net transfers (to)
from affiliate
and
subaccounts..... (14,703) (3,412) (21,697) 13,859 1,693 (6,225)
Payments for units
redeemed........ (16,838) (92) (87,868) (32,713) (39,162) (14,994)
-------- ------ -------- -------- ------- -------
Net increase
(decrease)
in contract
owners'
equity from
account unit
transactions... (24,101) (1,510) (61,820) 2,313 (1,996) (15,673)
-------- ------ -------- -------- ------- -------
Total increase
(decrease) in
contract owners'
equity............ (21,116) (1,370) 72,802 37,546 91,947 (516)
Beginning of
period.......... 78,950 3,685 583,865 217,488 320,270 91,509
-------- ------ -------- -------- ------- -------
End of period..... $ 57,834 2,315 656,667 255,034 412,217 90,993
======== ====== ======== ======== ======= =======
</TABLE>
See accompanying notes to financial statements.
B-33
<PAGE> 37
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------------------------------------------
SMALL CAP INVESTMENT SMALL CAP VALUE + HORIZON HORIZON
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1,112 (290) -- -- -- -- -- -- --
605 261 -- -- -- -- -- -- --
11,955 5,307 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
13,672 5,278 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
17,837 6,412 -- -- -- -- -- -- --
(6,157) 12,876 -- -- -- -- -- -- --
(13,593) (2,032) -- -- -- -- -- -- --
(1,913) 17,256 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
11,759 22,534 -- -- -- -- -- -- --
122,584 12,803 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
134,343 35,337 -- -- -- -- -- -- --
======= ====== == == == == == == ==
</TABLE>
B-34
<PAGE> 38
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUS ASPEN SERIES
--------------------------------------------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE
BOND GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income..................................... $ 3 39 6 1 11
Net realized gain (loss) on sales of investments.......... -- -- -- -- --
Change in unrealized appreciation (depreciation) of
investments............................................. (2) 18 107 55 59
---- ----- ----- ----- -----
Net increase in contract owners' equity resulting from
operations.......................................... 1 57 113 56 70
---- ----- ----- ----- -----
Account unit transactions:
Proceeds from units sold.................................. 1 304 198 186 182
Net transfers (to) from affiliate and subaccounts......... 155 2,234 1,957 1375 1650
Payments for units redeemed............................... -- (7) -- (6) (5)
---- ----- ----- ----- -----
Net increase in contract owners' equity from account
unit transactions................................... 156 2,531 2,155 1,555 1,827
---- ----- ----- ----- -----
Total increase in contract owners' equity................... 157 2,588 2,268 1,611 1,897
Beginning of period....................................... -- -- -- -- --
---- ----- ----- ----- -----
End of period............................................. $157 2,588 2,268 1,611 1,897
==== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
B-35
<PAGE> 39
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- --------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 6 -- -- -- -- --
-- -- -- -- -- -- --
22 11 -- -- -- -- --
--- --- -- -- -- -- --
23 17 -- -- -- -- --
--- --- -- -- -- -- --
57 23 -- -- -- -- --
680 756 -- -- -- -- --
(12) -- -- -- -- -- --
--- --- -- -- -- -- --
725 779 -- -- -- -- --
--- --- -- -- -- -- --
748 796 -- -- -- -- --
-- -- -- -- -- -- --
--- --- -- -- -- -- --
748 796 -- -- -- -- --
=== === == == == == ==
</TABLE>
B-36
<PAGE> 40
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
KILICO Variable Annuity Separate Account (the "Separate Account") is a unit
investment trust registered under the Investment Company Act of 1940, as
amended, established by Kemper Investors Life Insurance Company ("KILICO").
KILICO is a wholly-owned subsidiary of Kemper Corporation which was acquired by
an investor group led by Zurich Insurance Company ("Zurich") on January 4, 1996.
The Separate Account is used to fund contracts or certificates (collectively
referred to as "contracts") for ADVANTAGE III periodic and flexible payment
variable annuity contracts and PASSPORT individual and group variable and market
value adjusted deferred annuity contracts. The Separate Account is divided into
Subaccounts. For the ADVANTAGE III contracts, up to 26 Subaccounts may be
available to Contract Owners depending upon their respective Contracts. Each
Subaccount invests exclusively in a corresponding portfolio of one of the
underlying investment funds; the Investors Fund Series, the Janus Aspen Series,
the Lexington Funds, and the Fidelity VIP Funds. Fourteen Subaccounts are
available to Passport Contract Owners and each Subaccount invests exclusively in
a corresponding Portfolio of the Investors Fund Series, an open-end diversified
management investment company.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principals 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, 1996.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Dividends and capital gains distributions are recorded as
income on the ex-dividend date. Realized gains and losses from security
transactions are reported on an identified cost basis.
ACCUMULATION UNIT VALUATION
On each day the New York Stock Exchange (the "Exchange") is open for trading,
the accumulation unit value is determined as of the earlier of 3:00 p.m.
(Chicago time) or the close of the Exchange by dividing the total value of each
Subaccount's investments and other assets, less liabilities, by the number of
accumulation units outstanding in the respective Subaccount.
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.
B-37
<PAGE> 41
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
INVESTMENTS
INVESTORS FUND SERIES:
Money Market Portfolio (Money Market and Money Market #2
Subaccounts).............................................. 67,593 $ 67,593
Total Return Portfolio...................................... 246,380 545,752
High Yield Portfolio........................................ 223,976 268,638
Growth Portfolio............................................ 143,796 380,189
Government Securities Portfolio............................. 66,125 78,850
International Portfolio..................................... 104,269 132,975
Small Cap Growth Portfolio.................................. 41,110 55,057
Investment Grade Bond Portfolio............................. 1,907 1,945
Value Portfolio............................................. 17,874 19,266
Small Cap Value Portfolio................................... 12,750 12,249
Value+Growth Portfolio...................................... 8,729 9,273
Horizon 20+ Portfolio....................................... 3,063 3,274
Horizon 10+ Portfolio....................................... 5,107 5,321
Horizon 5 Portfolio......................................... 2,265 2,357
JANUS ASPEN SERIES FUND:
Short-Term Bond Portfolio................................... 75 747
Growth Portfolio............................................ 1,140 16,476
Aggressive Growth Portfolio................................. 1,056 19,412
Worldwide Growth Portfolio.................................. 1,640 29,139
Balanced Portfolio.......................................... 422 5,761
LEXINGTON FUNDS:
Natural Resources Portfolio................................. 347 4,363
Emerging Markets Portfolio.................................. 523 5,400
FIDELITY VIP FUNDS:
Equity Income Portfolio..................................... 298 5,873
Growth Portfolio............................................ 131 3,958
Asset Manager Portfolio..................................... 59 941
Index 500 Portfolio......................................... 64 5,333
Contrafund Portfolio........................................ 533 8,111
----------
TOTAL INVESTMENTS................................... $1,688,253
==========
</TABLE>
The underlying investments of the Fund's portfolios are summarized below.
INVESTORS FUND SERIES
MONEY MARKET PORTFOLIO: This Portfolio invests primarily in short-term
obligations of major banks and corporations. The Money Market Subaccount
represents the ADVANTAGE III Money Market Subaccount and the PASSPORT Money
Market Subaccount #1. Money Market Subaccount #2 represents funds allocated by
the owner of a contract to the dollar cost averaging program. Under the dollar
cost averaging program, an owner may predesignate a portion of the Subaccount
value to be automatically transferred on a monthly basis to one or more of the
other Subaccounts. This option is only available to PASSPORT individual and
group variable and market value adjusted deferred annuity contracts.
TOTAL RETURN PORTFOLIO: This Portfolio's investments will normally consist of
fixed-income and equity securities. Fixed-income securities will include bonds
and other debt securities and preferred stocks. Equity investments normally will
consist of common stocks and securities convertible into or exchangeable for
common stocks, however, the Portfolio may also make private placement
investments (which are normally restricted securities).
B-38
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
HIGH YIELD PORTFOLIO: This Portfolio invests in fixed-income securities, a
substantial portion of which are high yielding fixed-income securities. These
securities ordinarily will be in the lower rating categories of recognized
rating agencies or will be non-rated, and generally will involve more risk than
securities in the higher rating categories.
GROWTH PORTFOLIO: This Portfolio's investments normally will consist of common
stocks and securities convertible into or exchangeable for common stocks,
however, it may also make private placement investments (which are normally
restricted securities).
GOVERNMENT SECURITIES PORTFOLIO: This Portfolio invests primarily in U.S.
Government securities. The Portfolio will also invest in fixed-income securities
other than U.S. Government securities and will engage in options and financial
futures transactions.
INTERNATIONAL PORTFOLIO: This Portfolio's investments will normally consist of
equity securities of non-United States issuers, however, it may also invest in
convertible and debt securities of non-United States issuers and foreign
currencies.
SMALL CAP GROWTH PORTFOLIO: This Portfolio's investments will consist primarily
of common stocks and securities convertible into or exchangeable for common
stocks and to a limited degree in preferred stocks and debt securities. At least
65% of the Portfolio's total assets will be invested in equity securities of
companies having a market capitalization of $1 billion or less at the time of
initial investment.
INVESTMENT GRADE BOND PORTFOLIO: This Portfolio seeks high current income by
investing primarily in a diversified portfolio of investment grade debt
securities.
VALUE PORTFOLIO: This Portfolio seeks to achieve a high rate of total return.
SMALL CAP VALUE PORTFOLIO: This Portfolio seeks long-term capital appreciation.
VALUE+GROWTH PORTFOLIO: This Portfolio seeks growth of capital through
professional management of a portfolio of growth and value stocks.
HORIZON 20+ PORTFOLIO: This Portfolio is designed for investors with
approximately a 20+ year investment horizon and seeks growth of capital, with
income as a secondary objective.
HORIZON 10+ PORTFOLIO: This Portfolio is designed for investors with
approximately a 10+ year investment horizon and seeks a balance between growth
of capital and income, consistent with moderate risk.
HORIZON 5 PORTFOLIO: This Portfolio is designed for investors with approximately
a 5 year investment horizon, and seeks income consistent with a preservation of
capital, with growth of capital as a secondary objective.
JANUS ASPEN SERIES
SHORT-TERM BOND PORTFOLIO: This Portfolio seeks a high level of current income
while minimizing interest rate risk by investing in shorter term fixed-income
securities. Its average-weighted maturity is normally less than three years.
GROWTH PORTFOLIO: This Portfolio seeks long-term growth of capital by investing
primarily in common stocks with an emphasis on companies with larger market
capitalizations.
AGGRESSIVE GROWTH PORTFOLIO: This Portfolio is a nondiversified portfolio that
seeks long-term growth of capital by investing primarily in common stocks. The
common stocks held by the Portfolio will normally have an average market
capitalization between $1 billion and $5 billion.
WORLDWIDE GROWTH PORTFOLIO: This Portfolio seeks long-term growth of capital by
investing primarily in common stocks of foreign and domestic companies.
B-39
<PAGE> 43
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
BALANCED PORTFOLIO: This Portfolio seeks long-term growth of capital balanced by
current income. The Portfolio normally invests 40%-60% of its assets in equity
securities selected for their growth potential and 40%-60% in fixed-income
securities.
LEXINGTON FUNDS
LEXINGTON NATURAL RESOURCES PORTFOLIO: This Portfolio seeks long-term growth of
capital through investment primarily in common stocks of companies that own or
develop natural resources and other basic commodities, or supply goods and
services to such companies. Current income will not be a factor. Total return
will consist of capital appreciation.
LEXINGTON EMERGING MARKETS PORTFOLIO: This Portfolio seeks long-term growth of
capital primarily through investment in equity securities of companies domiciled
in, or doing business in, emerging countries and emerging markets.
FIDELITY VIP FUNDS
EQUITY-INCOME PORTFOLIO: This Portfolio seeks reasonable income by investing
primarily in income-producing equity securities.
GROWTH PORTFOLIO: This Portfolio seeks to achieve capital appreciation.
ASSET MANAGER PORTFOLIO: This Portfolio seeks to obtain high total return with
reduced risk over the long-term by allocating its assets among stocks, bonds and
short-term instruments.
INDEX 500 PORTFOLIO: This 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.
CONTRAFUND PORTFOLIO: This Portfolio seeks long-term capital appreciation.
(3) TRANSACTIONS WITH AFFILIATES
KILICO assumes mortality risks associated with the annuity contracts and incurs
all expenses involved in administering the contracts. In return, KILICO assesses
that portion of each Subaccount representing assets under the ADVANTAGE III
flexible payment contracts with a daily charge for mortality and expense risk
and administrative costs which amounts to an aggregate of one percent (1.00%)
per annum. KILICO also assesses that portion of each Subaccount representing
assets under the ADVANTAGE III periodic payment contracts with a daily asset
charge for mortality and expense risk and administrative costs which amounts to
an aggregate of one and three-tenths percent (1.30%) per annum. KILICO assesses
that portion of each Subaccount representing assets under PASSPORT individual
and group variable and market value adjusted deferred annuity contracts with a
daily asset charge for mortality and expense risk and administrative costs which
amounts to an aggregate of one and one-quarter percent (1.25%) per annum. The
PASSPORT DCA Money Market Subaccount #2, available for participation in the
dollar cost averaging program, has no daily asset charge deduction.
KILICO also assesses against each ADVANTAGE III contract participating in one or
more of the Subaccounts at any time during the year a records maintenance
charge. For contracts purchased prior to June 1, 1993, the charge is $25 and is
assessed on December 31st of each calendar year. For contracts purchased June 1,
1993, and subsequent, the charge is $36 and is assessed ratably every quarter of
each calendar year, except in those states which have yet to approve these
contract changes. The charge is assessed whether or not any purchase payments
have been made during the year. KILICO also assesses against each PASSPORT
contract participating in one or more of the Subaccounts a records maintenance
charge of $30 at the end of each contract year.
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Money Market, Total Return, High Yield, and Equity
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
B-40
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)
and administrative expenses, and records maintenance charges are excluded and,
for each Portfolio, charges for taxes, extraordinary expenses, and brokerage and
transaction costs are excluded. During the year ended December 31, 1996, no such
payment was made.
Proceeds payable on the redemption of units are reduced by the amount of any
applicable contingent deferred sales charge due to KILICO. During the year ended
December 31, 1996, KILICO received contingent deferred sales charges of
$1,726,400.
Zurich Kemper Investments, Inc. ("ZKI") (formerly named Kemper Financial
Services, Inc.), an affiliated company, is the investment manager of the
Investors Fund Series portfolios. In connection with the acquisition of Kemper
Corporation on January 4, 1996, Zurich also acquired 100% of ZKI.
Janus Capital Corporation is the investment manager of the Janus Aspen Series
Fund Portfolios, Lexington Management Corporation is the investment manager for
the Lexington Fund Portfolios and Fidelity Investments is the investment manager
for the Fidelity VIP Funds.
(4) NET TRANSFERS (TO) FROM AFFILIATED DIVISIONS AND SUBACCOUNTS
Net transfers (to) from affiliated divisions or accounts include transfers of
all or part of the contract owner's interest to or from another Subaccount or to
the general account of KILICO.
(5) CONTRACT OWNERS' EQUITY
The contract owners' equity is affected by the investment results of each
Portfolio and contract charges. The accompanying financial statements include
only contract owners' payments pertaining to the variable portions of their
contracts and exclude any payments for the market value adjusted or fixed
portions, the latter being included in the general account of KILICO. Contract
owners may elect to annuitize the contract under one of several annuity options,
as specified in the prospectus.
B-41
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Contract owners' equity at December 31, 1996, is as follows (in thousands,
except unit value; differences are due to rounding):
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
ADVANTAGE III SUBACCOUNT
INVESTORS FUND SERIES
MONEY MARKET
Flexible Payment, Qualified.......................... 770 $ 2.297 $ 1,768
Flexible Payment, Nonqualified....................... 4,762 2.297 10,939
Periodic Payment, Qualified.......................... 10,827 2.199 23,808
Periodic Payment, Nonqualified....................... 3,948 2.199 8,680
----------
45,195
----------
TOTAL RETURN
Flexible Payment, Qualified.......................... 990 5.473 5,420
Flexible Payment, Nonqualified....................... 4,838 5.068 24,518
Periodic Payment, Qualified.......................... 89,982 5.239 471,457
Periodic Payment, Nonqualified....................... 17,433 4.882 85,105
----------
586,500
----------
HIGH YIELD
Flexible Payment, Qualified.......................... 422 5.738 2,422
Flexible Payment, Nonqualified....................... 2,440 5.494 13,405
Periodic Payment, Qualified.......................... 24,077 5.493 132,251
Periodic Payment, Nonqualified....................... 10,028 5.351 53,659
----------
201,737
----------
GROWTH
Flexible Payment, Qualified.......................... 260 5.303 1,380
Flexible Payment, Nonqualified....................... 1,396 5.285 7,379
Periodic Payment, Qualified.......................... 58,672 5.102 299,371
Periodic Payment, Nonqualified....................... 14,340 5.095 73,063
----------
381,193
----------
GOVERNMENT SECURITIES
Flexible Payment, Qualified.......................... 165 1.599 264
Flexible Payment, Nonqualified....................... 1,187 1.599 1,898
Periodic Payment, Qualified.......................... 18,485 1.566 28,943
Periodic Payment, Nonqualified....................... 13,804 1.566 21,613
----------
52,718
----------
INTERNATIONAL
Flexible Payment, Qualified.......................... 429 1.590 683
Flexible Payment, Nonqualified....................... 1,190 1.590 1,892
Periodic Payment, Qualified.......................... 62,425 1.567 97,809
Periodic Payment, Nonqualified....................... 12,177 1.567 19,079
----------
119,463
----------
SMALL CAP GROWTH
Flexible Payment, Qualified.......................... 132 1.686 222
Flexible Payment, Nonqualified....................... 711 1.686 1,198
Periodic Payment, Qualified.......................... 25,931 1.673 43,372
Periodic Payment, Nonqualified....................... 4,091 1.673 6,842
----------
51,634
----------
</TABLE>
B-42
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------ --------
<S> <C> <C> <C>
INVESTMENT GRADE BOND
Flexible Payment, Qualified............................... -- $ -- $ --
Flexible Payment, Nonqualified............................ 68 1.029 70
Periodic Payment, Qualified............................... 326 1.027 335
Periodic Payment, Nonqualified............................ 50 1.027 51
------
456
------
VALUE
Flexible Payment, Qualified............................... 8 1.166 11
Flexible Payment, Nonqualified............................ 238 1.166 271
Periodic Payment, Qualified............................... 4,864 1.164 5,659
Periodic Payment, Nonqualified............................ 1,625 1.164 1,890
------
7,831
------
SMALL CAP VALUE
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ 7 1.012 10
Periodic Payment, Qualified............................... 3,784 1.010 3,820
Periodic Payment, Nonqualified............................ 840 1.010 848
------
4,678
------
VALUE+GROWTH
Flexible Payment, Qualified............................... 12 1.138 14
Flexible Payment, Nonqualified............................ 33 1.138 38
Periodic Payment, Qualified............................... 986 1.136 1,121
Periodic Payment, Nonqualified............................ 454 1.136 516
------
1,689
------
HORIZON 20+
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 406 1.144 464
Periodic Payment, Nonqualified............................ 7 1.144 8
------
472
------
HORIZON 10+
Flexible Payment, Qualified............................... 10 1.106 12
Flexible Payment, Nonqualified............................ 20 1.106 23
Periodic Payment, Qualified............................... 634 1.104 700
Periodic Payment, Nonqualified............................ 229 1.104 253
------
988
------
HORIZON 5
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ 45 1.089 49
Periodic Payment, Qualified............................... 243 1.086 264
Periodic Payment, Nonqualified............................ 84 1.086 91
------
404
------
</TABLE>
B-43
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- --------
<S> <C> <C> <C>
JANUS ASPEN SERIES FUND
SHORT-TERM BOND
Flexible Payment, Qualified............................... -- $ -- $ --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 63 10.460 660
Periodic Payment, Nonqualified............................ 8 10.460 84
-------
744
-------
GROWTH
Flexible Payment, Qualified............................... 9 16.021 145
Flexible Payment, Nonqualified............................ 22 16.021 353
Periodic Payment, Qualified............................... 976 15.960 15,579
Periodic Payment, Nonqualified............................ 99 15.960 1,581
-------
17,658
-------
AGGRESSIVE GROWTH
Flexible Payment, Qualified............................... 1 18.309 15
Flexible Payment, Nonqualified............................ 2 18.309 31
Periodic Payment, Qualified............................... 937 18.238 17,089
Periodic Payment, Nonqualified............................ 115 18.238 2,097
-------
19,232
-------
WORLDWIDE GROWTH
Flexible Payment, Qualified............................... 3 19.565 54
Flexible Payment, Nonqualified............................ 33 19.565 637
Periodic Payment, Qualified............................... 1,413 19.490 27,537
Periodic Payment, Nonqualified............................ 186 19.490 3,620
-------
31,848
-------
BALANCED
Flexible Payment, Qualified............................... 3 15.059 40
Flexible Payment, Nonqualified............................ 10 15.059 148
Periodic Payment, Qualified............................... 360 15.001 5,406
Periodic Payment, Nonqualified............................ 42 15.001 635
-------
6,229
-------
LEXINGTON FUNDS
NATURAL RESOURCES
Flexible Payment, Qualified............................... 7 14.211 103
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 243 14.154 3,435
Periodic Payment, Nonqualified............................ 100 14.154 1,412
-------
4,950
-------
EMERGING MARKETS
Flexible Payment, Qualified............................... 1 10.048 12
Flexible Payment, Nonqualified............................ 2 10.048 19
Periodic Payment, Qualified............................... 443 10.009 4,432
Periodic Payment, Nonqualified............................ 80 10.009 805
-------
5,268
-------
</TABLE>
B-44
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
FIDELITY VIP FUNDS
EQUITY INCOME
Flexible Payment, Qualified............................ 1 $20.891 $ 24
Flexible Payment, Nonqualified......................... 1 20.891 22
Periodic Payment, Qualified............................ 263 20.849 5,477
Periodic Payment, Nonqualified......................... 36 20.849 741
----------
6,264
----------
GROWTH
Flexible Payment, Qualified............................ -- -- --
Flexible Payment, Nonqualified......................... -- -- --
Periodic Payment, Qualified............................ 116 30.872 3,569
Periodic Payment, Nonqualified......................... 16 30.872 507
----------
4,076
----------
ASSET MANAGER
Flexible Payment, Qualified............................ -- 16.818 9
Flexible Payment, Nonqualified......................... -- -- --
Periodic Payment, Qualified............................ 55 16.784 915
Periodic Payment, Nonqualified......................... 5 16.784 79
----------
1,003
----------
INDEX 500
Flexible Payment, Qualified............................ -- -- --
Flexible Payment, Nonqualified......................... 1 88.539 110
Periodic Payment, Qualified............................ 53 88.364 4,695
Periodic Payment, Nonqualified......................... 10 88.364 914
----------
5,719
----------
CONTRAFUND
Flexible Payment, Qualified............................ -- -- --
Flexible Payment, Nonqualified......................... 2 16.450 30
Periodic Payment, Qualified............................ 488 16.418 8,009
Periodic Payment, Nonqualified......................... 47 16.418 770
----------
8,809
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY.............. $1,566,758
==========
</TABLE>
B-45
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
PASSPORT SUBACCOUNT
INVESTORS FUND SERIES
MONEY MARKET #1
Qualified............................................ 4,139 $ 1.153 $ 4,774
Nonqualified......................................... 8,132 1.153 9,379
----------
Total............................................. 14,153
----------
MONEY MARKET #2
Qualified............................................ 2,263 1.227 2,777
Nonqualified......................................... 4,660 1.227 5,718
----------
Total............................................. 8,495
----------
TOTAL RETURN
Qualified............................................ 18,236 1.423 25,942
Nonqualified......................................... 55,511 1.423 78,969
----------
Total............................................. 104,911
----------
HIGH YIELD
Qualified............................................ 11,427 1.708 19,517
Nonqualified......................................... 38,199 1.708 65,243
----------
Total............................................. 84,760
----------
GROWTH
Qualified............................................ 17,120 1.724 29,519
Nonqualified......................................... 42,617 1.724 73,482
----------
Total............................................. 103,001
----------
GOVERNMENT SECURITIES
Qualified............................................ 4,714 1.263 5,953
Nonqualified......................................... 16,641 1.263 21,016
----------
Total............................................. 26,969
----------
INTERNATIONAL
Qualified............................................ 7,403 1.571 11,628
Nonqualified......................................... 20,257 1.571 31,817
----------
Total............................................. 43,445
----------
SMALL CAP GROWTH
Qualified............................................ 2,967 1.675 4,969
Nonqualified......................................... 7,313 1.675 12,247
----------
Total............................................. 17,216
----------
</TABLE>
B-46
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
INVESTMENT GRADE BOND
Qualified............................................ 474 $ 1.027 $ 486
Nonqualified......................................... 907 1.027 931
----------
Total............................................. 1,417
----------
VALUE
Qualified............................................ 2,964 1.164 3,450
Nonqualified......................................... 8,229 1.164 9,578
----------
Total............................................. 13,028
----------
SMALL CAP VALUE
Qualified............................................ 1,862 1.010 1,879
Nonqualified......................................... 6,251 1.010 6,314
----------
Total............................................. 8,193
----------
VALUE+GROWTH
Qualified............................................ 1,392 1.137 1,582
Nonqualified......................................... 5,828 1.137 6,624
----------
Total............................................. 8,206
----------
HORIZON 20+
Qualified............................................ 825 1.144 943
Nonqualified......................................... 1,761 1.144 2,015
----------
Total............................................. 2,958
----------
HORIZON 10+
Qualified............................................ 868 1.105 958
Nonqualified......................................... 3,294 1.105 3,638
----------
Total............................................. 4,596
----------
HORIZON 5
Qualified............................................ 227 1.087 247
Nonqualified......................................... 1,591 1.087 1,729
----------
Total............................................. 1,976
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY................. $ 443,324
==========
</TABLE>
B-47
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDER
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying consolidated balance sheets of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1996 and as of
January 4, 1996, and the related consolidated statements of operations,
stockholder's equity, and cash flows for the periods from January 4, 1996 to
December 31, 1996 (post-acquisition), and for each of the years in the two-year
period ended December 31, 1995 (pre-acquisition). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned post-acquisition consolidated financial
statements present fairly, in all material respects, the financial position of
Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1996
and as of January 4, 1996, and the results of their operations and their cash
flows for the post-acquisition period, in conformity with generally accepted
accounting principles. Further, in our opinion, the aforementioned
pre-acquisition consolidated financial statements present fairly, in all
material respects, the financial position of Kemper Investors Life Insurance
Company and subsidiaries and the results of their operations and their cash
flows for the pre-acquisition periods, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 4, 1996, an investor group as described in Note 1, acquired all of the
outstanding stock of Kemper Investors Life Insurance Company in a business
combination accounted for as a purchase. As a result of the acquisition, the
consolidated financial information for the periods after the acquisition is
presented on a different cost basis than that for the periods before the
acquisition and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 21, 1997
B-48
<PAGE> 52
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
1996 1996
----------- ----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value (cost:
December 31, 1996, $3,929,650; January 4, 1996,
$3,749,323)............................................... $3,866,431 $3,749,323
Short-term investments...................................... 71,696 372,515
Joint venture mortgage loans................................ 110,971 110,194
Third-party mortgage loans.................................. 106,585 144,450
Other real estate-related investments....................... 50,157 34,296
Policy loans................................................ 288,302 289,390
Other invested assets....................................... 23,507 19,215
---------- ----------
Total investments................................. 4,517,649 4,719,383
Cash........................................................ 2,776 25,811
Accrued investment income................................... 115,199 104,402
Goodwill.................................................... 244,688 254,883
Value of business acquired.................................. 189,639 190,222
Deferred insurance acquisition costs........................ 26,811 --
Federal income tax receivable............................... 3,840 112,646
Reinsurance recoverable..................................... 427,165 502,836
Receivable on sales of securities........................... 32,569 902
Other assets and receivables................................ 30,277 10,540
Assets held in separate accounts............................ 2,127,247 1,761,110
---------- ----------
Total assets...................................... $7,717,860 $7,682,735
========== ==========
LIABILITIES
Future policy benefits...................................... $4,256,521 $4,585,148
Ceded future policy benefits................................ 427,165 502,836
Benefits and claims payable to policyholders................ 36,142 4,535
Other accounts payable and liabilities...................... 59,462 30,030
Deferred income taxes....................................... 60,362 53,472
Liabilities related to separate accounts.................... 2,127,247 1,761,110
---------- ----------
Total liabilities................................. 6,966,899 6,937,131
---------- ----------
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.................................. 761,538 743,104
Unrealized loss on investments.............................. (47,498) --
Retained earnings........................................... 34,421 --
---------- ----------
Total stockholder's equity........................ 750,961 745,604
---------- ----------
Total liabilities and stockholder's equity........ $7,717,860 $7,682,735
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
B-49
<PAGE> 53
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
PREACQUISITION
----------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
REVENUE
Net investment income..................................... $299,688 $ 348,448 $353,084
Realized investment gains (losses)........................ 13,602 (318,700) (54,557)
Premium income............................................ 7,822 236 --
Fees and other income..................................... 35,095 38,101 31,950
-------- --------- --------
Total revenue................................... 356,207 68,085 330,477
-------- --------- --------
BENEFITS AND EXPENSES
Benefits and interest credited to policyholders........... 237,349 245,615 248,494
Commissions, taxes, licenses and fees..................... 28,135 31,793 26,910
Operating expenses........................................ 24,678 20,837 25,324
Deferral of insurance acquisition costs................... (27,820) (36,870) (31,852)
Amortization of insurance acquisition costs............... 2,316 14,423 20,809
Amortization of value of business acquired................ 21,530 -- --
Amortization of goodwill.................................. 10,195 -- --
-------- --------- --------
Total benefits and expenses..................... 296,383 275,798 289,685
-------- --------- --------
Income (loss) before income tax expense (benefit)......... 59,824 (207,713) 40,792
Income tax expense (benefit).............................. 25,403 (74,664) 14,431
-------- --------- --------
Net income (loss)............................... $ 34,421 $(133,049) $ 26,361
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
B-50
<PAGE> 54
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
PREACQUISITION
--------------------------
DECEMBER 31 JANUARY 4 DECEMBER 31 DECEMBER 31
1996 1996 1995 1994
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
CAPITAL STOCK, beginning and end of period......... $ 2,500 $ 2,500 $ 2,500 $ 2,500
-------- -------- --------- ---------
ADDITIONAL PAID-IN CAPITAL, beginning of period.... 743,104 491,994 491,994 409,423
Capital contributions from parent.................. 18,434 -- -- 82,500
Adjustment to reflect purchase accounting method... -- 251,110 -- --
Transfer of limited partnership interest to
parent........................................... -- -- -- 71
-------- -------- --------- ---------
End of period............................ 761,538 743,104 491,994 491,994
-------- -------- --------- ---------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of
period........................................... -- 68,502 (236,443) 93,096
Unrealized gain (loss) on revaluation of
investments, net................................. (47,498) -- 304,945 (329,539)
Adjustment to reflect purchase accounting method... -- (68,502) -- --
-------- -------- --------- ---------
End of period............................ (47,498) -- 68,502 (236,443)
-------- -------- --------- ---------
RETAINED EARNINGS, beginning of period............. -- 42,880 175,929 149,568
Net income (loss).................................. 34,421 -- (133,049) 26,361
Adjustment to reflect purchase accounting method... -- (42,880) -- --
-------- -------- --------- ---------
End of period............................ 34,421 -- 42,880 175,929
-------- -------- --------- ---------
Total stockholder's equity............... $750,961 $745,604 $ 605,876 $ 433,980
======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-51
<PAGE> 55
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
PREACQUISITION
-------------------------
1996 1995 1994
----------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................... $ 34,421 $(133,049) $ 26,361
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses (gains)............... (13,602) 318,700 54,557
Interest credited and other charges.............. 230,298 237,984 242,591
Deferred insurance acquisition costs............. (25,504) (22,447) (11,043)
Amortization of value of business acquired....... 21,530 -- --
Amortization of goodwill......................... 10,195 -- --
Amortization of discount and premium on
investments.................................... 25,743 4,586 (1,383)
Deferred income taxes............................ (897) 38,423 20,809
Net change in Federal income tax receivable...... 108,806 (86,990) 809
Other, net....................................... (22,283) (29,905) (14,161)
----------- --------- -----------
Net cash provided from operating
activities................................ 368,707 327,302 318,540
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity................ 264,383 320,143 144,717
Fixed maturities sold prior to maturity.......... 891,995 297,637 910,913
Mortgage loans, policy loans and other invested
assets......................................... 168,727 450,573 536,668
Cost of investments purchased or loans originated:
Fixed maturities................................. (1,369,091) (549,867) (1,447,393)
Mortgage loans, policy loans and other invested
assets......................................... (119,044) (131,966) (281,059)
Short-term investments, net......................... 300,819 (168,351) 198,299
Net change in receivable and payable for securities
transactions..................................... (31,667) (1,397) (16,553)
Net reductions in other assets...................... 105 1,996 2,678
----------- --------- -----------
Net cash provided by investing activities... 106,237 218,768 48,270
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits......................................... 141,159 247,778 215,034
Withdrawals...................................... (700,084) (755,917) (652,513)
Capital contributions from parent................... 18,434 -- 82,500
Other............................................... 42,512 (35,309) 3,871
----------- --------- -----------
Net cash used in financing activities....... (497,979) (543,448) (351,108)
----------- --------- -----------
Net increase (decrease) in cash........ (23,035) 2,622 15,702
CASH, beginning of period............................. 25,811 23,189 7,487
----------- --------- -----------
CASH, end of period................................... $ 2,776 $ 25,811 $ 23,189
=========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
B-52
<PAGE> 56
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). On January 4, 1996, an investor group comprised of
Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and
Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance
Partners") acquired all of the issued and outstanding common stock of Kemper. As
a result of the change in control, Zurich and Insurance Partners own 80 percent
and 20 percent, respectively, of Kemper and therefore the Company.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated.
PURCHASE ACCOUNTING METHOD
The acquisition of the Company on January 4, 1996, was accounted for using the
purchase method of accounting. The consolidated financial statements of the
Company prior to January 4, 1996, were prepared on a historical cost basis in
accordance with generally accepted accounting principles. The accompanying
financial statements and notes thereto prepared prior to January 4, 1996 have
been labeled "preacquisition". The accompanying consolidated financial
statements of the Company as of January 4, 1996 (the acquisition date) and as of
and for the year ended December 31, 1996, have been prepared in conformity with
the purchase method of accounting. The Company has presented January 4, 1996
(the acquisition date), as the opening purchase accounting balance sheet for
comparative purposes throughout the accompanying financial statements and notes
thereto.
Under purchase accounting, the Company's assets and liabilities have been marked
to their relative fair market values as of the acquisition date. The difference
between the cost of acquiring the Company and the net fair market values of the
Company's assets and liabilities as of the acquisition date has been recorded as
goodwill. The Company is amortizing goodwill on a straight-line basis over
twenty-five years. The allocated cost of acquiring the Company was $745.6
million and the acquisition resulted in goodwill of $254.9 million as of January
4, 1996.
The Company 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, 1996, the Company
believes that no such adjustment is necessary.
Purchase accounting adjustments primarily affected the recorded historical
values of fixed maturities, mortgage loans, other invested assets, deferred
insurance acquisition costs, future policy benefits and deferred income taxes.
Deferred insurance acquisition costs, and the related amortization thereof, for
policies sold prior to January 4, 1996, have been replaced by the value of
business acquired.
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
A 15 percent discount rate was used to determine such value and represents the
rate of return required by Zurich and Insurance Partners to invest in the
business being acquired. In selecting the rate of return used to value the
policies purchased, the Company considered the magnitude of the risks associated
with each of the actuarial assumptions used in determining expected future cash
flows, the cost of capital available to fund the
B-53
<PAGE> 57
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
acquisition, the perceived likelihood of changes in insurance regulations and
tax laws, the complexity of the Company's business, and the prices paid (i.e.,
discount rates used in determining other life insurance company valuations) on
similar blocks of business sold in recent periods.
The value of the business acquired is amortized over the estimated contract life
of the business acquired in relation to the present value of estimated gross
profits using current assumptions based on an interest rate equal to the
liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2001 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(in thousands) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- --------------------------------------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1996............................................... $190,222 $(31,427) $ 9,897 $168,692
1997............................................... 168,692 (26,330) 10,152 152,514
1998............................................... 152,514 (26,769) 9,085 134,830
1999............................................... 134,830 (26,045) 8,000 116,785
2000............................................... 116,785 (24,288) 6,834 99,331
2001............................................... 99,331 (21,538) 5,867 83,660
</TABLE>
The projected ending balance of the value of business acquired will be further
adjusted to reflect the impact of unrealized gains or losses on fixed maturities
held as available for sale in the investment portfolio. Such adjustments are not
recorded in the Company's net income but rather are recorded as a credit or
charge to stockholder's equity, net of income tax. As of December 31, 1996, this
adjustment increased the value of business acquired and stockholder's equity by
approximately $20.9 million and $13.6 million, respectively.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets or liabilities at the date of the financial
statements. As a result, actual results reported as revenue and expenses could
differ from the estimates reported in the accompanying financial statements. As
further discussed in the accompanying notes to the consolidated financial
statements, significant estimates and assumptions affect deferred insurance
acquisition costs, the value of business acquired, provisions for real
estate-related losses and reserves, other-than-temporary declines in values for
fixed maturities, the valuation allowance for deferred income taxes and the
calculation of fair value disclosures for certain financial instruments.
Life insurance revenue and expenses
Revenue for annuities and interest-sensitive life insurance products consists of
investment income, and policy charges such as mortality, expense and surrender
charges. Expenses consist of benefits and interest credited to contracts, policy
maintenance costs and amortization of deferred insurance acquisition costs. Also
reflected in fees and other income is a ceding commission experience adjustment
received in 1995 as a result of certain reinsurance transactions entered into by
the Company during 1992. (See note captioned "Reinsurance".)
Premiums for term life policies are reported as earned when due. Profits for
such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.
Deferred insurance acquisition costs
The costs of acquiring new business after January 4, 1996, 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
B-54
<PAGE> 58
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contract life in relation to the present value of estimated gross profits.
Deferred insurance acquisition costs related to such interest-sensitive products
also reflect the estimated impact of unrealized gains or losses on fixed
maturities held as available for sale in the investment portfolio, through a
credit or charge to stockholder's equity, net of income tax. The deferred
insurance acquisition costs for term-life insurance products are being amortized
over the premium paying period of the policies.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 4.0 percent to 7.5 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.5 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 3.0 percent to 12.0
percent.
Liabilities for future term life policy benefits have been computed principally
by a net level premium method. Anticipated rates of mortality are based on the
1975-1980 Select and Ultimate Table modified by Company experience, including
withdrawals. Estimated future investment yields are a level 7 percent for
reinsurance assumed and for direct business, 8 percent for three years; 7
percent for year four; and 6 percent thereafter.
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities are carried at fair value. Short-term
investments are carried at cost, which approximates fair value. (See note
captioned "Fair Value of Financial Instruments".)
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed and
asset-backed securities, over the estimated life of the security. Such
amortization is included in net investment income. Amortization of the discount
or premium from mortgage-backed and asset-backed securities is recognized using
a level effective yield method which considers the estimated timing and amount
of prepayments of the underlying loans and is adjusted to reflect differences
which arise between the prepayments originally anticipated and the actual
prepayments received and currently anticipated. To the extent that the estimated
lives of such securities change as a result of changes in prepayment rates, the
adjustment is also included in net investment income. The Company does not
accrue interest income on fixed maturities deemed to be impaired on an
other-than-temporary basis, or on mortgage loans, real estate-related bonds and
other real estate loans where the likelihood of collection of interest is
doubtful.
Mortgage loans are carried at their unpaid balance, net of unamortized discount
and any applicable reserves or write-downs. Other real estate-related
investments net of any applicable reserve and write-downs include notes
receivable from real estate ventures; investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures; common
stock carried at fair value and real estate owned carried at fair value.
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. At year-end
1995, reflecting the Company's change in strategy with respect to its real
estate portfolio, and the disposition thereof, and on January 4, 1996,
reflecting the acquisition of the Company, real estate-related investments were
valued using an estimate of the investments observable market price, net of
estimated costs to sell. Prior to year-end 1995, the Company evaluated its real
estate-related assets (including accrued interest) by estimating the
probabilities of loss utilizing various projections that included several
factors relating to the borrower, property, term of the loan, tenant
composition, rental rates, other supply and demand factors and overall economic
conditions. Generally, at that time, the reserve was based upon the excess of
the loan amount over the estimated future cash flows from the loan, discounted
at the loan's contractual rate of interest taking into consideration the effects
of recourse to, and subordination of loans held by, affiliated non-life realty
companies.
B-55
<PAGE> 59
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Under purchase accounting, the market value of the Company's policy loans and
other invested assets consisting primarily of venture capital investments and a
leveraged lease, became the Company's new cost basis in such investments.
Investments in policy loans and other invested assets after January 4, 1996 are
carried at cost. Other invested assets also include equity securities, not
related to real estate-related investments, which are carried at fair value.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Net unrealized gains or losses
on revaluation of investments are credited or charged to stockholder's equity.
Such unrealized gains are recorded net of deferred income tax expense, while
unrealized losses are not tax benefitted.
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at fair value.
INCOME TAX
The operations of the Company prior to January 4, 1996 have been included in the
consolidated Federal income tax return of Kemper. Income taxes receivable or
payable have been determined on a separate return basis, and payments have been
received from or remitted to Kemper pursuant to a tax allocation arrangement
between Kemper and its subsidiaries, including the Company. The Company
generally had received a tax benefit for losses to the extent such losses can be
utilized in Kemper's consolidated Federal tax return. Subsequent to January 4,
1996, the Company and its subsidiaries will file separate Federal income tax
returns.
Deferred taxes are provided on the temporary differences between the tax and
financial statement basis of assets and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts. Federal
income tax refunded by Kemper under the tax allocation arrangement for the
period from January 1, 1996 to January 4, 1996 and for the years ended December
31, 1995 and 1994 amounted to $108.8 million, $25.2 million and $10.7 million,
respectively. The Company paid $28.1 million of Federal income taxes directly to
the United States Treasury Department during 1996.
Not reflected in the statement of cash flows are rollovers of mortgage loans,
other loans and investments totaling approximately $57.0 million in 1994.
B-56
<PAGE> 60
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale. The carrying
value (estimated fair value) of fixed maturities compared with amortized cost,
adjusted for other-than-temporary declines in value, were as follows:
<TABLE>
<CAPTION>
Estimated Unrealized
Carrying Amortized ---------------------
Value Cost Gains Losses
(in thousands) -------- --------- ----- ------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. treasury securities and obligations of U.S.
government agencies and authorities................ $ 92,238 $ 93,202 $ -- $ (964)
Obligations of states and political subdivisions,
special revenue and nonguaranteed.................. 30,853 31,519 -- (666)
Debt securities issued by foreign governments........ 105,394 108,456 504 (3,566)
Corporate securities................................. 1,896,615 1,935,511 5,918 (44,814)
Mortgage and asset-backed securities................. 1,741,331 1,760,962 1,990 (21,621)
---------- ---------- ------ --------
Total fixed maturities........................ $3,866,431 $3,929,650 $8,412 $(71,631)
========== ========== ====== ========
JANUARY 4, 1996
U.S. treasury securities and obligations of U.S.
government agencies and authorities................ $ 215,637 $ 215,637 $ -- $ --
Obligations of states and political subdivisions,
special revenue and nonguaranteed.................. 24,241 24,241 -- --
Debt securities issued by foreign governments........ 139,361 139,361 -- --
Corporate securities................................. 1,695,268 1,695,268 -- --
Mortgage and asset-backed securities................. 1,674,816 1,674,816 -- --
---------- ---------- ------ --------
Total fixed maturities........................ $3,749,323 $3,749,323 $ -- $ --
========== ========== ====== ========
</TABLE>
Upon default or indication of potential default by an issuer of fixed maturity
securities, the Company-owned issue(s) of such issuer would be placed on
nonaccrual status and, since declines in fair value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value
during the fiscal quarter in which the impairment was determined to have become
other than temporary. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $267.7 million real estate portfolio at December 31, 1996 consists
of joint venture and third-party mortgage loans and other real estate-related
investments.
At December 31, 1996 and January 4, 1996, total impaired loans were as follows:
<TABLE>
<CAPTION>
December 31 January 4
1996 1996
(in millions) ----------- ---------
<S> <C> <C>
Impaired loans without reserves--gross...................... $39.8 $ --
Impaired loans with reserves--gross......................... 7.6 21.9
----- -----
Total gross impaired loans........................... 47.4 21.9
Reserves related to impaired loans.......................... (4.4) (6.5)
----- -----
Net impaired loans................................... $43.0 $15.4
===== =====
</TABLE>
B-57
<PAGE> 61
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. At December 31, 1996, the Company's deficit in equity
investments considered in determining reserves and write-downs amounted to $5.9
million. The Company had an average balance of $30.8 million and $124.2 million
in impaired loans for 1996 and 1995, respectively. Cash payments received on
impaired loans are generally applied to reduce the outstanding loan balance.
At December 31, 1996 and January 4, 1996, loans on nonaccrual status amounted to
$43.5 million and $3.5 million, respectively. The Company's nonaccrual loans are
generally included in impaired loans.
At December 31, 1996, securities carried at approximately $6.1 million were on
deposit with governmental agencies as required by law.
At December 31, 1996, the Company had six separate asset-backed securities
included in fixed maturity investments from trusts formed to securitize assets
underwritten by Green Tree Financial Corporation, which in aggregate amounted to
$90.7 million. No other investments exceeded ten percent of the Company's
stockholder's equity at December 31, 1996.
Proceeds from sales of investments in fixed maturities prior to maturity were
$892.0 million, $297.6 million and $910.9 million during 1996, 1995 and 1994,
respectively. Gross gains of $9.9 million, $21.2 million and $6.0 million and
gross losses of $16.2 million, $11.9 million and $55.9 million were realized on
sales of fixed maturities in 1996, 1995 and 1994, respectively.
The following table sets forth the maturity aging schedule of fixed maturity
investments at December 31, 1996:
<TABLE>
<CAPTION>
Carrying Amortized
Value Cost Value
(in thousands) -------- ----------
<S> <C> <C>
One year or less............................................ $ 36,814 $ 36,862
Over one year through five.................................. 643,741 648,811
Over five years through ten................................. 1,170,034 1,200,620
Over ten years.............................................. 274,511 282,395
Securities not due at a single maturity date(1)............. 1,741,331 1,760,962
---------- ----------
Total fixed maturities............................... $3,866,431 $3,929,650
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 4.6 years.
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
Preacquisition
-----------------------
1996 1995 1994
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities................. $250,683 $269,934 $274,231
Dividends on equity securities............................. 646 681 1,751
Income from short-term investments......................... 9,130 13,159 10,668
Income from mortgage loans................................. 20,257 40,494 41,713
Income from policy loans................................... 20,700 19,658 18,517
Income from other real estate-related investments.......... 4,917 15,565 21,239
Income from other loans and investments.................... 2,480 1,555 3,533
-------- -------- --------
Total investment income............................. 308,813 361,046 371,652
Investment expense......................................... (9,125) (12,598) (18,568)
-------- -------- --------
Net investment income............................... $299,688 $348,448 $353,084
======== ======== ========
</TABLE>
B-58
<PAGE> 62
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Realized gains (losses) for the years ended December 31, 1996, 1995 and 1994,
were as follows:
<TABLE>
<CAPTION>
Realized Gains (Losses)
-------------------------------------------
Preacquisition
--------------------------
1996 1995 1994
(in thousands) ------- --------- --------
<S> <C> <C> <C>
Real estate-related.................................. $17,462 $(325,611) $(41,720)
Fixed maturities..................................... (6,344) 9,336 (49,857)
Equity securities.................................... -- (346) 28,243
Other................................................ 2,484 (2,079) 8,777
------- --------- --------
Realized investment gains (losses) before income
tax expense (benefit)........................... 13,602 (318,700) (54,557)
Income tax expense (benefit)......................... 4,761 (111,545) (19,095)
------- --------- --------
Net realized investment gains (losses)............. $ 8,841 $(207,155) $(35,462)
======= ========= ========
</TABLE>
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity securities and other--the
difference between fair value and cost. The change in unrealized investment
gains (losses) by class of investment for the years ended December 31, 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Change in Unrealized Gains (Losses)
--------------------------------------------------------------
Preacquisition
--------------------------
December 31
December 31 January 4 --------------------------
1996 1996 1995 1994
(in thousands) ----------- --------- -------- ---------
<S> <C> <C> <C> <C>
Fixed maturities.......................... $(63,219) $-- $351,964 $(351,646)
Equity securities......................... 1,256 -- 180 (32,710)
Adjustment to deferred insurance
acquisition costs....................... 1,307 -- (14,277) 11,325
Adjustment to value of business
acquired................................ 20,947 -- -- --
-------- --- -------- ---------
Unrealized gain (loss) before income tax
expense (benefit).................... (39,709) -- 337,867 (373,031)
Income tax expense (benefit).............. 7,789 -- 32,922 (43,492)
-------- --- -------- ---------
Net unrealized gain (loss) on
investments..................... $(47,498) $-- $304,945 $(329,539)
======== === ======== =========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1996, the Company, along with other Kemper subsidiaries,
directly held partnership interests in a number of real estate joint ventures.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation
accounting methods are not utilized as the Company, in most instances, does not
own more 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, 1996 and January 4, 1996, the Company's net equity investment
in unconsolidated investees amounted to $11.7 million and $11.4 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $223 thousand for the year ended December 31, 1996,
compared with net losses of $453 thousand, and $6.3 million for the years ended
December 31, 1995 and 1994, respectively.
B-59
<PAGE> 63
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) UNCONSOLIDATED INVESTEES (CONTINUED)
Also at January 4, 1996, the Company had joint venture-related loans totaling
$21.8 million before reserves to partnerships in which Lumbermens Mutual
Casualty Company, an affiliate until August 1993 ("Lumbermens"), had equity
interests. These joint venture-related loans were sold during 1996.
(5) CONCENTRATION OF CREDIT AND INTEREST RATE RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of risk exist in the Company's
ownership of mortgage-backed and asset-backed securities and real estate.
Approximately 36.4 percent of the Company's investment-grade fixed maturities at
December 31, 1996 were mortgage-backed securities, down from 45.7 percent at
January 4, 1996, due to sales and paydowns during 1996. These investments had an
average yield of 6.83 percent during 1996 and consisted 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 of AAA credit quality, and the markets for these investments have been
and are expected to remain liquid. The Company plans to continue to reduce its
holding of such investments over time.
As a result of purchases during 1996, approximately 8.8 percent of the Company's
investment-grade fixed maturities at December 31, 1996 consisted of corporate
asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by manufactured housing loans, auto loans
and home equity loans.
Investment income was lower in 1996, compared with both 1995 and 1994, primarily
reflecting purchase accounting adjustments related to the amortization of
premiums on fixed maturity investments. Under purchase accounting, the market
value of the Company's fixed maturity investments as of January 4, 1996 became
the Company's new cost basis in such investments. The difference between the new
cost basis and original par is then amortized against investment income over the
remaining effective lives of the fixed maturity investments. As a result of the
interest rate environment as of January 4, 1996, the market value of the
Company's fixed maturity investments was approximately $133.9 million greater
than original par. The amortization of such premiums reduced investment income
by approximately $22.7 million in 1996, compared with 1995 and 1994.
Future investment income from mortgage-backed securities and other asset-backed
securities may be affected by the timing of principal payments and the yields on
reinvestment alternatives available at the time of such payments. As a result of
purchase accounting adjustments to fixed maturities, most of the Company's
mortgage-backed securities are carried at a premium over par. Prepayment
activity resulting from a decline in interest rates on such securities purchased
at a premium would accelerate the amortization of the premiums which would
result in reductions of investment income related to such securities. At
December 31, 1996, the Company had unamortized premiums and discounts of $24.7
million and $5.7 million, respectively, related to mortgage-backed and
asset-backed securities. The Company believes that as a result of the purchase
accounting adjustments and the current interest rate environment, anticipated
prepayment activity is expected to result in reductions to future investment
income similar to those reductions experienced by the Company in 1996.
B-60
<PAGE> 64
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT AND INTEREST RATE RISK (CONTINUED)
The Company's real estate portfolio is distributed by geographic location and
property type, as shown in the following two tables:
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
California....................... 35.2%
Illinois......................... 13.5
Hawaii........................... 11.0
Colorado......................... 7.9
Oregon........................... 7.6
Washington....................... 7.4
Florida.......................... 5.4
Texas............................ 4.2
Ohio............................. 2.7
Other states..................... 5.1
-----
Total.................. 100.0%
=====
</TABLE>
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
Hotel............................ 38.8%
Land............................. 24.4
Office........................... 14.1
Residential...................... 9.1
Retail........................... 2.6
Industrial....................... 1.0
Other............................ 10.0
-----
Total.................. 100.0%
=====
</TABLE>
Real estate markets have been depressed in recent periods in areas where most of
the Company's real estate portfolio is located. Portions of California's and
Hawaii's real estate market conditions have continued to be worse than in many
other areas of the country. Real estate markets in northern California and
Illinois continue to show some stabilization and improvement.
Undeveloped land represented approximately 24.4 percent of the Company's real
estate portfolio at December 31, 1996. To maximize the value of certain land and
other projects, additional development has been proceeding or has been planned.
Such development of existing projects would continue to require funding, either
from the Company or third parties. In the present real estate markets,
third-party financing can require credit enhancing arrangements (e.g., standby
financing arrangements and loan commitments) from the Company. The values of
development projects are dependent on a number of factors, including Kemper's
and the Company's plans with respect thereto, obtaining necessary construction
and zoning permits and market demand for the permitted use of the property. The
values of certain development projects have been written down as of December 31,
1995, reflecting changes in plans in connection with the Zurich-led acquisition
of Kemper. There can be no assurance that such permits will be obtained as
planned or at all, nor that such expenditures will occur as scheduled, nor that
Kemper's and the Company's plans with respect to such projects may not change
substantially.
Approximately half of the Company's real estate loans are on properties or
projects where the Company, Kemper, or their affiliates have taken ownership
positions in joint ventures with a small number of partners. (See note captioned
"Unconsolidated Investees".)
At December 31, 1996, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), have interests constituted
approximately $101.3 million, or 37.8 percent, of the Company's real estate
portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At
December 31, 1996, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
At December 31, 1996, loans to and investments in a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens,
constituted approximately $53.0 million, or 19.8 percent, of the Company's real
estate portfolio. The Company's interest in the MLP is a less than one percent
limited partnership interest and Kemper's interest is 75 percent at December 31,
1996. At December 31, 1996, MLP-related commitments accounted for approximately
$9.4 million of the Company's off-balance-sheet legal commitments, which the
Company expects to fund.
At December 31, 1996, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates totaled approximately $(5.3) million.
Negative amounts represent the Company's share of project related operating
losses in excess of the Company's investment. Prime Group-related commitments,
however,
B-61
<PAGE> 65
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounted for $145.2 million of the off-balance-sheet legal commitments at
December 31, 1996, of which the Company expects to fund $15.9 million.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
Preacquisition
----------------------
1996 1995 1994
(in thousands) ------- --------- -------
<S> <C> <C> <C>
Current................................................... $26,300 $(113,087) $(6,898)
Deferred.................................................. (897) 38,423 21,329
------- --------- -------
Total........................................... $25,403 $ (74,664) $14,431
======= ========= =======
</TABLE>
Included in the 1995 current tax benefit is the recognition of a net operating
loss carryover at December 31, 1995 which was utilized against taxable income on
Kemper's consolidated short-period Federal income tax return for the January 1
through January 4, 1996 tax year. Beginning January 5, 1996, the Company and its
subsidiaries will each file a stand alone Federal income tax return. Previously,
the Company had filed a consolidated Federal income tax return with Kemper. In
1996, the Company and Kemper settled all outstanding balances under the tax
allocation agreement.
The actual income tax expense (benefit) for 1996, 1995 and 1994 differed from
the "expected" tax expense (benefit) for those years as displayed below.
"Expected" tax expense (benefit) was computed by applying the U.S. Federal
corporate tax rate of 35 percent in 1996, 1995, and 1994 to income (loss) before
income tax expense (benefit).
<TABLE>
<CAPTION>
Preacquisition
---------------------
1996 1995 1994
(in thousands) ------- -------- -------
<S> <C> <C> <C>
Computed expected tax expense (benefit).................... $20,938 $(72,700) $14,277
Difference between "expected" and actual tax expense
(benefit):
State taxes.............................................. 913 (1,370) 645
Amortization of goodwill................................. 3,568 -- --
Foreign tax credit....................................... -- (183) (155)
Other, net............................................... (16) (411) (336)
------- -------- -------
Total actual tax expense (benefit)............... $25,403 $(74,664) $14,431
======= ======== =======
</TABLE>
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax bases 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 Company has established a valuation allowance to reduce the deferred Federal
tax asset related to real estate and other investments to the amount that, based
upon available evidence, is, in management's judgment, more likely than not to
be realized. Any reversals of the valuation allowance are contingent upon the
recognition of future capital gains in the Company's Federal income tax return
or a change in circumstances which causes the recognition of the benefits to
become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred Federal tax asset or liability from
unrealized gains or losses on investments.
B-62
<PAGE> 66
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 liability were as follows:
<TABLE>
<CAPTION>
Preacquisition
---------------------
December 31
December 31 January 4 ---------------------
1996 1996 1995 1994
(in thousands) ----------- --------- --------- --------
<S> <C> <C> <C> <C>
Deferred Federal tax assets:
Unrealized losses on investments............... $ 16,624 $ -- $ -- $ 85,331
Life policy reserves........................... 46,452 46,654 42,512 51,519
Real estate-related............................ 20,642 27,736 21,920 39,360
Other investment-related....................... 5,409 1,773 1,725 7,435
Other.......................................... 8,159 9,750 6,864 6,415
-------- -------- --------- --------
Total deferred Federal tax assets........... 97,286 85,913 73,021 190,060
Valuation allowance............................ (31,825) (15,201) (15,201) (100,532)
-------- -------- --------- --------
Total deferred Federal tax assets after
valuation allowance....................... 65,461 70,712 57,820 89,528
-------- -------- --------- --------
Deferred Federal tax liabilities:
Deferred insurance acquisition costs........... 9,384 -- 111,523 108,663
Value of business acquired..................... 66,373 66,578 -- --
Other investment-related....................... 28,855 37,919 -- --
Unrealized gains on investments................ -- -- 37,919 --
Depreciation and amortization.................. 15,473 15,490 18,767 18,878
Other.......................................... 5,738 4,197 2,320 3,351
-------- -------- --------- --------
Total deferred Federal tax liabilities...... 125,823 124,184 170,529 130,892
-------- -------- --------- --------
Net deferred Federal tax liabilities............. $(60,362) $(53,472) $(112,709) $(41,364)
======== ======== ========= ========
</TABLE>
The valuation allowance is subject to future adjustments based on, among other
items, the Company's estimates of future operating earnings and capital gains.
The tax returns through the year 1986 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1987 through 1993 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received cash capital contributions of $18.4 million and $82.5
million during 1996 and 1994, 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, 1996 and January 4, 1996, joint venture
mortgage loans totaled $111.0 million and $110.2 million, respectively, and
during 1996, 1995 and 1994, the Company earned interest income on these joint
venture loans of $9.5 million, $19.6 million and $22.0 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Zurich Kemper Investments, Inc. ("ZKI"), an affiliated company, and
the information systems of Kemper Service Company ("KSvC"), a ZKI subsidiary,
based on the Company's share of administrative, legal, marketing, investment
management, information systems and operation and support services. During 1996,
1995 and 1994, expenses allocated to the Company from ZKI and KSvC amounted to
$1.7 million, $4.4 million and $6.5 million, respectively. The Company also paid
to ZKI investment
B-63
<PAGE> 67
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
management fees of $3.6 million, $3.4 million and $6.0 million during 1996, 1995
and 1994, respectively. In addition, expenses allocated to the Company from FKLA
during 1996, 1995 and 1994 amounted to $10.5 million, $14.3 million and $11.1
million, respectively.
During 1995 and 1994, the Company sold certain mortgages and real estate-related
investments, net of reserves, amounting to approximately $3.5 million and $154.0
million, respectively, to an affiliated non-life realty company, in exchange for
cash. No gain or loss was recognized on these sales. During 1996, the Company
purchased approximately $24.5 million of real estate-related investments from
such affiliated non-life realty subsidiaries for cash. The Company also paid to
Kemper real estate subsidiaries $1.8 million in both 1996 and 1995, related to
the management of the Company's real estate portfolio.
(8) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
In 1992 and 1991, the Company entered into 100 percent indemnity reinsurance
agreements ceding $515.7 million and $416.3 million, respectively, of its
fixed-rate annuity liabilities to FLA. FLA is a mutual insurance company that
shares common management and common board members with the Company, FKLA and
Kemper. As of December 31, 1996 and January 4, 1996, the reinsurance recoverable
related to the fixed-rate annuity liabilities ceded to FLA amounted to $427.0
million and $502.8 million, respectively. During 1995, the Company recorded
income of $4.4 million related to a ceding commission experience adjustment from
the 1992 reinsurance agreement.
In December 1996, the Company assumed on a yearly renewable term basis
approximately $14.4 billion (face amount) of term life insurance from FKLA. As a
result of this transaction, the Company recorded premiums and reserves of
approximately $7.3 million. The difference between the cash transferred, which
represents the statutory reserves of the business assumed, and the reserves
recorded under generally accepted accounting principles, of approximately $18.4
million, was deemed to be a capital contribution from Kemper and was recorded as
additional paid-in-capital during 1996.
The Company's retention limit on term life insurance is $300 thousand (face
amount) on the life of any one individual with the excess amounts ceded to
outside reinsurers. The term life insurance business assumed from FKLA during
1996 did not have any individual contracts greater than $300 thousand in face
amount. Reserves ceded to outside reinsurers on the Company's direct business
amounted to approximately $94 thousand as of December 31, 1996.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a welfare plan that provides medical and life insurance benefits
to its retired and active employees and the Company is allocated a portion of
the costs of providing such benefits. The Company is self insured with respect
to medical benefits, and the plan is not funded except with respect to certain
disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.7 million and $687 thousand at December 31, 1996 and
January 4, 1996, respectively.
B-64
<PAGE> 68
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The discount rate used in determining the allocated postretirement benefit
obligation was 7.75 percent and 7.25 percent for 1996 and 1995, respectively.
The assumed health care trend rate used was based on projected experience for
1996 and 1997, 10 percent in 1998, gradually declining to 5.0 percent by the
year 2001 and remaining at that level thereafter.
A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1996 and January 4, 1996 by $56 thousand and $146 thousand,
respectively.
During 1995, the Company adopted certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement. The effect of adopting these policies was
immaterial.
(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 none of the Company or its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of or lending to real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" below for
the discussion regarding the Company's loan commitments and standby financing
agreements.
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1996 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders. The Company is
also contingently liable for any future guaranty fund assessments related to
insolvencies of unaffiliated insurance companies, for which the life insurance
industry has been unable to estimate the cost to cover losses to policyholders.
No specific amount can be reasonably estimated for such insolvencies as of
December 31, 1996.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1996, the Company had future legal loan commitments and stand-by
financing agreements totaling $197.4 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be secured by assets of the joint ventures, including
first mortgage liens on the real estate. The Company's criteria in making these
arrangements are the same as for its mortgage loans and other real estate
investments. The Company presently expects to fund approximately $39.6 million
of these arrangements. These commitments are included in the Company's analysis
of real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are
B-65
<PAGE> 69
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) FINANCIAL INSTRUMENTS--OFF BALANCE-SHEET (CONTINUED)
estimated in conjunction with and using the same methodology as the fair value
estimates of mortgage loans and other real estate-related investments.
(12) DERIVATIVE FINANCIAL INSTRUMENTS
The Company was party to derivative financial instruments in the normal course
of business for other than trading purposes to hedge exposures in foreign
currency fluctuations related to certain foreign fixed maturity securities held
by the Company. The Company sold its interest in such securities during 1996.
The following table summarizes various information regarding these derivative
financial instruments as of January 4, 1996:
<TABLE>
<CAPTION>
(in thousands) WEIGHTED
WEIGHTED AVERAGE AVERAGE REPRICING
NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY
JANUARY 4, 1996 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS)
- --------------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Non-trading foreign exchange forward options................ $43,754 $112 $112 .32 30
</TABLE>
The Company's hedges relating to foreign currency exposure were implemented
using forward contracts on foreign currencies. These are generally
short-duration contracts with U.S. money-center banks. The Company records
realized and unrealized gains and losses on such investments in net income on a
current basis. The amounts of gain (loss) included in net income during 1996,
1995 and 1994 totaled $227 thousand, $(1.0) million and $6.4 million,
respectively.
(13) 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. (See note captioned "Invested Assets and Related
Income".) Fair value estimates for financial instruments not carried at fair
value are generally determined using discounted cash flow models and assumptions
that are based on judgments regarding current and future economic conditions and
the risk characteristics of the investments. Although fair value estimates are
calculated using assumptions that management believes are appropriate, changes
in assumptions could significantly affect the estimates and such estimates
should be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Fixed maturities and equity securities: Fair values for fixed maturity
securities and for equity securities 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, ZKI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments were estimated based
upon the investments observable market price, net of estimated costs
B-66
<PAGE> 70
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
to sell. The estimates of fair value should be used with care given the inherent
difficulty of estimating the fair value of real estate due to the lack of a
liquid quotable market.
Other loans and investments: The carrying amounts reported in the consolidated
balance sheet for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1996 to be 4.75 percent, while the assumed average
market crediting rate was 5.8 percent in 1996.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1996 and January 4, 1996 were as follows:
<TABLE>
<CAPTION>
December 31, 1996 January 4, 1996
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities(1)......................... $3,866,431 $3,866,431 $3,749,323 $3,749,323
Cash and short-term investments............. 74,472 74,472 398,326 398,326
Mortgage loans and other real estate-related
assets................................... 267,713 267,713 288,940 288,940
Policy loans................................ 288,302 288,302 289,390 289,390
Other invested assets....................... 23,507 23,507 19,215 19,215
Financial instruments recorded as liabilities:
Life policy benefits........................ 4,249,264 4,101,588 4,585,148 4,585,148
</TABLE>
- ---------------
(1) Includes $112 thousand carrying value and fair value for January 4, 1996, of
derivative securities used to hedge the foreign currency exposure on certain
specific foreign fixed maturity investments.
(14) 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 1997 is $40.9 million. The
Company paid no cash dividends in 1996, 1995 or 1994.
The Company's net income (loss) and stockholder's equity as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income (loss)........................................... $ 37,287 $(64,707) $ 44,491
======== ======== ========
Statutory surplus........................................... $411,837 $383,374 $416,243
======== ======== ========
</TABLE>
B-67
<PAGE> 71
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
------------------------------------
QUALIFIED NON-QUALIFIED
PLANS PLANS
STATE --------- -------------
-------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
Kansas...................................................... -- 2.00%*
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-68
