<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1999
COMMISSION FILE NOS. 333-22375
811-3199
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 46 [X]
</TABLE>
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
(EXACT NAME OF REGISTRANT)
KEMPER INVESTORS LIFE INSURANCE
COMPANY
(NAME OF INSURANCE COMPANY)
<TABLE>
<S> <C>
1 Kemper Drive, Long Grove, Illinois 60049
(Address of Insurance Company's Principal Executive Offices) (Zip Code)
Insurance Company's Telephone Number, including Area Code: (847) 550-5500
</TABLE>
Debra P. Rezabek, Esq.
1 Kemper Drive
Long Grove, Illinois 60049
(Name and Address of Agent for Service)
COPIES TO:
FRANK JULIAN, ESQ.
KEMPER INVESTORS LIFE INSURANCE COMPANY
1 KEMPER DRIVE
LONG GROVE, ILLINOIS 60049
JOAN E. BOROS, ESQ.
JORDEN BURT BOROS
CICCHETTI BERENSON & JOHNSON
1025 THOMAS JEFFERSON STREET, N.W.
SUITE 400E
WASHINGTON, D.C. 20007
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this filing.
It is proposed that this filing will become effective (check appropriate
box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[X] on 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities Being Registered:
Units of interest in Separate Account under the Contracts
- -- No filing fee is due because an indefinite number of shares is deemed to have
been registered in reliance on Section 24(f) of the Investment Company Act of
1940.
================================================================================
<PAGE> 2
This amendment to the registration statement on Form N-4 includes two
prospectuses describing Individual and Group Variable, Fixed and Market Value
Adjusted Deferred Annuity Contracts which are substantially identical, except
that the Contract described in the second prospectus makes available to Contract
owners different investment subaccounts of Registrant than does the prospectus
described in the original prospectus.
<PAGE> 3
CROSS-REFERENCE SHEET
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
REGISTRATION STATEMENT ON FORM N-4
<TABLE>
<CAPTION>
N-4 ITEM NO. LOCATION IN PROSPECTUS
------------ ----------------------
<S> <C> <C>
PART A
Item 1. Cover Page................................... Cover Page
Item 2. Definitions.................................. Definitions
Item 3. Synopsis..................................... Summary; Summary of Expenses;
Example
Item 4. Condensed Financial Information.............. Condensed Financial Information
Item 5. General Description of Registrant, Depositor
and Portfolio Companies.................... KILICO, the MVA Option, the Separate
Account and the Funds; Fixed Account
Option; Voting Rights
Item 6. Deductions and Expenses...................... Contract Charges and Expenses
Item 7. General Description of Variable
Annuity Contracts.......................... The Contracts
Item 8. Annuity Period............................... The Annuity Period
Item 9. Death Benefit................................ The Annuity Period; The Accumulation
Period
Item 10. Purchases and Contract Value................. KILICO, the MVA Option, the Separate
Account and the Funds; The Contracts
Item 11. Redemptions.................................. The Contracts; The Accumulation Period
Item 12. Taxes........................................ Federal Income Taxes
Item 13. Legal Proceedings............................ Legal Proceedings
Item 14. Table of Contents of the Statement of
Additional Information..................... Table of Contents
PART B
Item 15. Cover Page................................... Cover Page
Item 16. Table of Contents............................ Table of Contents
Item 17. General Information and History.............. Not Applicable
Item 18. Services..................................... Services to the Separate Account
Item 19. Purchase of Securities Being Offered......... Not Applicable
Item 20. Underwriters................................. Services to the Separate Account
Item 21. Calculation of Performance Data.............. Performance Information of
Subaccounts
Item 22. Annuity Payments............................. Not Applicable
Item 23. Financial Statements......................... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE> 4
PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE,
FIXED AND MARKET
VALUE ADJUSTED DEFERRED ANNUITY
CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
OF
KEMPER INVESTORS LIFE INSURANCE COMPANY
This prospectus describes Variable, Fixed and Market Value Adjusted Deferred
Annuity Contracts of Kemper Investors Life Insurance Company that are designed
to provide benefits under retirement plans which may qualify for certain federal
tax advantages. Depending on particular state requirements, the Contracts may be
issued on a group or individual basis. Contracts issued on an individual basis
are represented by a Certificate. All discussion of "Contracts" includes issued
on an individual or group basis.
You may allocate purchase payments to one or more of the variable options, the
fixed option or the fixed option subject to a market value adjustment. The
(CONTINUED)
THE CONTRACTS ARE NOT ISSUED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR SAVINGS
INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE CONTRACTS THAT YOU
SHOULD KNOW BEFORE INVESTING. YOU SHOULD READ IT BEFORE INVESTING AND KEEP IT
FOR FUTURE REFERENCE. WE HAVE FILED A STATEMENT OF ADDITIONAL INFORMATION
("SAI") WITH THE SECURITIES AND EXCHANGE COMMISSION. THE CURRENT SAI HAS THE
SAME DATE AS THIS PROSPECTUS [AND IS INCORPORATED BY REFERENCE IN THIS
PROSPECTUS]. YOU MAY OBTAIN A FREE COPY BY WRITING US OR CALLING (847) 550-5500.
A TABLE OF CONTENTS FOR THE SAI APPEARS ON PAGE 88. YOU MAY ALSO FIND THIS
PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC") AT THE SEC'S WEB SITE AT
HTTP://WWW.SEC.GOV.
THE DATE OF THIS PROSPECTUS , 1999.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
Contract currently offers twenty-eight investment options, each of which is a
Subaccount of KILICO Variable Annuity Separate Account. Currently, you may
choose among the following Portfolios:
INVESTORS FUND SERIES: Kemper Money Market; Kemper Government Securities; Kemper
Investment Grade Bond; Kemper Global Income; Kemper Horizon 5; Kemper High
Yield; Kemper Horizon 10+; Kemper Total Return; Kemper Horizon 20+; Kemper Value
+ Growth; Kemper Blue Chip; Kemper International; Kemper Contrarian Value
(formerly Kemper Value); Kemper Small Cap Value; Kemper Small Cap Growth; Kemper
Growth; Kemper Global Blue Chip; Kemper International Growth and Income;
Kemper-Dreman High Return Equity; Kemper-Dreman Financial Services.
SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A SHARES): Scudder VLIF Global
Discovery; Scudder VLIF Growth and Income; Scudder VLIF International; Scudder
VLIF Capital Growth.
JANUS ASPEN SERIES: Janus Growth; Janus Growth and Income.
WARBURG PINCUS TRUST: Warburg Emerging Markets; Warburg Post-Venture Capital.
Subaccounts and Portfolios may be added or deleted in the future. Contract
values allocated to any of the Subaccounts vary, reflecting the investment
experience of the selected Subaccounts. Contract values allocated to the Fixed
account or one or more Guarantee Periods of the Market Value Adjustment Option
accumulate on a fixed basis.
<PAGE> 6
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 4
SUMMARY OF EXPENSES......................................... 7
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 12
FIXED ACCOUNT OPTION........................................ 21
THE CONTRACTS............................................... 21
CONTRACT CHARGES AND EXPENSES............................... 31
THE ANNUITY PERIOD.......................................... 35
FEDERAL INCOME TAXES........................................ 39
DISTRIBUTION OF CONTRACTS................................... 46
VOTING RIGHTS............................................... 46
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 47
DOLLAR COST AVERAGING....................................... 47
SYSTEMATIC WITHDRAWAL PLAN.................................. 48
EXPERTS..................................................... 48
LEGAL MATTERS............................................... 49
SPECIAL CONSIDERATIONS...................................... 49
AVAILABLE INFORMATION....................................... 49
BUSINESS.................................................... 50
PROPERTIES.................................................. 59
LEGAL PROCEEDINGS........................................... 59
SELECTED FINANCIAL DATA..................................... 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 61
DIRECTORS AND EXECUTIVE OFFICERS OF KILICO.................. 80
EXECUTIVE COMPENSATION...................................... 85
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 88
FINANCIAL STATEMENTS........................................ 88
CHANGE OF ACCOUNTANTS....................................... 88
</TABLE>
<PAGE> 7
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATED GUARANTEE PERIOD VALUE--The sum of an Owner's Guarantee Period
Values.
ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments and upon the continuation of whose life annuity payments
involving life contingencies depend.
ANNUITY DATE--The date on which annuity payments are to commence.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person designated to receive any benefits under a Contract
upon the death of the Annuitant or the Owner prior to the Annuity Period.
COMPANY ("WE", "US", "KILICO")--Kemper Investors Life Insurance Company.
Our home office is located at 1 Kemper Drive, Long Grove, Illinois 60049.
CONTRACT--A Variable, Fixed and Market Value Adjusted Annuity Contract
offered by this Prospectus.
CONTRACT VALUE--The sum of the values of the Owner's Separate Account
Contract Value, Accumulated Guarantee Period Value and Fixed Account
Contract Value.
CONTRACT YEAR--Period between anniversaries of the Contract's Date of
Issue.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Contract's
Date of Issue.
CONTRIBUTION YEAR--Each one year period following the date a Purchase
Payment is made.
DATE OF ISSUE--The date on which the first Contract Year commences.
FIXED ACCOUNT--The General Account of KILICO to which a Contract Owner may
allocate all or a portion of Purchase Payments or Contract Value. We
guarantee a minimum rate of interest on Purchase Payments allocated to the
Fixed Account.
FIXED ACCOUNT CONTRACT VALUE--The value of the Owner's Contract interest in
the Fixed Account.
1
<PAGE> 8
FIXED ANNUITY--An annuity under which the amount of each annuity payment
does not vary with the investment experience of a Subaccount and is
guaranteed by KILICO.
FUND OR FUNDS--Investors Fund Series, Scudder Variable Life Investment
Fund, Janus Aspen Series and Warburg Pincus Trust including any Portfolios
thereunder.
GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
separate account.
GUARANTEED INTEREST RATE--The rate of interest we establish for a given
Guarantee Period.
GUARANTEE PERIOD--The time when an amount is credited with a Guaranteed
Interest Rate. Guarantee Period options may range from one to ten years, at
our option.
GUARANTEE PERIOD VALUE--The Guarantee Period Value is the sum of the
Owner's: (1) Purchase Payment allocated or amount transferred to a
Guarantee Period; plus (2) interest credited; minus (3) withdrawals,
previously assessed Withdrawal Charges and transfers; and (4) as adjusted
for any applicable Market Value Adjustment previously made.
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula on any date prior to the end of a Guarantee
Period.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula prior to the end of
that Guarantee Period. The adjustment reflects the change in the value of
the Guarantee Period Value due to changes in interest rates since the date
the Guarantee Period commenced. The adjustment is computed using the market
value adjustment formula stated in the Contract.
NON-QUALIFIED PLAN CONTRACT--A Contract which does not receive favorable
tax treatment as an Individual Retirement Annuity, as a Simplified Employee
Pension-IRA or as a Roth Individual Retirement Annuity under the Internal
Revenue Code.
OWNER OR OWNER--The person designated in the Contract as having the
privileges of ownership defined in the Contract.
PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to herein as a
Fund.
PURCHASE PAYMENTS--Amounts paid to us for an Owner.
QUALIFIED PLAN CONTRACT--A Contract issued in connection with a retirement
plan which receives favorable tax treatment as an Individual Retirement
Annuity, as a Simplified Employee Pension--IRA or as a Roth Individual
Retirement Annuity under the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
2
<PAGE> 9
SEPARATE ACCOUNT CONTRACT VALUE--The sum of the Owner's Contract interest
in the Subaccount(s).
SUBACCOUNTS--The twenty-nine subdivisions of the Separate Account, the
assets of which consist solely of shares of the corresponding Portfolios.
SUBACCOUNT VALUE--The value of the Owner's Contract interest in each
Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which the Owner's
Contract has an interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Contract Value in the first seven Contribution Years
after a Purchase Payment is made or against certain annuitizations of
Contract Value in the first seven Contribution Years after a Purchase
Payment is made.
WITHDRAWAL VALUE--Contract Value, plus or minus any applicable Market Value
Adjustment, less any premium tax payable if the Contract is being
annuitized, minus any Withdrawal Charge applicable to that Contract.
3
<PAGE> 10
SUMMARY
Because this is a summary, it does not contain all of the information that may
be important. Read the entire prospectus and Statement of Additional Information
before deciding to invest.
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified Plan and Qualified Plan Contracts are described in
this Prospectus.
The minimum initial Purchase Payment is $1,000 and, subject to certain
exceptions, the minimum subsequent payment is $500. An allocation to a
Subaccount, Fixed Account or Guarantee Period must be at least $500. Our prior
approval is required for Purchase Payments over $1,000,000. (See "The
Contracts," page 21.)
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts selected by the Owner. Each Subaccount invests in one
of the following corresponding Portfolios:
- - Kemper Money Market
- - Kemper Government Securities
- - Kemper Investment Grade Bond
- - Kemper Global Income
- - Kemper Horizon 5
- - Kemper High Yield
- - Kemper Horizon 10+
- - Kemper Total Return
- - Kemper Horizon 20+
- - Kemper Value+Growth
- - Kemper Blue Chip
- - Kemper International
- - Kemper Contrarian Value
- - Kemper Small Cap Value
- - Kemper Small Cap Growth
- - Kemper Growth
- - Kemper Global Blue Chip
- - Kemper International Growth and Income
- - Kemper-Dreman High Return Equity
- - Kemper-Dreman Financial Services
- - Scudder VLIF Global Discovery
- - Scudder VLIF Growth and Income
- - Scudder VLIF International
- - Scudder VLIF Capital Growth
- - Janus Growth
- - Janus Growth and Income
- - Warburg Emerging Markets
- - Warburg Post-Venture Capital
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccounts.
The Fixed Account has fixed accumulations and benefits. We guarantee that
Purchase Payments allocated to the Fixed Account earn a minimum fixed interest
rate of 3%. In our discretion, we may credit interest in excess of 3%. (See
"Fixed Account Option," page 21.)
The MVA Option also provides fixed accumulations. The MVA Option is only
available during the Accumulation Period. An Owner may allocate amounts to
4
<PAGE> 11
one or more Guarantee Periods. We may offer additional Guarantee Periods at our
discretion. For new Contracts, we may limit the number of Guarantee Period
options available to three (3). We credit interest daily to amounts allocated to
the MVA Option. We declare the rate at our sole discretion. We guarantee amounts
allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee
Periods selected by the Owner. These guaranteed amounts are subject to any
applicable Withdrawal Charge, Market Value Adjustment or Records Maintenance
Charge. We will not change a Guaranteed Interest Rate for the duration of the
Guarantee Period. However, Guaranteed Interest Rates for subsequent Guarantee
Periods are set at our discretion. At the end of a Guarantee Period, a new
Guarantee Period for the same duration starts, unless the Owner timely elects
another Guarantee Period. The interests under the Contract relating to the MVA
Option are registered under the Securities Act of 1933 but are not registered
under the Investment Company Act of 1940. (See "The MVA Option," page 12.)
The investment risk under the Contracts is borne by the Owner, unless Contract
Values are allocated to:
- the MVA Option and are guaranteed to receive the Guaranteed Interest Rate
or
- the Fixed Option and are guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization,
subject to certain limitations. A transfer from a Guarantee Period is subject to
a Market Value Adjustment unless effected within 30 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 25 and 37, respectively.)
An Owner may withdraw Contract Value subject to Withdrawal Charges, any
applicable Market Value Adjustment and other specified conditions. (See
"Withdrawal During Accumulation Period," page 27.)
We do not deduct sales charges from Purchase Payments. Each Contract Year, an
Owner may withdraw, without Withdrawal Charge, the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of Contract Value. If the Owner withdraws a larger amount, the excess
Purchase Payments withdrawn are subject to a Withdrawal Charge.
The Withdrawal Charge is:
- 7% in the first Contribution Year
- 6% in the second Contribution Year
- 5% in the third and fourth Contribution Years
- 4% in the fifth Contribution Year
5
<PAGE> 12
- 3% in the sixth Contribution Year
- 2% in the seventh Contribution Year
- 0% thereafter
(See "Withdrawal Charge," page 32.) The Withdrawal Charge also applies at the
annuitization of Accumulation Units in their seventh Contribution Year or
earlier, except as set forth under "Withdrawal Charge." Withdrawals may be
subject to income tax, a 10% penalty tax, and other tax consequences. (See
"Federal Income Taxes," page 39.)
Contract charges include:
- mortality and expense risk
- administrative expenses
- records maintenance
- applicable premium taxes
- Guaranteed Retirement Income Benefit
(See "Charges Against the Separate Account," page 31.) In addition, the
investment advisers to the Funds deduct varying charges against the assets of
the Funds for which they provide investment advisory services. (See the Funds'
prospectuses for such information.)
The Contract may be purchased as an Individual Retirement Annuity, Simplified
Employee Pension--IRA, Roth Individual Retirement Annuity, and as a non-
qualified annuity. (See "Taxation of Annuities in General," page 39 and
"Qualified Plans," page 43.)
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period will depend on the state in
which the Contract is issued. However, it will be at least ten days from the
date the Owner receives the Contract. (See "The Contracts," page 21.) In
addition, a special free look period applies in some circumstances to Contracts
issued as Individual Retirement Annuities, Simplified Employee Pensions--IRAs or
as Roth Individual Retirement Annuities.
6
<PAGE> 13
- --------------------------------------------------------------------------------
SUMMARY OF EXPENSES
- --------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments).............................. None
Contingent Deferred Sales Load (as a percentage of amount surrendered)(1)
Year of Withdrawal After Purchase
First year........................... 7%
Second year.......................... 6%
Third year........................... 5%
Fourth year.......................... 5%
Fifth year........................... 4%
Sixth year........................... 3%
Seventh year......................... 2%
Eighth year and following............ 0%
Surrender Fees...................................................................................... None
Exchange Fee(2)..................................................................................... $25
ANNUAL CONTRACT FEE (Records Maintenance Charge)(3)................................................. $30
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense
Risk.................................. 1.25%
Administration.......................... .15%
Account Fees and
Expenses.............................. 0%
---------
Total Separate Account
Annual Expenses....................... 1.40%
=========
GUARANTEED RETIREMENT INCOME BENEFIT
CHARGE
Annual Expense (as a percentage of
Contract Value)....................... .25%
</TABLE>
FUND ANNUAL EXPENSES(After Fee Waivers and Expense
Reductions)
(as percentage of each Portfolio's average net assets for
the period ended December 31, 1997)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
MONEY GOVERNMENT INVESTMENT GLOBAL KEMPER
MARKET SECURITIES GRADE INCOME(8) HORIZON 5
------ ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Management
Fees... .50% .55% .60% .75% .60%
Other
Expenses... .05 .09 .20 .30 .37
Total
Portfolio
Annual
Expenses... .55 .64 .80 1.05 .97
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER
HIGH HORIZON TOTAL HORIZON VALUE+
YIELD 10+ RETURN 20+ GROWTH
------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Management
Fees... .60% .60% .55% .60% .75%
Other
Expenses... .05 .23 .05 .33 .09
Total
Portfolio
Annual
Expenses... .65 .83 .60 .93 .84
</TABLE>
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
BLUE KEMPER CONTRARIAN SMALL CAP SMALL CAP
CHIP(8) INTERNATIONAL VALUE VALUE GROWTH
------- ------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Management
Fees... .65% .75% .75% .75% .65%
Other
Expenses... .30 .16 .05 .09 .06
Total
Portfolio
Annual
Expenses... .95 .91 .80 .84 .71
<CAPTION>
KEMPER KEMPER KEMPER-
GLOBAL INTERNATIONAL DREMAN
KEMPER BLUE GROWTH AND HIGH RETURN
GROWTH CHIP(6)(7) INCOME(6)(7) EQUITY(7)
------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
Management
Fees... .60% .85% .70% .75%
Other
Expenses... .05 .71 .42 .12
Total
Portfolio
Annual
Expenses... .65 1.56 1.12 .87
</TABLE>
<TABLE>
<CAPTION>
KEMPER- SCUDDER SCUDDER SCUDDER
DREMAN VLIF VLIF SCUDDER VLIF
FINANCIAL GLOBAL GROWTH AND VLIF CAPITAL
INCOME(6)(7) DISCOVERY INCOME INTERNATIONAL GROWTH
------------ --------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C>
Management
Fees... .75 .98 .48 .88 .48%
Other
Expenses... .24 .52 .10 .12 .03
Total
Portfolio
Annual
Expenses... .99 1.50 .58 1.00 .51
<CAPTION>
WARBURG
JANUS WARBURG POST-
JANUS GROWTH AND EMERGING VENTURE
GROWTH(4) INCOME(4)(7) MARKETS(5) CAPITAL(5)
--------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Management
Fees... .65% .67% .81% 1.07%
Other
Expenses... .05 .30 .59 .33
Total
Portfolio
Annual
Expenses... .70 .97 1.40 1.40
</TABLE>
- --------------------------------------------------------------------------------
(1) A Contract Owner may withdraw up to the greater of (i) the excess of
Contract Value over total Purchase Payments subject to Withdrawal Charges
less prior withdrawals that were previously assessed a Withdrawal Charge,
and (ii) 10% of the Contract Value in any Contract Year without assessment
7
<PAGE> 14
of any charge. In certain circumstances We may reduce or waive the contingent
deferred sales charge.
(2) We reserve the right to charge a fee of $25 for each transfer of Contract
Value in excess of 12 transfers per calendar year.
(3) Applies to Contracts with a Contract Value less than $50,000 on the date of
assessment. In certain circumstances We may reduce or waive the annual
Records Maintenance Charge.
(4) The expense figures shown are net of certain fee waivers or reductions from
Janus Capital Corporation. Without such waivers (estimated for Growth and
Income Portfolio), Management Fees, Other Expenses and Total Portfolio
Annual Expenses for the Portfolios for the fiscal year ended December 31,
1997 would have been: .74%, .04% and .78%, respectively, for the Growth
Portfolio; and .75%, .30% and 1.05%, respectively, for the Growth and Income
Portfolio. See the prospectus and Statement of Additional Information of
Janus Aspen Series for a description of these waivers.
(5) The expense figures shown are net of certain fee waivers or reductions from
Warburg Pincus Asset Management, Inc. Without such waivers, Management Fees,
Other Expenses and Total Portfolio Annual Expenses for the Portfolios for
the fiscal year ended December 31, 1997 would have been 1.25%, .71% and
1.96%, respectively, for the Emerging Markets Portfolio; and 1.25%, .44% and
1.69%, respectively, for the Post-Venture Capital Portfolio.
(6) The expense figures shown are net of certain fee waivers or reductions from
Scudder Kemper Investments, Inc. Without such waivers, Management Fees,
Other Expenses and Total Portfolio Annual Expenses for the Portfolios for
the fiscal year ended December 31, 1997 would have been: 1.00%, .42% and
1.42% for the Kemper International Growth and Income Portfolio; and 1.00%,
.71% and 1.71% for the Kemper Global Blue Chip Portfolio.
(7) Portfolios commenced operations 5/1/98. "Other Expenses" have been
estimated.
(8) Portfolios commenced operations 5/1/97. "Other Expenses" have been
estimated.
8
<PAGE> 15
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your Contract at the
end of the periods shown, you would pay
the following expenses on a $1,000
investment, assuming 5% annual return on
assets:
Kemper Money Market #1(1) $ 93 $119 $156 $237
Kemper Government Securities 94 121 161 247
Kemper Investment Grade Bond 95 126 169 263
Kemper Global Income 98 133 181 289
Kemper Horizon 5 97 131 177 281
Kemper High Yield 94 122 161 248
Kemper Horizon 10+ 95 127 170 266
Kemper Total Return 93 120 159 242
Kemper Horizon 20+ 96 130 175 277
Kemper Value+Growth 96 127 171 267
Kemper Blue Chip 97 130 176 278
Kemper International 96 129 174 275
Kemper Contrarian Value 95 126 169 263
Kemper Small Cap Value 96 127 171 267
Kemper Small Cap Growth 94 123 164 254
Kemper Growth 94 122 161 248
Kemper Global Blue Chip 102 148 -- --
Kemper International Growth and 98 135 -- --
Income
Kemper-Dreman High Return 96 128 -- --
Equity
Kemper-Dreman Financial 97 131 -- --
Services
Scudder VLIF Global Discovery 102 146 -- --
Scudder VLIF Growth and Income 93 119 -- --
Scudder VLIF International 97 132 -- --
Scudder VLIF Capital Growth 92 117 -- --
Janus Growth 94 123 164 253
Janus Growth and Income 97 131 -- --
Warburg Emerging Markets 101 143 -- --
Warburg Post-Venture Capital 101 143 -- --
</TABLE>
9
<PAGE> 16
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you do not surrender your contract,
you would pay the following expenses on
a $1,000 investment, assuming 5% annual
return on assets:
Kemper Money Market #1(1) $ 21 $ 64 $110 $237
Kemper Government Securities 22 67 115 247
Kemper Investment Grade Bond 23 72 123 263
Kemper Global Income 26 80 136 289
Kemper Horizon 5 25 77 132 281
Kemper High Yield 22 67 115 248
Kemper Horizon 10+ 24 73 125 266
Kemper Total Return 21 66 113 242
Kemper Horizon 20+ 25 76 130 277
Kemper Value+Growth 24 73 125 267
Kemper Blue Chip 25 76 131 278
Kemper International 24 75 129 275
Kemper Contrarian Value 23 72 123 263
Kemper Small Cap Value 24 73 125 267
Kemper Small Cap Growth 22 69 118 254
Kemper Growth 22 67 115 248
Kemper Global Blue Chip 31 95 -- --
Kemper International Growth and 27 82 -- --
Income
Kemper-Dreman High Return 24 74 -- --
Equity
Kemper-Dreman Financial 25 78 -- --
Services
Scudder VLIF Global Discovery 30 93 -- --
Scudder VLIF Growth and Income 21 65 -- --
Scudder VLIF International 25 78 -- --
Scudder VLIF Capital Growth 20 63 -- --
Janus Growth 22 69 118 253
Janus Growth and Income 25 77 -- --
Warburg Emerging Markets 29 90 -- --
Warburg Post-Venture Capital 29 90 -- --
</TABLE>
10
<PAGE> 17
The purpose of the preceding table which includes the "SUMMARY OF EXPENSES" on
the prior page, is to assist Contract Owners in understanding the various costs
and expenses that a Contract Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH
MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. "Management Fees" and "Other Expenses" in the "SUMMARY OF
EXPENSES" for the Portfolios have been provided by Scudder Kemper Investments,
Inc., Janus Capital Corporation and Warburg Pincus Asset Management, Inc., as
applicable, and have not been independently verified. The Example assumes a 5%
annual rate of return pursuant to requirements of the Securities and Exchange
Commission. This hypothetical rate of return is not intended to be
representative of past or future performance of any Subaccount. The Records
Maintenance Charge is a single charge, it is not a separate charge for each
Subaccount. In addition, the effect of the Records Maintenance Charge has been
reflected in the Example by applying the percentage derived by dividing the
total amounts of annual Records Maintenance Charge collected by the total net
assets of all the Subaccounts in the Separate Account. See "Contract Charges and
Expenses" for more information regarding the various costs and expenses.
(1)Money Market Subaccount #2 is not shown because it is available only for
dollar cost averaging that will deplete an Owner's subaccount value entirely
at least by the end of the first Contribution Year.
11
<PAGE> 18
KILICO, THE MVA OPTION,
THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
Kemper Corporation is a wholly-owned subsidiary of Zurich Holding Company of
America ("ZHCA"), which is a wholly-owned subsidiary of Zurich Insurance Company
("Zurich"). Zurich is a wholly-owned subsidiary of Zurich Financial Services
("ZFS"). ZFS was formed in the September, 1998 merger of the Zurich Group with
the financial services business of B.A.T. Industries. ZFS is owned by Zurich
Allied A.G. and Allied Zurich p.l.c., fifty-seven percent and forty-three
percent, respectively.
THE MVA OPTION
An Owner may allocate amounts in the Market Value Adjustment ("MVA") Option to
one or more Guarantee Periods with durations of one to ten years during the
Accumulation Period. At our discretion, We may offer additional Guarantee
Periods or limit, for new Contracts, the number of Guarantee Periods available
to three.
The amounts allocated to the MVA Option under the Contracts are invested under
the laws regulating our General Account. Assets supporting the amounts allocated
to Guarantee Periods are held in a "non-unitized" separate account. However, our
General Account assets are available to fund benefits under the Contracts. A
non-unitized separate account is a separate account in which the Owner does not
participate in the performance of the assets through unit values. There are no
discrete units for this separate account. The assets of the non-unitized
separate account are held as reserves for our guaranteed obligations. The assets
of the separate account are not chargeable with liabilities arising out of the
business conducted by any other separate account or out of any other business we
may conduct.
State insurance laws concerning the nature and quality of investments regulate
our General Account investments and any non-unitized separate account
investments. These laws generally permit investment in federal, state and
municipal obligations, preferred and common stocks, corporate bonds, real estate
mortgages, real estate and certain other investments. (See "Management's
Discussion and Analysis--INVESTMENTS" and "FINANCIAL STATEMENTS" for information
on KILICO's investments.) Our affiliate, Scudder Kemper Investments, Inc.
("SKI"), manages our General Account.
We consider the return available on the instruments in which Contract proceeds
are invested when establishing Guaranteed Interest Rates. This return is only
one of many factors considered in establishing Guaranteed Interest
12
<PAGE> 19
Rates. (See "The Accumulation Period--4. Establishment of Guaranteed Interest
Rates.")
Our investment strategy for the non-unitized separate account is generally to
match Guarantee Period liabilities with assets, such as debt instruments. We
expect to invest in debt instruments such as:
- securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the
United States Government;
- debt securities which have an investment grade, at the time of purchase,
within the four (4) highest grades assigned by Moody's Investors
Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other
nationally recognized rating service; and
- other debt instruments including issues of or guaranteed by banks or bank
holding companies and corporations, which obligations, although not rated
by Moody's or Standard & Poor's, are deemed by our management to have an
investment quality comparable to securities which may be otherwise
purchased
- options and futures transactions on fixed income securities.
[TO BE UPDATED BY AMENDMENT] KILICO's invested assets portfolio at December 31,
1997 included approximately 87.4 percent in U.S. Treasuries, investment grade
corporate, foreign and municipal bonds, and commercial paper, .3 percent in
below investment grade (high risk) bonds, 4.9 percent in mortgage loans and
other real estate-related investments and 7.4 percent in all other investments.
(See "Management's Discussion and Analysis--INVESTMENTS.")
We are not obligated to invest the amounts allocated to the MVA Option according
to any particular strategy, except as state insurance laws may require. (See
"Management's Discussion and Analysis--INVESTMENTS.")
THE SEPARATE ACCOUNT
We established the KILICO Variable Annuity Separate Account on May 29, 1981
pursuant to Illinois law as the KILICO Money Market Separate Account. KILICO
Money Market Separate Account was initially registered with the Securities and
Exchange Commission ("SEC") as an open-end, diversified management investment
company. On November 2, 1989, contract owners approved a Reorganization under
which the Separate Account was restructured as a unit investment trust. The SEC
does not supervise the management, investment practices or policies of the
Separate Account or KILICO.
Benefits provided under the Contracts are Our obligations. Although the assets
in the Separate Account are Our property, they are held separately from Our
other assets and are not chargeable with liabilities arising out of any other
business We may conduct. Income, capital gains and capital losses, whether or
not realized, from the assets allocated to the Separate Account are credited to
13
<PAGE> 20
or charged against the Separate Account without regard to the income, capital
gains and capital losses arising out of any other business We may conduct.
Twenty-eight Subaccounts of the Separate Account are currently available. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios.
We may add or delete Subaccounts in the future.
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges and to transfer assets from one Subaccount to another as
requested by Owners. All dividends and capital gains distributions received by
the Separate Account from a Portfolio are reinvested in that Portfolio at net
asset value and retained as assets of the corresponding Subaccount.
The Separate Account's financial statements appear in the Statement of
Additional Information.
THE FUNDS
The Separate Account invests in shares of the following open-end, management
investment companies:
- Investors Fund Series
- Scudder Variable Life Investment Fund
- Janus Aspen Series
- Warburg Pincus Trust
The Funds provide investment vehicles for variable life insurance and variable
annuity contracts and, in the case of Janus Aspen Series and Warburg Pincus
Trust, certain qualified retirement plans. Shares of the Funds are sold only to
insurance company separate accounts and qualified retirement plans. Shares of
the Funds may be sold to separate accounts of other insurance companies, whether
or not affiliated with Us. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts of companies unaffiliated with Us, or for variable
life insurance separate accounts, variable annuity separate accounts and
qualified retirement plans to invest simultaneously in the Funds. Currently, We
do not foresee disadvantages to variable life insurance owners, variable annuity
owners or qualified retirement plans. The Funds monitor events for material
conflicts between owners and determine what action, if any, should be taken. In
addition, if we believe that a Fund's response to any of those events or
conflicts insufficiently protects Owners, we will take appropriate action.
A Fund may consist of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio.
14
<PAGE> 21
The twenty-eight Portfolios are summarized below:
INVESTORS FUND SERIES
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments.
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.
KEMPER GLOBAL INCOME PORTFOLIO seeks to provide high current income consistent
with prudent total return asset management.
KEMPER HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
KEMPER HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
KEMPER TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, by investing in a combination of debt securities and
common stocks.
KEMPER HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER VALUE+GROWTH PORTFOLIO seeks growth of capital through professional
management of a portfolio of growth and value stocks.
KEMPER BLUE CHIP PORTFOLIO seeks growth of capital and of income.
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER CONTRARIAN VALUE PORTFOLIO seeks to achieve a high rate of total return
from a portfolio primarily of value stocks of larger companies.
KEMPER SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
15
<PAGE> 22
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER GLOBAL BLUE CHIP PORTFOLIO seeks long-term growth of capital through a
diversified worldwide portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO seeks a long-term growth of
capital and current income, primarily from foreign equity securities.
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO seeks to achieve a high rate of total
return.
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO seeks long-term capital appreciation
by investing primarily in common stocks and other equity securities of companies
in the financial services industry believed by the Portfolio's investment
manager to be undervalued.
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF GLOBAL DISCOVERY PORTFOLIO seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
SCUDDER VLIF GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
SCUDDER VLIF CAPITAL GROWTH PORTFOLIO seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
JANUS ASPEN SERIES
JANUS GROWTH PORTFOLIO seeks long-term growth of capital in a manner consistent
with the preservation of capital. It is a diversified Portfolio that pursues its
objective by investing in common stocks of companies of any size. This Portfolio
generally invests in larger, more established issuers.
JANUS GROWTH AND INCOME PORTFOLIO seeks long-term capital growth and current
income.
WARBURG PINCUS TRUST
WARBURG EMERGING MARKETS PORTFOLIO seeks long-term growth of capital.
WARBURG POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities of issuers in their
post-venture-capital stage of development and pursues an aggressive investment
strategy.
------------------
16
<PAGE> 23
The Portfolios may not achieve their stated objective. More detailed
information, including a description of risks involved in investing in the
Portfolios is found in the Funds' prospectuses and Statements of Additional
Information, available from us upon request.
Scudder Kemper Investments, Inc. ("SKI") is the investment manager for the
twenty available Portfolios of Investors Fund Series and the four available
Portfolios of Scudder Variable Life Investment Fund. Zurich Investment
Management Limited ("ZIML"), an affiliate of SKI, is the sub-adviser for the
Kemper International Portfolio. Under the terms of the Sub-Advisory Agreement
with SKI, ZIML renders investment advisory and management services with regard
to that portion of this Portfolio's assets as may be allocated by SKI to ZIML
from time to time for management, including services related to foreign
securities, foreign currency transactions and related investments. Dreman Value
Management L.L.C. ("DVM") serves as sub-adviser for the Kemper-Dreman High
Return Equity and Kemper-Dreman Financial Services Portfolios. Under the terms
of the sub-advisory agreement between SKI and DVM for each Portfolio, DVM
manages the investment and reinvestment of each Portfolio's assets in accordance
with the investment objectives, policies and limitations and subject to the
supervision of SKI and the Board of Trustees. Janus Capital Corporation is the
investment adviser for the two available Portfolios of the Janus Aspen Series.
Warburg Pincus Asset Management, Inc. is the investment adviser for the two
available Portfolios of the Warburg Pincus Trust. The investment advisers are
paid fees for their services by the Funds they manage. KILICO may receive
compensation from the Funds or the investment advisers of the Funds for services
related to the Funds. Such compensation will be consistent with the services
rendered or the cost savings resulting from the arrangement.
For their services to the Portfolios, the managers receive compensation at the
following rates: [TO BE UPDATED BY AMENDMENT]
INVESTORS FUND SERIES
For its services, SKI is paid a management fee based upon the average daily net
assets of each Portfolio, as follows: Kemper Money Market (.50 of 1%), Kemper
Government Securities (.55 of 1%), Kemper Investment Grade Bond (.60 of 1%),
Kemper Global Income (.75 of 1%), Kemper Horizon 5 (.60 of 1%), Kemper High
Yield (.60 of 1%), Kemper Horizon 10+ (.60 of 1%), Kemper Total Return (.55 of
1%), Kemper Horizon 20+ (.60 of 1%), Kemper Value+Growth (.75 of 1%), Kemper
Blue Chip (.65 of 1%), Kemper International (.75 of 1%), Kemper Contrarian Value
(.75 of 1%), Kemper Small Cap Value (.75 of 1%), Kemper Small Cap Growth (.65 of
1%), Kemper Growth (.60 of 1%), Kemper Global Blue Chip (1.00% for the first
$250 million, .95% for the next $750 million and .90% over $1 billion), Kemper
International Growth and Income (.70 of 1%), Kemper-Dreman High Return Equity
and Kemper-Dreman Financial Services (.75% for the first $250 million, .72% for
the next $750 million, .70% for the next $1.5 billion, .68% for the next $2.5
billion, .65% for the next $2.5 billion, .64% for the next $2.5 billion, .63%
for
17
<PAGE> 24
the next $2.5 billion and .62% over $12.5 billion). SKI pays ZIML for its
services as sub-adviser for the Kemper International Portfolio and the Kemper
Global Income Portfolio a sub-advisory fee, payable monthly, at an annual rate
of .35 of 1% and .30 of 1%, respectively, of the average daily net assets of
such Portfolios. SKI pays DVM for its services as sub-adviser for the Kemper-
Dreman High Return Equity and Kemper-Dreman Financial Services Portfolios a
sub-advisory fee, payable monthly, at the annual rate of .24% of the first $250
million of each Portfolio's average daily net assets, .23% of the average daily
net assets between $250 million and $1 billion, .224% of average daily net
assets between $1 billion and $2.5 billion, .218% of average daily net assets
between $2.5 billion and $5 billion, .208% of average daily net assets between
$5 billion and $7.5 billion, .205% of average daily net assets between $7.5
billion and $10 billion, .202% of average daily net assets between $10 billion
and $12.5 billion and .198% of each Portfolio's average daily net assets over
$12 billion.
SCUDDER VARIABLE LIFE INVESTMENT FUND
For its advisory services to the Portfolios, SKI receives compensation monthly
at the following annual rate for each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF THE AVERAGE
DAILY NET ASSET VALUES
PORTFOLIO OF EACH PORTFOLIO
--------- ----------------------
<S> <C>
Scudder VLIF Global Discovery....................... .975%
Scudder VLIF Growth and Income...................... .475%
Scudder VLIF International.......................... .875%
Scudder VLIF Capital Growth......................... .475%
</TABLE>
JANUS ASPEN SERIES
Janus Capital Corporation receives a monthly advisory fee for the Janus Growth
Portfolio and Janus Growth and Income Portfolio based on the following schedule
(expressed as an annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
------------------- -----------
<S> <C>
First $300,000,000.......... .75%
Next $200,000,000........... .70%
Over $500,000,000........... .65%
</TABLE>
However, Janus Capital Corporation has agreed to reduce each of the above
Portfolios' advisory fees to the extent that such fee exceeds the effective rate
of a fund managed by Janus Capital Corporation with similar investment objective
and policies.
WARBURG PINCUS TRUST
Warburg Pincus Asset Management, Inc. receives a monthly advisory fee based upon
the average daily net assets of each Warburg Portfolio, as follows:
18
<PAGE> 25
Emerging Markets .81% and Post-Venture Capital 1.07% (after waivers and/or
reimbursements).
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We reserve the right to eliminate the shares of any of the Portfolios
and to substitute shares of another Portfolio or of another investment company,
if the shares of a Portfolio are no longer available for investment, or if in
our judgment further investment in any Portfolio becomes inappropriate in view
of the purposes of the Separate Account. We will not substitute any shares
attributable to an Owner's interest in a Subaccount without prior notice and the
SEC's prior approval, if required. The Separate Account may purchase other
securities for other series or classes of policies, or may permit a conversion
between series or classes of policies on the basis of requests made by Owners.
We may establish additional subaccounts of the Separate Account, each of which
would invest in a new portfolio of the Funds, or in shares of another investment
company. New subaccounts may be established when, in our discretion, marketing
needs or investment conditions warrant. New subaccounts may be made available to
existing Owners as we determine. We may also eliminate or combine one or more
subaccounts, transfer assets, or substitute one subaccount for another
subaccount, if, in our discretion, marketing, tax, or investment conditions
warrant. We will notify all Owners of any such changes.
If we deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be: (a) operated as a management company
under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with our other separate
accounts. To the extent permitted by law, we may transfer the assets of the
Separate Account to another separate account or to the General Account.
PERFORMANCE INFORMATION
The Separate Account may advertise several types of performance information for
the Subaccounts. All Subaccounts may advertise standardized "average annual
total return" and nonstandardized "total return." The Kemper High Yield
Subaccount, Kemper Government Securities Subaccount and Kemper Investment Grade
Bond Subaccount may also advertise "yield". The Kemper Money Market Subaccount
may advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of a Subaccount's
future performance.
Standardized average annual total return and nonstandardized total return
calculations measure a Subaccount's net income plus the effect of any realized
or unrealized appreciation or depreciation of the Subaccount's underlying
investments. Standardized average annual total return and nonstandardized total
return will be quoted for periods of at least one year, three years, five years
19
<PAGE> 26
and ten years, if applicable. In addition, we will show standardized average
annual total return for the life of the Subaccount, meaning the time the
underlying Portfolio has been held in the Subaccount. We will show
nonstandardized total return for the life of the Portfolio, meaning the time the
underlying Portfolio has been in existence. Standardized average annual total
return will be current to the most recent calendar quarter. Nonstandardized
total return will be current to the most recent calendar month. Standardized
average annual total return figures are annualized and, therefore, represent the
average annual percentage change in the value of a Subaccount investment over
the applicable period. Nonstandardized total return may include annualized and
nonannualized (cumulative) figures. Nonannualized figures represent the actual
percentage change over the applicable period.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for the Kemper Money
Market Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period, compounded on a semi-annual basis. The effective yield for the
Kemper Money Market Subaccount is calculated similarly, but includes the effect
of assumed compounding calculated under rules prescribed by the SEC. The Kemper
Money Market Subaccount's effective yield will be slightly higher than its yield
due to this compounding effect.
The Subaccounts' units are sold at Accumulation Unit value. The Subaccounts'
performance figures and Accumulation Unit values fluctuate. Subaccount units are
redeemable by an Owner at Accumulation Unit value, which may be more or less
than original cost. The performance figures reflect the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first seven years may be subject to a Withdrawal
Charge that ranges from 7% the first year to 0% after seven years. Yield,
effective yield and nonstandardized total return figures do not include the
effect of any Withdrawal Charge that may be imposed upon the redemption of
units, and thus may be higher than if such charges were deducted. Standardized
average annual total return figures include the effect of the applicable
Withdrawal Charge that may be imposed at the end of the period.
The Subaccounts may be compared to relevant indices and performance data from
independent sources. From time to time, the Separate Account may quote
information from publications such as MORNINGSTAR, INC., THE WALL STREET
JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA
TODAY, INSTITUTIONAL INVESTOR, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE,
BROKER WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
Additional information concerning a Subaccount's performance and these indices
and independent sources is provided in the Statement of Additional Information.
20
<PAGE> 27
FIXED ACCOUNT OPTION
Amounts allocated or transferred to the Fixed Account are part of our General
Account, supporting insurance and annuity obligations. Interests in the Fixed
Account are not registered under the Securities Act of 1933 ("1933 Act"), and
the Fixed Account is not registered as an investment company under the
Investment Company Act of 1940 ("1940 Act"). Accordingly, neither the Fixed
Account nor any interests therein generally are subject to the provisions of the
1933 or 1940 Acts. We have been advised that the staff of the SEC has not
reviewed the disclosures in this Prospectus relating to the Fixed Account.
Disclosures regarding the Fixed Account, however, may be subject to the general
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
Under the Fixed Account Option, we pay a fixed interest rate for stated periods.
This Prospectus describes only the aspects of the Contract involving the
Separate Account, unless we refer to fixed accumulation and annuity elements.
We guarantee that payments allocated to the Fixed Account earn a minimum fixed
interest rate of 3%. At our discretion, We may credit interest in excess of 3%.
We reserve the right to change the rate of excess interest credited. We also
reserve the right to declare different rates of excess interest depending on
when amounts are allocated or transferred to the Fixed Account. As a result,
amounts at any designated time may be credited with a different rate of excess
interest than the rate previously credited to such amounts and to amounts
allocated or transferred at any other designated time.
THE CONTRACTS
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $1,000, and the minimum subsequent
payment is $500. The minimum subsequent payment is $100 if an Owner authorizes
us to draw on an account via check or electronic debit. Cumulative Purchase
Payments in excess of $1,000,000 require our prior approval. The Internal
Revenue Code may also limit the maximum annual amount of Purchase Payments. An
allocation to a Subaccount, the Fixed Account or a Guarantee Period must be at
least $500.
We may at any time amend the Contract in accordance with changes in the law,
including applicable tax laws, regulations or rulings, and for other purposes.
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period depends upon the state in which
the Contract is issued. However, it will be at least 10 days from the date the
Owner receives the Contract. The amount of the refund depends on the state in
which the Contract is issued. Generally, it will be an amount at least equal to
the Separate Account Contract Value plus amounts allocated to the General
Account and the Guarantee Periods on the date We receive the returned Contract,
without any deduction for Withdrawal Charges or Records
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<PAGE> 28
Maintenance Charges. Some states require the return of the Purchase Payment. In
addition, a special free look period applies in some circumstances to Contracts
issued as Individual Retirement Annuities, Simplified Employee Pensions--IRAs or
as Roth Individual Retirement Annuities.
During the Accumulation Period, the Owner may assign the Contract or change a
Beneficiary at any time by signing our form. No assignment or Beneficiary change
is binding on us until we receive it. We assume no responsibility for the
validity of the assignment or Beneficiary change. An assignment will subject the
Owner to immediate tax liability and may subject the Owner to a 10% tax penalty.
(See "Tax Treatment of Withdrawals, Loans and Assignments.")
Amounts payable during the Annuity Period may not be assigned or encumbered. In
addition, to the extent permitted by law, annuity payments are not subject to
levy, attachment or other judicial process for the payment of the payee's debts
or obligations.
The Owner designates the Beneficiary. If the Annuitant or Owner dies, and no
designated Beneficiary or contingent beneficiary is alive at that time, we will
pay the Annuitant's or Owner's estate.
Under a Qualified Plan Contract, the provisions of the applicable plan may
prohibit a change of Beneficiary. Generally, an interest in a Qualified Plan
Contract may not be assigned.
B. THE ACCUMULATION PERIOD.
1. APPLICATION OF PURCHASE PAYMENTS.
The Owner selects the allocation of Purchase Payments to the Subaccount(s),
Guarantee Periods, or Fixed Account. The amount of each Purchase Payment
allocated to a Subaccount is based on the value of an Accumulation Unit, as
computed after we receive the Purchase Payment. Generally, we determine the
value of an Accumulation Unit by 3:00 p.m. Chicago time on each day that the New
York Stock Exchange is open for trading. Purchase Payments allocated to a
Guarantee Period or to the Fixed Account begin earning interest one day after we
receive them. However, with respect to initial Purchase Payments, the amount is
credited only after we determine to issue the Contract, but no later than the
second day after we receive the Purchase Payment. After the initial purchase, we
determine the number of Accumulation Units credited by dividing the Purchase
Payment allocated to a Subaccount by the Subaccount's Accumulation Unit value,
as computed after we receive the Purchase Payment.
The number of Accumulation Units will not change due to investment experience.
Accumulation Unit value varies to reflect the investment experience of the
Subaccount and the assessment of charges against the Subaccount, other than the
Records Maintenance Charge and Guaranteed Retirement Income Benefit Charge. The
number of Accumulation Units is reduced when the Records Maintenance Charge and
Guaranteed Retirement Income Benefit Charge are assessed.
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<PAGE> 29
If we are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, we will promptly request the
necessary information. If the requested information is not furnished within five
(5) business days after we receive the initial Purchase Payment, or if we
determine that we cannot issue the Contract within the five (5) day period, we
will return the initial Purchase Payment to the Owner, unless the Owner consents
to our retaining the Purchase Payment until the application is completed.
We will issue a Contract without a signed application if:
- a dealer provides us with application information, electronically or in
writing
- we receive the initial Purchase Payment
- the Owner confirms in writing, after the Contract is delivered, that all
information in the Contract is correct.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units purchased is based on
the Subaccount's Accumulation Unit value at the end of the current Valuation
Period. When amounts are transferred out of or deducted from a Subaccount, units
are redeemed in a similar manner.
The Accumulation Unit value for each subsequent Valuation Period is the
investment experience factor for that Valuation Period times the Accumulation
Unit value for the preceding Valuation Period. Each Valuation Period has a
single Accumulation Unit value which applies to each day in the Valuation
Period.
Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
Valuation Period.
The investment experience factor of a Subaccount for any Valuation Period is
determined by the following formula:
(1 / 2) - 3, where:
(1) is the net result of:
- the net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period; plus
- the per share amount of any dividend or capital gain distributions
made by the investments held in the Subaccount, if the "ex-dividend"
date occurs during the current Valuation Period; plus or minus
- a charge or credit for any taxes reserved for the current Valuation
Period which we determine have resulted from the investment operations
of the Subaccount;
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<PAGE> 30
(2) is the net asset value per share of the investment held in the
Subaccount determined at the end of the preceding Valuation Period;
(3) is the factor representing the mortality and expense risk and
administration charges.
3. GUARANTEE PERIODS OF THE MVA OPTION.
An Owner may allocate Purchase Payments to one or more Guarantee Periods with
durations of one to ten years. Each Guarantee Period has a Guaranteed Interest
Rate which will not change during the Guarantee Period. Interest is credited
daily at the effective annual rate.
The following example illustrates how we credit Guarantee Period interest.
EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 4.0% Effective Annual Rate
</TABLE>
<TABLE>
<CAPTION>
INTEREST CREDITED CUMULATIVE
YEAR DURING YEAR INTEREST CREDITED
- ---- ----------------- -----------------
<S> <C> <C>
1........................ $1,600.00 $1,600.00
2........................ 1,664.00 3,264.00
3........................ 1,730.56 4,994.56
4........................ 1,799.78 6,794.34
5........................ 1,871.77 8,666.11
</TABLE>
Accumulated value at the end of 5 years is:
$40,000 + $8,666.11 = $48,666.11
NOTE: THIS EXAMPLE ASSUMES THAT NO WITHDRAWALS ARE MADE DURING THE FIVE-YEAR
PERIOD. IF THE OWNER MAKES WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET
VALUE ADJUSTMENTS AND WITHDRAWAL CHARGES APPLY.
THE HYPOTHETICAL INTEREST RATE IS NOT INTENDED TO PREDICT FUTURE GUARANTEED
INTEREST RATES. ACTUAL GUARANTEED INTEREST RATES FOR ANY GUARANTEE PERIOD MAY BE
MORE OR LESS THAN THOSE SHOWN.
At the end of any Guarantee Period, we send written notice of the beginning of a
new Guarantee Period. A new Guarantee Period for the same duration starts unless
the Owner elects another Guarantee Period within thirty days after the end of
the terminating Guarantee Period. The Owner may choose a different Guarantee
Period by preauthorized telephone instructions or by giving us written notice.
An Owner should not select a new Guarantee Period extending beyond the Annuity
Date. Otherwise, the guarantee period amount available for annuitization is
subject to Market Value Adjustments and Withdrawal Charges. (See "Market Value
Adjustment" below.)
The amount reinvested at the beginning of a new Guarantee Period is the
Guarantee Period Value for the Guarantee Period just ended. The Guaranteed
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<PAGE> 31
Interest Rate in effect when the new Guarantee Period begins applies for the
duration of the new Guarantee Period.
An Owner may call Us at 1-800-621-5001 or write to us at 1 Kemper Drive, Long
Grove, Illinois 60049 for the new Guaranteed Interest Rates.
4. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
We declare the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate. Once
established, rates are guaranteed for the respective Guarantee Periods. We
advise an Owner of the Guaranteed Interest Rate for a chosen Guarantee Period
when we receive a Purchase Payment, when a transfer is effectuated or when a
Guarantee Period renews. Withdrawals of Accumulated Guarantee Period Value are
subject to Withdrawal Charges and Records Maintenance Charges and may be subject
to a Market Value Adjustment. (See "Market Value Adjustment" below.)
We have no specific formula for establishing the Guaranteed Interest Rates. The
determination may be influenced by, but not necessarily correspond to, the
current interest rate environment. (See "The MVA Option".) We may also consider,
among other factors, the duration of a Guarantee Period, regulatory and tax
requirements, sales commissions and administrative expenses we bear, and general
economic trends.
WE MAKE THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED.
WE CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE GUARANTEED INTEREST RATES.
5. CONTRACT VALUE.
On any Valuation Date, Contract Value equals the total of:
- the number of Accumulation Units credited to each Subaccount times
- the value of a corresponding Accumulation Unit for each Subaccount plus
- the Owner's Accumulated Guarantee Period Value in the MVA Option plus
- the Owner's interest in the Fixed Account.
6. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, an Owner may transfer the Contract Value among
the Subaccounts, the Guarantee Periods and the Fixed Account subject to the
following provisions:
- the amount transferred must be at least $100 unless the total Contract
Value attributable to a Subaccount, Guarantee Period or Fixed Account is
transferred;
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<PAGE> 32
- the Contract Value remaining in a Subaccount, Guarantee Period or Fixed
Account must be at least $500 unless the total value is transferred;
- transfers may not be made from any Subaccount to the Fixed Account over
the six months following any transfer from the Fixed Account into one or
more Subaccounts;
- transfers from the Fixed Account may be made one time during the Contract
Year during the thirty days following an anniversary of a Contract Year.
We reserve the right to charge a $25 fee for each transfer in excess of 12
transfers per calendar year. In addition, transfers of Guarantee Period Value
are subject to Market Value Adjustment unless the transfer is made within thirty
days of the end of the Guarantee Period. Because a transfer before the end of a
Guarantee Period is subject to a Market Value Adjustment, the amount transferred
from the Guarantee Period may be more or less than the requested dollar amount.
We make transfers pursuant to written or telephone instructions specifying in
detail the requested changes. Transfers involving a Subaccount are based upon
the Accumulation Unit values, as calculated after we receive transfer
instructions. We may suspend, modify or terminate the transfer provision. We
disclaim all liability if we follow in good faith instructions given in
accordance with our procedures, including requests for personal identifying
information, that are designed to limit unauthorized use of the privilege.
Therefore, an Owner bears the risk of loss in the event of a fraudulent
telephone transfer.
If an Owner authorizes a third party to transact transfers on the Owner's
behalf, we will reallocate the Contract Value pursuant to the authorized asset
allocation program. However, we do not offer or participate in any asset
allocation program and we take no responsibility for any third party asset
allocation program. We may suspend or cancel acceptance of a third party's
instructions at any time and may restrict the investment options available for
transfer under third party authorizations.
An Owner may elect to have transfers made automatically among the Subaccounts on
an annual, semiannual or quarterly basis so that Contract Value is reallocated
to match the percentage allocations in the Owner's predefined allocation
elections. Transfers under this program are not be subject to the $100 minimum
transfer limitation. An election to participate in the automatic asset
reallocation program must be in writing on our form and returned to Us.
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<PAGE> 33
7. WITHDRAWAL DURING ACCUMULATION PERIOD.
The Owner may redeem some or all of the Contract Value and previous withdrawals,
plus or minus any applicable Market Value Adjustment and minus any Withdrawal
Charge. Withdrawals will have tax consequences. (See "Federal Tax Matters.") A
withdrawal of the entire Contract Value is called a surrender.
In any Contract Year, an Owner may withdraw, without Withdrawal Charge, up to
the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of the Contract Value.
If the Owner withdraws a larger amount, the Purchase Payments withdrawn are
subject to a Withdrawal Charge. The Withdrawal Charge is:
- 7% in the first Contribution Year
- 6% in the second Contribution Year
- 5% in the third and fourth Contribution Years
- 4% in the fifth Contribution Year
- 3% in the sixth Contribution Year
- 2% in the seventh Contribution Year
- 0% in the eighth and later Contribution Years
If Contract Value is allocated to more than one investment option, an Owner must
specify the source of the partial withdrawal. If an Owner does not specify the
source, we redeem Accumulation Units on a pro rata basis from all investment
options in which the Owner has an interest. Accumulation Units attributable to
the earliest Contribution Years are redeemed first.
Partial withdrawals are subject to the following:
- Partial withdrawals are not permitted from the Fixed Account in the first
Contract Year.
- The minimum withdrawal is $100 (before any Market Value Adjustment), or
the Owner's entire interest in the investment option(s) from which
withdrawal is requested.
- The Owner must leave at least $500 in each investment option from which
the withdrawal is requested, unless the total value is withdrawn.
Election to withdraw shall be made in writing to us at Suite 102, 1290 Silas
Deane Highway, Wethersfield, CT 06109 and should be accompanied by the Contract
if surrender is requested. Withdrawal requests are processed only on days when
the New York Stock Exchange is open. The Withdrawal Value attributable to the
Subaccounts is determined on the basis of the Accumulation Unit values, as
calculated after we receive the request. The Withdrawal Value
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<PAGE> 34
attributable to the Subaccounts is paid within seven (7) days after we receive
the request. However, we may suspend withdrawals or delay payment:
- during any period when the New York Stock Exchange is closed
- when trading in a Portfolio is restricted or the SEC determines that an
emergency exists
- as the SEC by order may permit.
For withdrawal requests from the MVA Option and the Fixed Account, we may defer
any payment for up to six months, as permitted by state law. During the deferral
period, we will continue to credit interest at the current Guaranteed Interest
Rate for the same Guarantee Period.
8. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected during the "free look" period or within 30 days after a Guarantee
Period ends, may be adjusted up or down by a Market Value Adjustment. The Market
Value Adjustment applies before deduction of a Withdrawal Charge.
The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, the Market Value Adjustment
reduces Market Adjusted Value and results in a lower payment. Thus, if interest
rates increase, the withdrawal could be less than the original Purchase Payment
or the original amount allocated to a Guarantee Period. Conversely, if the
Guaranteed Interest Rate is higher than the applicable Current Interest Rate,
the Market Value Adjustment increases Market Adjusted Value and results in a
higher payment.
The Market Value Adjustment (MVA) uses this formula:
(1 + I)
MVA = MPV X [ [ ------- ] (t/365) -1 ]
(1 + J)
Where I is the Guaranteed Interest Rate being credited to the Guarantee
Period Value (MPV) subject to the Market Value Adjustment,
J is the Current Interest Rate we declare, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
Guarantee Period the length of which is equal to the balance of the
Guarantee Period for the Guarantee Period Value subject to the Market Value
Adjustment, rounded to the next higher number of complete years, and
t is the number of days remaining in the Guarantee Period.
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<PAGE> 35
For an illustration showing an upward and a downward adjustment, see Appendix A.
9. GUARANTEED DEATH BENEFIT.
We will pay a death benefit to the Beneficiary if any of the following occurs
during the Accumulation Period:
- the Owner, or a joint owner, dies
- the Annuitant dies with no living contingent annuitant
- the contingent annuitant dies after the Annuitant
The amount of the death benefit depends on the age of the deceased Owner or
Annuitant when the death benefit becomes payable. If the deceased Owner or
Annuitant dies before age 91, we will pay the Beneficiary the greater of the
following:
- Purchase Payments, minus all previous withdrawals
- Contract Value
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the deceased's age 80 or the date of
death, plus Purchase Payments minus all withdrawals from age 80 to the
date of death
- the greatest anniversary value before death
The greatest anniversary value equals:
- the highest of the Contract Values on each Contract anniversary prior to
the deceased's age 81, plus the dollar amount of any Purchase Payments
made since that anniversary, minus
- withdrawals since that anniversary.
We pay Contract Value to the Beneficiary if the Owner or Annuitant dies after
age 91. The Owner or Beneficiary, as appropriate, may elect to have all or a
part of the death proceeds paid to the Beneficiary under one of the Annuity
Options described under "Annuity Options" below.
For Non-Qualified Plan Contracts, if the Beneficiary is the Owner's surviving
spouse, the surviving spouse may elect to be treated as the successor Owner of
the Contract with no requirement to begin Death Benefit distribution.
10. GUARANTEED RETIREMENT INCOME BENEFIT.
Guaranteed Retirement Income Benefit (GRIB) is an optional Contract benefit.
GRIB provides a minimum fixed annuity guaranteed lifetime income to the
Annuitant as described below. The Owner must elect GRIB on the initial Contract
application. GRIB may be discontinued after the seventh Contract anniversary by
written notice to us. Once discontinued, GRIB may not be elected again.
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<PAGE> 36
GRIB may be exercised only within thirty days after the seventh or later
Contract anniversary. In addition, GRIB must be exercised between the
Annuitant's 60th and 91st birthdays. However, if the Annuitant is younger than
age 44 on the Date of Issue, GRIB may be exercised after the Contract's 15th
Anniversary.
GRIB payments are based on the greater of:
- the income provided by applying the GRIB base to the guaranteed annuity
factors; and
- the income provided by applying Contract Value to the current annuity
factors.
The GRIB base is the greater of:
- Purchase Payments minus all previous withdrawals
- Contract Value
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the Annuitant's age 80 or the GRIB
exercise date plus Purchase Payments minus all withdrawals from age 80 to
the GRIB exercise date
- the greatest anniversary value before the exercise date
The greatest anniversary value equals:
- the highest of the Contract Values on each Contract anniversary prior to
the Annuitant's age 81, plus
- the dollar amount of any Purchase Payments made since that anniversary,
minus
- withdrawals since that anniversary.
The guaranteed annuity factors are based on the 1983a table projected using
projection scale G, with interest at 2.5% (the "Annuity 2000" table). However,
if GRIB is exercised on or after the 10th Contract anniversary, interest at
3.50% is assumed.
Because GRIB is based on conservative actuarial factors, the income guaranteed
may often be less than the income provided by applying Contract Value to current
annuity factors.
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<PAGE> 37
GRIB is paid for the life of the Annuitant with a period certain based on the
Annuitant's age at the GRIB exercise date and the type of Contract, as follows:
<TABLE>
<CAPTION>
PERIOD CERTAIN YEARS
-----------------------------
ANNUITANT'S AGE QUALIFIED NON-QUALIFIED
AT EXERCISE PLAN CONTRACT PLAN CONTRACT
- --------------- ------------- -------------
<S> <C> <C>
15 to 75 10 10
76 9 10
77 8 10
78 7 10
79 7 10
80 7 10
81 7 9
82 7 8
83 7 7
84 6 6
85 to 90 5 5
</TABLE>
CONTRACT CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk
- administrative expenses
- Records Maintenance Charge
- Withdrawal Charge
- Guaranteed Retirement Income Benefit charge, if elected
Subject to certain expense limitations, investment management fees and other
Fund expenses are indirectly borne by the Owner.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
1. MORTALITY AND EXPENSE RISK CHARGE.
We assess each Subaccount a daily asset charge for mortality and expense risks
at a rate of 1.25% per annum. Variable Annuity payments reflect the investment
experience of each Subaccount but are not affected by changes in actual
mortality experience or by actual expenses incurred by Us.
The mortality risk we assume arises from two contractual obligations. First, if
the Owner or Annuitant dies before age 91 and before the Annuity Date, we may,
in some cases, pay more than Contract Value. (See "Guaranteed Death Benefit",
page 29) Second, when Annuity Options involving life contingencies are selected,
we assume the risk that Annuitants will live beyond actuarial life expectancies.
We also assume an expense risk. Actual expenses of administering the Contracts
may exceed the amounts we recover from the Records Maintenance Charge or the
administrative cost portion of the daily asset charge.
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<PAGE> 38
2. ADMINISTRATIVE COSTS.
We assess each Subaccount a daily asset charge for administrative costs at a
rate of .15% per annum. This charge reimburses us for expenses incurred for
administering the Contracts. These expenses include Owner inquiries, changes in
allocations, Owner reports, Contract maintenance costs, and data processing
costs. The administrative charge covers the average anticipated administrative
expenses incurred while the Contracts are in force. There is not necessarily a
direct relationship between the amount of the charge and the administrative
costs of a particular Contract
3. RECORDS MAINTENANCE CHARGE.
We deduct an annual Records Maintenance Charge of $30 during the Accumulation
Period. The charge is assessed:
- at the end of each Contract Year,
- on Contract surrender and
- upon annuitization.
However, We do not deduct the Records Maintenance Charge for Contracts with
Contract Value of at least $50,000 on the assessment date.
This charge reimburses us for the expenses of establishing and maintaining
Contract records. The Records Maintenance Charge reduces the net assets of each
Subaccount, Guarantee Period and the Fixed Account.
The Records Maintenance Charge is assessed equally among all investment options
in which the Owner has an interest.
4. WITHDRAWAL CHARGE.
We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal
Charge covers Contract sales expenses, including commissions and other promotion
and acquisition expenses.
Each Contract Year, an Owner may withdraw, without Withdrawal Charge, the
greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of the current Contract Value.
If the Owner withdraws a larger amount, the excess Purchase Payments withdrawn
are subject to a Withdrawal Charge. The Withdrawal Charge applies
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<PAGE> 39
in the first seven Contribution Years following each Purchase Payment as
follows:
<TABLE>
<CAPTION>
CONTRIBUTION WITHDRAWAL
YEAR CHARGE
------------ ----------
<S> <C>
First............................. 7%
Second............................ 6%
Third............................. 5%
Fourth............................ 5%
Fifth............................. 4%
Sixth............................. 3%
Seventh........................... 2%
Eighth and following.............. 0%
</TABLE>
Purchase Payments are deemed surrendered in the order in which they were
received.
When a withdrawal is requested, the Owner receives a check in the amount
requested. If a Withdrawal Charge applies, Contract Value is reduced by the
Withdrawal Charge, plus the dollar amount sent to the Owner.
Because Contribution Years are based on the date each Purchase Payment is made,
Owners may be subject to a Withdrawal Charge, even though the Contract may have
been issued many years earlier. (For additional details, see "Withdrawal During
Accumulation Period.")
Subject to certain exceptions and state approvals, withdrawal charges are not
assessed on withdrawals:
- after an Owner has been confined in a hospital or skilled health care
facility for at least thirty days and the Owner remains confined at the
time of the request;
- within thirty days following an Owner's discharge from a hospital or
skilled health care facility after a confinement of at least thirty days;
or
- if the Owner or Annuitant becomes disabled after the Contract is issued
and before age 65.
Restrictions and provisions related to the nursing care or hospitalization
disability waivers are described in Contract endorsements.
The Withdrawal Charge compensates us for Contract distribution expense.
Currently, we anticipate Withdrawal Charges will not fully cover distribution
expenses. Unrecovered distribution expenses may be recovered from our general
assets. Those assets may include proceeds from the mortality and expense risk
charge.
The Withdrawal Charge also applies at annuitization to amounts attributable to
Purchase Payments in their seventh Contribution Year or earlier. No Withdrawal
Charge applies upon annuitization if the Owner selects Annuity Options 2, 3 or 4
or if payments under Annuity Option 1 are scheduled to continue for at least
five years.
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<PAGE> 40
We may reduce or eliminate the Withdrawal Charge if We anticipate that We will
incur lower sales expenses or perform fewer services because of economies due to
the size of a group, the average contribution per participant, or the use of
mass enrollment procedures. No Withdrawal Charge applies to Contracts sold to
officers, directors and employees of KILICO and Investors Fund Series (IFS), IFS
investment advisers and principal underwriter or certain affiliated companies,
or to any trust, pension, profit-sharing or other benefit plan for such persons.
5. GUARANTEED RETIREMENT INCOME BENEFIT CHARGE.
The annual charge for GRIB is 0.25% of Contract Value. We deduct a pro rata
portion of the charge on each Contract Quarter anniversary. The quarterly charge
is deducted pro rata from the investment options in which the Owner has an
interest. We no longer charge for GRIB after the Annuitant's 91st birthday.
6. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deduction of investment management
fees and certain general operating expenses. Subject to limitations, Owners
indirectly bear these fees and expenses. Investment management fees appear on
page 7. Further detail is provided in the attached prospectuses for the
Portfolios and the Funds' Statements of Additional Information.
7. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If We pay state premium taxes, we may charge the amount
paid against Contract Value upon annuitization. See "Appendix--State Premium Tax
Chart" in the Statement of Additional Information.
8. EXCEPTIONS.
We may decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, We guarantee
that they will not increase. We bear the risk that such charges will not cover
Our costs. On the other hand, should such charges exceed Our costs, We will not
refund any charges. Any profit is available for corporate purposes including,
among other things, payment of distribution expenses.
We may also offer reduced fees and charges, including but not limited to,
Records Maintenance Charge and mortality and expense risk and administrative
charges, for certain sales that may result in cost savings. Reductions in these
fees and charges will not unfairly discriminate against any Owner.
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<PAGE> 41
THE ANNUITY PERIOD
In addition to GRIB, Contracts may be annuitized under one of several Annuity
Options. Annuity payments begin on the Annuity Date and under the selected
Annuity Option. The Annuity Date must be at least one year after the Date of
Issue. Subject to state variation, the Annuity Date may not be deferred beyond
the Annuitant's 91st birthday (100th birthday if the Contract is part of a
Charitable Remainder Trust).
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
- the selected Annuity Option, and
- the investment performance of the selected Subaccount(s) (if variable
annuitization is elected).
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly. Annuity payments may be subject to a Withdrawal Charge. (For
additional details, see "Withdrawal Charge.")
2. ANNUITY OPTIONS.
The Owner may elect one of the Contract's Annuity Options. The Owner may decide
at any time (subject to the provisions of any applicable retirement plan and
state variations) to begin annuity payments before the Annuitant's 91st birthday
(100th birthday if the Contract is part of a Charitable Remainder Trust). The
Owner may change the Annuity Option before the Annuity Date. If no other Annuity
Option is elected, monthly annuity payments are made in accordance with Option 3
below with a ten (10) year period certain. Generally, annuity payments are made
in monthly installments. However, we may make a lump sum payment if the net
proceeds available to apply under an Annuity Option are less than $2,000. In
addition, if the first monthly payment is less than $25, we may change the
frequency of payments to quarterly, semiannual or annual intervals so that the
initial payment is at least $25.
The amount of periodic annuity payments may depend upon:
- the Annuity Option selected;
- the age and sex of the payee; and
- the investment experience of the selected Subaccount(s).
For example:
- if Option 1, income for a specified period, is selected, shorter
periods result in fewer payments with higher values.
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- if Option 2, life income, is selected, it is likely that each payment
will be smaller than would result if income for a short period were
specified.
- if Option 3, life income with installments guaranteed, is selected,
each payment will probably be smaller than would result if the life
income option were selected.
- if Option 4, the joint and survivor annuity, is selected, each payment
is smaller than those measured by an individual life income option.
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. The sex of the payee influences the amount of periodic payments
because females live longer than males, resulting in smaller payments. Finally,
if the Owner participates in a Subaccount with higher investment performance, it
is likely the Owner will receive a higher periodic payment.
If the Owner dies before the Annuity Date, available Annuity Options are
limited. The Annuity Options available are:
- Option 2 or
- Option 1 or 3 for a period no longer than the life expectancy of the
Beneficiary (but not less than 5 years from the Owner's death).
If the Beneficiary is not an individual, the entire interest must be distributed
within 5 years of the Owner's death. The Death Benefit distribution must begin
no later than one year from the Owner's death, unless a later date is prescribed
by federal regulation.
OPTION 1--INCOME FOR SPECIFIED PERIOD.
Option 1 provides an annuity payable monthly for a selected number of years
ranging from five to thirty. Upon the payee's death, if the Beneficiary is an
individual, we automatically continue payments to the Beneficiary for the
remainder of the period specified. If the Beneficiary is not an individual
(e.g., an estate or trust), we pay the discounted value of the remaining
payments in the specified period. Although there is no life contingency risk
associated with Option 1, we continue to deduct the daily asset charges for
mortality and expense risks and administrative costs.
Payees may elect to cancel all or part of the remaining payments due under
Option 1. We will then pay the discounted value of the remaining payments.
OPTION 2--LIFE INCOME.
Option 2 provides for an annuity over the lifetime of the payee. If Option 2 is
elected, annuity payments terminate automatically and immediately on the payee's
death without regard to the number or total amount of payments made. Thus, it is
possible for an individual to receive only one payment if death occurred prior
to the date the second payment was due.
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OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.
Option 3 provides an annuity payable monthly during the payee's lifetime.
However, Option 3 also provides for the automatic continuation of payments for
the remainder of the specified period if the Beneficiary is an individual and
payments have been made for less than the specified period. The period specified
maybe five, ten, fifteen or twenty years. If the Beneficiary is not an
individual, we pay the discounted value of the remaining payments in the
specified period.
OPTION 4--JOINT AND SURVIVOR ANNUITY.
Option 4 provides an annuity payable monthly while both payees are living. Upon
either payee's death, the monthly income payable continues over the life of the
surviving payee at a percentage specified when Option 4 is elected. Annuity
payments terminate automatically and immediately upon the surviving payee's
death without regard to the number or total amount of payments received.
3. ALLOCATION OF ANNUITY.
The Owner may elect payments on a fixed or variable basis, or a combination. Any
Fixed Account Contract Value or Guarantee Period Value is annuitized on a fixed
basis. Any Separate Account Contract Value is annuitized on a variable basis.
The MVA Option is not available during the Annuity Period. An Owner may exercise
the transfer privilege during the Accumulation Period. Transfers during the
Annuity Period are subject to certain limitations.
4. TRANSFER DURING ANNUITY PERIOD.
During the Annuity Period, the payee may, by written request, transfer
Subaccount Value from one Subaccount to another Subaccount or to the Fixed
Account, subject to the following limitations:
- Transfers to a Subaccount are prohibited during the first year of the
Annuity Period; subsequent transfers are limited to one per year.
- All interest in a Subaccount must be transferred.
- If We receive notice of transfer to a Subaccount more than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the date we receive the notice.
- If We receive notice of transfer to a Subaccount less than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the annuity payment date.
- Transfers to the Fixed Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least thirty (30) days
prior to the anniversary.
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
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5. ANNUITY UNIT VALUE.
Annuity Unit value is determined independently for each Subaccount.
Annuity Unit value for any Valuation Period is:
- Annuity Unit value for the preceding Valuation Period times
- the net investment factor for the current Valuation Period times
- an interest factor which offsets the 2.5% per annum rate of investment
earnings assumed by the Contract's annuity tables.
The net investment factor for a Subaccount for any Valuation Period is:
- the Subaccount's Accumulation Unit value at the end of the current
Valuation Period, plus or minus the per share charge or credit for taxes
reserved; divided by
- the Subaccount's Accumulation Unit value at the end of the preceding
Valuation Period, plus or minus the per share charge or credit for taxes
reserved.
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
When annuity payments begin, the value of the Owner's Contract interest is:
- Accumulation Unit values at the end of the Valuation Period falling on
the 20th or 7th day of the month before the first annuity payment is due
times
- the number of Accumulation Units credited at the end of the Valuation
Period minus
- premium taxes and Withdrawal Charges
The first annuity payment is determined by multiplying the benefit per $1,000 of
value shown in the applicable annuity table by the number of thousands of
dollars of Contract Value.
A 2.5% per annum rate of investment earnings is assumed by the Contract's
annuity tables. If the actual net investment earnings rate exceeds 2.5% per
annum, payments increase accordingly. Conversely, if the actual rate is less
than 2.5% per annum, annuity payments decrease.
7. SUBSEQUENT PERIODIC PAYMENTS UNDER VARIABLE ANNUITY.
Subsequent annuity payments are determined by multiplying the number of Annuity
Units by the Annuity Unit value at the Valuation Period before each annuity
payment is due. The first annuity payment is divided by the Annuity Unit value
as of the Annuity Date to establish the number of Annuity Units representing
each annuity payment. This number does not change.
8. FIXED ANNUITY PAYMENTS.
Each Fixed Annuity payment is determined from tables we prepare. These tables
show the monthly payment for each $1,000 of Contract Value allocated
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to a Fixed Annuity. Payment is based on the Contract Value at the date before
the annuity payment is due. Fixed Annuity payments do not change regardless of
investment, mortality or expense experience.
9. DEATH PROCEEDS.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, depend upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
FEDERAL INCOME TAXES
A. INTRODUCTION
This discussion is not exhaustive and is not intended as tax advice. A qualified
tax adviser should always be consulted with regard to the application of the law
to individual circumstances. This discussion is based on the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Department regulations, and
interpretations existing on the date of this Prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and
judicial decisions.
This discussion does not address state or local tax consequences associated with
buying a Contract. In addition, WE MAKE NO GUARANTEE REGARDING ANY TAX
TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CONTRACT OR OF ANY TRANSACTION
INVOLVING A CONTRACT.
B. OUR TAX STATUS
We are taxed as a life insurance company and the operations of the Separate
Account are treated as a part of our total operations. The Separate Account is
not separately taxed as a "regulated investment company". Investment income and
capital gains of the Separate Account are not taxed to the extent they are
applied under a Contract. We do not anticipate that we will incur federal income
tax liability attributable to the income and gains of the Separate Account, and
therefore we do not intend to provide for these taxes. If we are taxed on
investment income or capital gains of the Separate Account, then we may impose a
charge against the Separate Account to provide for these taxes.
C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under the Code, except as described below, increases in the Contract Value of a
Non-Qualified Plan Contract are generally not taxable to the Owner or Annuitant
until received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
- the Contract must be owned by an individual
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- Separate Account investments must be "adequately diversified"
- We, rather than the Owner, must be considered the owner of Separate
Account assets for federal tax purposes, and
- annuity payments must appropriately amortize Purchase Payments and
Contract earnings.
NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons", such as corporations, trusts or similar entities, are not
annuity contracts for federal income tax purposes. The investment income on
these contracts is taxed as ordinary income received or accrued by the non-
natural owner. There are exceptions to this general rule for non-natural owners.
Contracts are generally treated as held by a natural person if the nominal owner
is a trust or other entity holding the contract as an agent for a natural
person. However, this special exception does not apply to an employer who is the
nominal owner of a contract under a non-qualified deferred compensation plan for
its employees.
Additional exceptions to this rule include:
- contracts acquired by a decedent's estate
- certain Qualified Plan Contracts
- Contracts purchased by employers at termination of certain qualified
plans
- Contracts used with structured settlement agreements
- Contracts purchased with a single premium when the annuity starting date
is no later than a year from Contract purchase and substantially equal
periodic payments are made at least annually.
DIVERSIFICATION REQUIREMENTS. For a contract to be treated as an annuity for
federal income tax purposes, separate account investments must be "adequately
diversified". The Treasury Secretary issued regulations prescribing standards
for adequately diversifying separate account investments. If the Separate
Account failed to comply with these diversification standards, the Contract
would not be treated as an annuity contract for federal income tax purposes and
the Owner would generally be taxed on the difference between Contract Value and
Purchase Payments.
Although we do not control Fund investments, we expect the Fund will comply with
these regulations so that the Separate Account will be considered "adequately
diversified."
OWNERSHIP TREATMENT. In certain circumstances, a variable annuity contract owner
may be considered the owner of the assets of the separate account supporting the
contract. In those circumstances, income and gains from separate account assets
are includible in the owner's gross income. The IRS, in published rulings,
stated that a variable contract owner will be considered the owner of separate
account assets if the owner possesses the ability to exercise investment control
over the assets. As of the date of this Prospectus, no investor control guidance
is available.
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We may modify the Contract as necessary to attempt to prevent the Owner from
being considered the owner of the Separate Account assets.
DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur)
when the Annuitant has reached an advanced age, E.G., past age 85, the Contract
might not be treated as an annuity for federal income tax purposes. In that
event, the income and gains under the Contract could be currently includible in
the Owner's income.
The following discussion assumes that the Contract is treated as an annuity
contract for tax purposes and that we are treated as the owner of Separate
Account assets.
2. TAXATION OF PARTIAL AND FULL WITHDRAWALS
Partial withdrawals from a Non-Qualified Plan Contract are includible in income
if Contract Value before the withdrawal exceeds the "investment in the
contract." Full withdrawals are also includible in income if they exceed the
"investment in the contract." Investment in the contract equals the total of
Purchase Payments minus amounts previously received from the Contract.
Any assignment or pledge (or agreement to assign or pledge) of Contract Value,
is treated as a withdrawal. Investment in the contract is increased by the
amount includible in income with respect to such assignment or pledge. If an
individual transfers a Contract interest without adequate consideration to
someone other than the Owner's spouse (or to a former spouse incident to
divorce), the Owner is taxed on the difference between Contract Value and the
"investment in the contract." In this case, the transferee's investment in the
contract is increased to reflect the increase in the transferor's income.
The Contract's death benefit may exceed Purchase Payments or Contract Value. As
described in this Prospectus, we impose certain charges with respect to the
death benefit. It is possible that those charges (or some portion) could be
treated as a partial withdrawal.
There may be special income tax issues present in situations where the Owner and
the Annuitant are not the same person and are not married to one another. A tax
adviser should be consulted in those situations.
3. TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as income equals the
payment minus the exclusion amount. The exclusion amount for variable annuity
payments is the "investment in the contract" allocated to the variable annuity
option and adjusted for any period certain or refund feature, divided by the
number of payments expected to be made. The exclusion amount for fixed annuity
payments is the payment times the ratio of the investment in the
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contract allocated to the fixed annuity option and adjusted for any period
certain or refund feature, to expected value of all annuity payments.
Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments stop because
the Annuitant dies before the total amount of the investment in the contract is
recovered, the unrecovered amount generally is allowed as a deduction to the
Annuitant in the last taxable year.
4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon the Owner's or Annuitant's death. Before the
Annuity Date, death benefits are includible in income and:
- if distributed in a lump sum are taxed like a full withdrawal, or
- if distributed under an annuity option are taxed like annuity payments.
After the Annuity Date, where a guaranteed period exists and the Annuitant dies
before the end of that period, payments made to the Beneficiary for the
remainder of that period are includible in income and:
- if received in a lump sum are includible in income if they exceed the
unrecovered investment, or
- if distributed in accordance with the selected annuity option are fully
excludable from income until the remaining investment in the contract is
deemed to be recovered.
Thereafter, all annuity payments are fully includible in income.
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
A 10% penalty tax applies to a taxable payment from a Non-Qualified Plan
Contract unless:
- received on or after the Owner reaches age 59 1/2
- attributable to the Owner's disability
- made to a Beneficiary after the Owner's death or, for non-natural Owners,
after the primary Annuitant's death
- made as a series of substantially equal periodic payments (at least
annually) for the life (or life expectancy) of the Annuitant or for the
joint lives (or joint life expectancies) of the Annuitant and designated
Beneficiary
- made under a Contract purchased with a single premium when the annuity
starting date is no later than a year from Contract purchase and
substantially equal periodic payments are made at least annually
- made with annuities used with structured settlement agreements
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6. AGGREGATION OF CONTRACTS
The taxable amount of an annuity payment or withdrawal from a Non-Qualified Plan
Contract is determined by combining some or all of the Non-Qualified Plan
Contracts owned by an individual. For example, if a person purchases a Contract
and also purchases an immediate annuity at approximately the same time, the IRS
may treat the two contracts as one contract. In addition, if a person purchases
two or more deferred annuity contracts from the same company (or its affiliates)
during any calendar year, these contracts are treated as one contract. The
effects of this aggregation are not clear. However, it could affect the taxable
amount of an annuity payment or withdrawal and the amount which might be subject
to the 10% penalty tax.
7. LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
For Contracts issued after June 8, 1997 to a non-natural owner, otherwise
deductible interest may no longer be deductible by the owner. However, this
interest deduction disallowance does not affect Contracts generating taxable
income. Entities considering purchasing the Contract, or entities that will be
beneficiaries under a Contract, should consult a tax adviser.
D. QUALIFIED PLANS
Qualified Plan Contracts are used with retirement plans which receive favorable
tax treatment as Individual Retirement Annuities, Simplified Employee
Pensions -- IRAs or as Roth Individual Retirement Annuities ("Qualified Plans").
Numerous special tax rules apply to Qualified Plans and to Qualified Plan
Contracts. Therefore, We make no attempt to provide more than general
information about the use of Qualified Plan Contracts.
The tax rules applicable to Qualified Plans vary according to the type, terms
and conditions of the plan. For example, for both withdrawals and annuity
payments under certain Qualified Plan Contracts, there may be no "investment in
the contract" and the total amount received may be taxable. Both the amount of
the permitted contribution, and the corresponding deduction or exclusion, are
limited under Qualified Plans. In Qualified Plan Contracts, the Owner and
Annuitant must be the same individual. If a joint Annuitant is named and the
Annuitant is alive, all distributions must be made to the Annuitant. Also, if
the joint Annuitant is not the Annuitant's spouse, the annuity options may be
limited, depending on the difference in their ages. Furthermore, the length of
any guarantee period may be limited in some circumstances to satisfy certain
minimum distribution requirements under the Code.
Under a Qualified Plan Contract, rules specify the form of distribution and
commencement dates. An excise tax is imposed for failure to comply with minimum
distribution requirements. This excise tax generally equals 50% of the amount by
which a minimum required distribution exceeds the actual distribution. In the
case of Individual Retirement Annuities, distributions of minimum
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amounts must generally begin by April 1 of the calendar year following the
calendar year in which the owner attains age 70 1/2.
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Plan Contracts. For Individual Retirement Annuities, the penalty tax does not
apply to a payment:
- received after the Owner reaches age 59 1/2
- received after the Owner's death or because of the Owner's disability
- made as a series of substantially equal periodic payments (at least
annually) for the life (or life expectancy) of the Owner or for the joint
lives (or joint life expectancies) of the Owner and designated
beneficiary
In addition, the penalty tax does not apply to certain distributions taken after
December 31, 1997 used for qualified first time home purchases or for higher
education expenses. Special conditions must be met to qualify for these
exceptions. Owners wishing to take a distribution for these purposes should
consult their tax adviser. Other exceptions may apply.
Qualified Plan Contracts are amended to conform to plan requirements. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, we are not bound by terms and conditions of Qualified
Plans if they are inconsistent with the Contract.
1. QUALIFIED PLAN TYPES
We issue Contracts for the following types of Qualified Plans.
INDIVIDUAL RETIREMENT ANNUITIES. The Code permits eligible individuals to
contribute to an individual retirement annuity known as an "IRA." IRAs limit the
amounts contributed, the persons eligible and the time when distributions start.
Also, subject to direct rollover and mandatory withholding requirements,
distributions from other types of Qualified Plans may be "rolled over" on a tax-
deferred basis into an IRA. The Contract may not fund an "Education IRA."
IRAs generally may not provide life insurance coverage, but they may provide a
death benefit that equals the greater of the premiums paid and the contract
value. The Contract's death benefit may exceed Purchase Payments or Contract
Value. It is possible that the death benefit could be viewed as violating the
prohibition on investment in life insurance contracts and failing IRA
requirements.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). The Code allows employers to establish
simplified employee pension plans, using the employees' IRAs. Under these plans
the employer may make limited deductible contributions on behalf of the
employees to IRAs. Employers and employees intending to use the Contract in
connection with these plans should seek tax competent advice.
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ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth
IRAs differ from other IRAs in that:
- Roth IRA contributions are never deductible,
- "qualified distributions" from a Roth IRA are excludable from income,
- different eligibility and mandatory distribution requirements apply,
- a rollover to a Roth IRA must be a "qualified rollover contribution,"
under the Code.
For a rollover from a non-Roth IRA to a Roth IRA, amounts which would have been
includible in gross income but for the qualified rollover contribution are
includible in gross income, without application of the 10 percent penalty tax.
An IRA may be converted into a Roth IRA without taking a distribution. An
individual may convert by notifying the IRA issuer or trustee. The conversion of
an IRA to a Roth IRA is a special type of qualified rollover distribution.
Hence, the IRA participant must be eligible for a qualified rollover
distribution to convert an IRA to a Roth IRA. A conversion typically results in
the inclusion of some or all of the IRA value in gross income. Persons with
adjusted gross incomes in excess of $100,000 or who are married and file a
separate return are not eligible to make a qualified rollover contribution or a
transfer in a taxable year from a non-Roth IRA to a Roth IRA.
Any "qualified distribution" from a Roth IRA is excludible from gross income. A
"qualified distribution" is:
- a payment or distribution
-- made after the Owner attains age 59 1/2,
-- made after the Owner's death,
-- attributable to the Owner being disabled, or
-- a qualified first-time homebuyer distribution under the Code.
- a payment or distribution made in a taxable year that is five years or
more after
-- the first taxable year for which a contribution was made to the
Owner's Roth IRA, or
-- the first taxable year for which rollover was made to the Owner's
Roth IRA. A non-qualified distribution from a Roth IRA is generally
taxed like a distribution from an IRA. Distributions from a Roth IRA
need not commence at age 70 1/2.
E. FEDERAL INCOME TAX WITHHOLDING
We withhold and send to the U.S. Government a part of the taxable portion of
each distribution unless the payee notifies us before distribution of an
available election not to have any amounts withheld. In certain circumstances,
we may be required to withhold tax. The withholding rates for the taxable
portion of periodic annuity payments are the same as the withholding rates for
wage payments. In addition, the withholding rate for the taxable portion of non-
periodic payments (including withdrawals prior to the maturity date and
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conversions of, or rollovers from, non-Roth IRAs to Roth IRAs) is 10%. The
withholding rate for eligible rollover distributions is 20%.
DISTRIBUTION OF CONTRACTS
The Contracts are sold by licensed insurance agents in those states where the
Contract may be lawfully sold. The agents are also registered representatives of
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc. Sales commissions may vary, but are not expected to
exceed 6.25% of Purchase Payments. In addition to commissions, we may pay
additional promotional incentives, in the form of cash or other compensation, to
selling broker-dealers. These incentives may be offered to certain licensed
broker-dealers that sell or are expected to sell certain minimum amounts during
specified time periods. The Contracts are distributed through the principal
underwriter for the Separate Account:
Investors Brokerage Services, Inc. ("IBS")
1 Kemper Drive
Long Grove, Illinois, 60010
IBS is our wholly-owned subsidiary. IBS enters into selling group agreements
with affiliated and unaffiliated broker-dealers. All of the investment options
are not available to all Owners. The investment options are available only under
Contracts that are sold or serviced by broker-dealers having a selling group
agreement with IBS authorizing the sale of Contracts with the investment options
specified in this Prospectus. Other distributors may sell and service contracts
with different investment options.
VOTING RIGHTS
Proxy materials in connection with any Fund shareholder meeting are delivered to
each Owner with Subaccount interests invested in the Fund as of the record date.
Proxy materials include a voting instruction form. We vote all Fund shares
proportionately in accordance with instructions received from Owners. We will
also vote any Fund shares attributed to amounts we have accumulated in the
Subaccounts in the same proportion that Owners vote. A Fund is not required to
hold annual shareholders' meetings. Funds hold special meetings as required or
deemed desirable for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement.
Owners have voting rights in a Portfolio based upon the Owner's proportionate
interest in the corresponding Subaccount as measured by units. Owners have
voting rights before surrender, the Annuity Date or the death of the Annuitant.
Thereafter, the payee entitled to receive Variable Annuity payments has voting
rights. During the Annuity Period, Annuitants' voting rights decrease as Annuity
Units decrease.
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REPORTS TO CONTRACT OWNERS AND INQUIRIES
After each Contract anniversary, we send Owners a statement showing amounts
credited to each Subaccount and to the Fixed Account Option. In addition, Owners
transferring amounts among the investment options or making additional payments
receive written confirmation of these transactions. We will also send a current
statement upon Owner request. Owners are also sent annual and semi-annual
reports for the Portfolios that correspond to the Subaccounts in which the Owner
invests and a list of the securities held by that Portfolio. In addition, we
calculate for an Owner the portion of a total amount that must be invested in a
selected Guarantee Period so that the portion grows to equal the original total
amount at the expiration of the Guarantee Period.
An Owner may direct inquiries to the selling agent or may call 1-800-621-5001 or
write to Kemper Investors Life Insurance Company, Customer Service, 1 Kemper
Drive, Long Grove, Illinois 60049.
DOLLAR COST AVERAGING
Under our Dollar Cost Averaging program, a predesignated portion of Subaccount
Value is automatically transferred monthly, quarterly, semiannually or annually
for a specified duration to other Subaccounts, Guarantee Periods and the Fixed
Account. The Dollar Cost Averaging program is available only during the
Accumulation Period. An Owner may also elect transfers from the Fixed Account on
a monthly or quarterly basis for a minimum duration of one year. An Owner may
enroll any time by completing our Dollar Cost Averaging form. Transfers are made
on the second Tuesday of the month. We must receive the enrollment form at least
five (5) business days before the transfer date.
An Owner participating in the Dollar Cost Averaging program may allocate all or
a portion of the initial Purchase Payment to the Kemper Money Market Subaccount
#2. This is the only Subaccount with no deduction for the 1.40% charge for
mortality and expense risks and administrative costs. The Owner must transfer
all Subaccount Value out of Kemper Money Market Subaccount #2 within one year
from the initial Purchase Payment. If an Owner terminates Dollar Cost Averaging
or does not deplete all Subaccount Value in Kemper Money Market Subaccount #2
within one year, we automatically transfer any remaining Subaccount Value to
Kemper Money Market Subaccount #1.
The minimum transfer amount is $100 per Subaccount, Guarantee Period or Fixed
Account. The total Contract Value in an account at the time Dollar Cost
Averaging is elected must be at least equal to the amount designated to be
transferred on each transfer date times the duration selected.
Dollar Cost Averaging ends if:
- the number of designated monthly transfers has been completed
- Contract Value in the transferring account is insufficient to complete
the next transfer; the remaining amount is transferred
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- we receive the Owner's written termination at least five (5) business
days before the next transfer date
- the Contract is surrendered or annuitized.
If the Fixed Account balance is at least $10,000, an Owner may elect automatic
calendar quarter transfers of interest accrued in the Fixed Account to one or
more of the Subaccounts or Guarantee Periods. An Owner may enroll in this
program any time by completing our Dollar Cost Averaging form. Transfers are
made within five business days of the end of the calendar quarter. We must
receive the enrollment form at least ten (10) days before the end of the
calendar quarter.
Dollar Cost Averaging is not available during the Annuity Period.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing Owners to pre-authorize
periodic withdrawals during the Accumulation Period. Owners instruct us to
withdraw selected amounts from the Fixed Account, or from any of the Subaccounts
or Guarantee Periods on a monthly, quarterly, semi-annual or annual basis. The
SWP is available to Owners who request a minimum $100 periodic payment. A market
value adjustment applies to any withdrawals under the SWP from a Guarantee
Period, unless effected within 30 days after the Guarantee Period ends. SWP
withdrawals from the Fixed Account are not available in the first Contract Year
and are limited to the amount not subject to Withdrawal Charges. If the amounts
distributed under the SWP from the Subaccounts or Guarantee Periods exceed the
free withdrawal amount, the Withdrawal Charge is applied on any amounts
exceeding the free withdrawal amount. WITHDRAWALS TAKEN UNDER THE SWP MAY BE
SUBJECT TO THE 10% TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME TAXES AND
WITHHOLDING. Owners interested in SWP may obtain an application and information
concerning this program and its restrictions from us or their agent. We give
thirty days' notice if we amend the SWP. The SWP may be terminated at any time
by the Owner or us.
EXPERTS
[TO BE UPDATED BY AMENDMENT]
The consolidated balance sheet of KILICO as of December 31, 1997 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the year ended December 31, 1997 have been included herein and in the
registration statement in reliance upon the report of PricewaterhouseCoopers
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. The
consolidated balance sheet of KILICO as of December 31, 1996 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the period from January 4, 1996 to December 31, 1996 and for the year ended
December 31, 1995 have been included herein and in the registration statement in
reliance upon the report of KPMG LLP,
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<PAGE> 55
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG LLP covering KILICO's financial statements referred to above contains an
explanatory paragraph that states as a result of the acquisition of its parent,
Kemper Corporation, the consolidated financial information for the period after
the acquisition is presented on a different cost basis than that for the period
before the acquisition and, therefore, is not comparable.
LEGAL MATTERS
Legal matters with respect to Our organization, Our authority to issue annuity
contracts and the validity of the Contract have been passed upon by Frank
Julian, our Associate General Counsel. Jorden Burt Boros Cicchetti Berenson &
Johnson, Washington, D.C., has advised us on certain legal matters concerning
federal securities laws applicable to the issue and sale of the Contracts.
SPECIAL CONSIDERATIONS
We reserve the right to amend the Contract to meet the requirements of federal
or state laws or regulations. We will notify the Owner in writing of these
amendments.
An Owner's rights under a Contract may be assigned as provided by law. An
assignment will not be binding upon us until we receive a written copy of the
assignment. The Owner is solely responsible for the validity or effect of any
assignment. The Owner, therefore, should consult a qualified tax adviser
regarding the tax consequences, as an assignment may be a taxable event.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934 and file reports and other information with the SEC. These reports and
other information can be inspected and copied at the SEC's public reference
facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500 West
Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies also
can be obtained from the SEC's Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
We have filed registration statements (the "Registration Statements") relating
to the Contracts with the SEC under the Securities Act of 1933. This Prospectus
has been filed as part of the Registration Statements and does not contain all
of the information set forth in the Registration Statements. These Registration
Statements contain further information about Us and the Contracts. The
Registration Statements may be inspected and copied, and copies can be obtained
at prescribed rates, as mentioned above.
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<PAGE> 56
BUSINESS
[TO BE UPDATED BY AMENDMENT]
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. KILICO is
licensed in the District of Columbia and all states except New York. KILICO is a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company. Kemper Corporation is a wholly-owned subsidiary of Zurich Holding
Company of America, which is a wholly-owned subsidiary of Zurich Insurance
Company ("Zurich"). Zurich is a wholly-owned subsidiary of Zurich Financial
Services ("ZFS"). ZFS was formed in the September, 1998 merger of the Zurich
Group with the financial services business of B.A.T. Industries. ZFS is owned by
Zurich Allied A.G. and Allied Zurich p.l.c. fifty-seven percent and forty-three
percent, respectively.
CORPORATE CONTROL EVENTS
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 that change in
control, Zurich and Insurance Partners owned 80 percent and 20 percent,
respectively, of Kemper and therefore KILICO. On February 27, 1998, Zurich
acquired Insurance Partner's remaining 20 percent interest for cash. As a result
of this transaction, Kemper and KILICO became wholly-owned subsidiaries of
Zurich.
The acquisition of KILICO was accounted for using the purchase method of
accounting. The consolidated financial statements of KILICO prior to January 4,
1996, were prepared on a historical cost basis and have been labeled as
"preacquisition" throughout this Prospectus.
Under purchase accounting, KILICO's assets and liabilities have been marked to
their relative fair values as of the acquisition date. The difference between
the allocated cost of $745.6 million of acquiring KILICO and the net fair values
of KILICO's assets and liabilities as of the acquisition date resulted in $254.9
million of goodwill. KILICO originally began to amortize goodwill on a straight-
line basis over twenty-five years, however, in the fourth quarter of 1997,
KILICO changed its amortization period to twenty years. The change in
amortization periods was made to conform to Zurich's accounting practices and
policies and resulted in an increase in goodwill amortization of $5.1 million in
1997. KILICO has presented January 4, 1996 (the acquisition date) as the opening
purchase accounting balance sheet for comparative purposes, where appropriate,
throughout this Prospectus.
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.
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<PAGE> 57
(See note captioned "Summary of Significant Accounting Policies" in the notes to
the consolidated financial statements below.)
STRATEGIC INITIATIVES
Since the early 1990's, KILICO has intensified the management of its real
estate-related investments due to adverse market conditions. KILICO also
successfully implemented strategies over the last several years to reduce both
its joint venture operating losses and the level of its real estate-related
investments. These strategies included individual property sales, refinancings
and restructurings, as well as bulk sale transactions completed in December 1995
in anticipation of the 1996 change in control. As a result of these strategies,
KILICO reduced its holdings of real estate-related investments from 36.2 percent
of its total invested assets and cash at year-end 1991 to 4.9 percent at
year-end 1997.
The management, operations and strategic directions of KILICO were also
integrated by the end of 1993 with those of another Kemper subsidiary, Federal
Kemper Life Assurance Company ("FKLA"). The integration streamlined management,
controlled costs, improved profitability, increased operating efficiencies and
productivity, and helped to expand both companies' distribution capabilities.
Headquartered in Long Grove, Illinois, FKLA markets term and interest-sensitive
life insurance, as well as certain annuity products through brokerage general
agents and other independent distributors.
Beginning in 1995, KILICO also began to introduce and expand new and existing
product lines. In late 1995, KILICO began to sell term life insurance products
in order to balance its product mix and asset-liability structure. Over the last
three years, KILICO increased the competitiveness of its variable annuity
products by adding multiple variable subaccount investment options and
investment managers to existing variable annuity products. In 1996, KILICO
introduced a registered flexible individual variable life insurance product and
in 1997 KILICO introduced a non-registered individual and group variable
bank-owned life insurance contract ("BOLI") and a series of individual variable
life insurance contracts.
NARRATIVE DESCRIPTION OF BUSINESS
KILICO offers both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual term
life, universal life and individual and group variable life insurance products
through various distribution channels. KILICO offers investment-oriented
products, guaranteed returns or a combination of both, to help policyholders
meet multiple insurance and financial objectives. Financial institutions,
securities brokerage firms, insurance agents and financial planners are
important distribution channels for KILICO's products. KILICO's sales mainly
consist of deposits received on certain long duration annuity and variable life
insurance contracts as well as reinsurance premiums assumed from FKLA beginning
in 1996. (See note captioned "Reinsurance" in the notes to the consolidated
financial statements and see the table captioned "Sales" below.)
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<PAGE> 58
KILICO's fixed and variable annuities generally have surrender charges that are
a specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
Over the last several years, in part reflecting the current interest rate
environment, KILICO has increased its emphasis on marketing its existing and new
separate account products. Unlike the fixed-rate annuity business where KILICO
manages spread revenue, variable annuities pose minimal investment risk for
KILICO, as policyholders invest in one or more of several underlying investment
funds. KILICO, in turn, receives administrative fee revenue as well as cost of
insurance charges which compensate KILICO for providing life insurance coverage
to the contractholder potentially in excess of their cash surrender values.
As a result of this strategy, KILICO's separate account assets and related sales
of its variable annuity and life products have increased as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
------------------- ----------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Separate account assets................. $5,122.0 $2,127.2 $1,761.1
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Variable annuity sales................. $ 259.8 $254.6 $ 151.1
Variable life sales.................... 2,708.6 .2 --
-------- ------ --------
Total separate account sales......... $2,968.4 $254.8 $ 151.1
======== ====== ========
</TABLE>
Rating improvements in 1996 (see "Rankings and ratings" below) and the 1996
change in control also helped to increase KILICO's sales in 1997 and 1996,
compared with 1995.
In order to increase variable annuity sales, KILICO introduced Kemper PASSPORT
in 1992. Kemper PASSPORT is a variable and market value adjusted annuity
featuring a choice of investment portfolios, an increasing estate benefit,
tax-free transfers and guaranteed rates for a variety of terms. In 1994, KILICO
changed Kemper PASSPORT from a single premium annuity to one with a flexible
premium structure and also added a small capitalization equity subaccount as
another investment portfolio option. In 1995 and 1996, KILICO also added several
new subaccounts and new investment managers as investment portfolio choices for
certain purchasers of the Kemper Advantage III variable annuity product. During
late 1996, KILICO introduced POWER V, a registered flexible premium variable
life insurance product. During mid-1997, KILICO also introduced variable BOLI
which is primarily marketed to banks and other large corporate entities and a
series of non-registered variable individual universal life insurance contracts
which are marketed primarily to high net worth individuals. These products are
being distributed by Investors Brokerage Services, Inc., ("IBS") a wholly-owned
subsidiary of KILICO. Excluding these contracts
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<PAGE> 59
distributed by IBS which accounted for $2,705.8 million of KILICO's first year
sales, INVEST Financial Corporation, ("INVEST") an affiliated company until June
28, 1996, and certain other unrelated companies of INVEST's new parent First
American National Bank, and EVEREN Securities, Inc., an affiliated company until
September 13, 1995, accounted for approximately 23.0 percent and 5.0 percent,
respectively, in 1997 of KILICO's first-year sales, compared with 24 percent and
12 percent, respectively, in 1996.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted general account annuity sales for KILICO over the
last several years. KILICO's general account fixed annuity sales were as follows
(in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
General account fixed annuity sales...... $145.7 $140.6 $247.6
====== ====== ======
</TABLE>
Beginning in early 1995, KILICO began raising crediting rates on certain of its
existing and new general account products, reflecting both competitive
conditions and a rising interest rate environment. As a result of these actions,
sales of general account annuities increased. During late 1995, as interest
rates fell, KILICO began reducing crediting rates on certain of its existing and
new general account products reflecting both competitive conditions and the
falling interest rate environment. As a result of these events, as well as a
strong stock and bond market during 1996 and most of 1997, which influenced
potential buyers of fixed annuity products to purchase variable annuity
products, sales of general account annuities have increased only slightly in
1997, compared with 1996.
Beginning in 1995, KILICO began to sell term life insurance products in order to
balance its product mix and asset-liability structure. During 1997 and 1996,
KILICO also assumed $21.1 million and $7.3 million, respectively, of term life
insurance premiums from FKLA. Excluding the amounts assumed from FKLA, KILICO's
total term life sales, including new and renewal premiums, net of reinsurance
ceded, amounted to $1.1 million in 1997, compared with $565 thousand in 1996 and
$236 thousand in 1995.
FEDERAL INCOME TAX DEVELOPMENTS
In early 1998, the Clinton Administration's Fiscal Year 1998 Budget ("Budget")
was released and contained certain proposals to change the taxation of
non-qualified fixed and variable annuities and variable life insurance
contracts. It is currently unknown whether or not such proposals will be
accepted, amended or omitted in the final 1999 Budget approved by Congress. If
the current Budget proposals are accepted, certain of KILICO's non-qualified
fixed and variable annuities and certain of its variable life insurance
products, including BOLI and the nonregistered individual variable universal
life insurance contract introduced during 1997, may no longer be tax advantaged
53
<PAGE> 60
products and therefore no longer attractive to those customers who purchase them
because of their favorable tax attributes. Additionally, sales of such products
during 1998 may also be negatively impacted until the likelihood of the current
proposals being enacted into law has be determined.
YEAR 2000 COMPLIANCE
Many existing computer programs were originally designed without considering the
impact of the year 2000 and currently use only two digits to identify the year
in the date field. This issue affects nearly all companies and organizations and
could cause computer applications and systems to fail or create erroneous
results to occur for any transaction with a date of January 1, 2000, or later.
Many companies must undertake major projects to address the year 2000 issue and
each company's costs and uncertainties will depend on a number of factors,
including its software and hardware, and the nature of the industry. Companies
must also coordinate with other entities with which they electronically
interact, including suppliers, customers, creditors and other financial services
institutions.
If a company does not successfully address its year 2000 issues it could face
material adverse consequences in the form of lawsuits against the company, lost
business, erroneous results and substantial operating problems after January 1,
2000.
KILICO has taken substantial steps over the last several years to ensure that
its systems will be compliant for the year 2000. Such steps have included the
replacement of older systems with new systems which are already compliant. In
1996, KILICO replaced its investment accounting system and in 1997 KILICO
replaced its general ledger and accounts payable system. KILICO has also ensured
that new systems developed to support new product introductions in 1996 and 1997
are already year 2000 compliant. Data processing expenses related solely to
bringing KILICO's systems in compliance with the year 2000 amounted to $88
thousand in 1997 and KILICO anticipates that it will cost an additional $895
thousand to bring all remaining systems into compliance. KILICO has also
undertaken steps which require that all other entities with which KILICO
electronically interacts, including suppliers and other financial services
institutions, attest in writing to KILICO that their systems are year 2000
compliant.
NAIC RATIOS
The National Association of Insurance Commissioners (the "NAIC") annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System ("IRIS") ratios. There presently are twelve IRIS ratios. The
primary purpose of the ratios is to provide an "early warning" of any negative
developments. The NAIC reports the ratios to state regulators who may then
contact the companies if three or more ratios fall outside the NAIC's "usual
ranges".
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<PAGE> 61
Based on statutory financial data as of December 31, 1997, KILICO had three
ratios outside the usual ranges, the change in reserving ratio, the change in
premium ratio and the change in product mix ratio. KILICO's change in reserving
ratio reflected the level of interest-sensitive life surrenders and withdrawals
during 1997, as well as the 1997 reinsurance agreement with FKLA. KILICO's
change in premium ratio and change in product mix ratio reflected the $2.7
billion increase in BOLI premiums received during 1997. Other than certain
states requesting quarterly financial reporting and/or explanations of the
underlying causes for certain ratios, no state regulators have taken any action
due to KILICO's IRIS ratios for 1997 or earlier years.
GUARANTY ASSOCIATION ASSESSMENTS
From time to time, mandatory assessments are levied on KILICO by life and health
guaranty associations of most states in which KILICO is licensed, to cover
losses to policyholders of insolvent or rehabilitated insurance companies. These
associations levy assessments (up to prescribed limits) on all member insurers
in a particular state, in order to pay claims on the basis of the proportionate
share of premiums written by member insurers in the lines of business in which
the insolvent or rehabilitated insurer engaged. These assessments may be
deferred or forgiven in certain states if they would threaten an insurer's
financial strength, and, in some states, these assessments can be partially
recovered through a reduction in future premium taxes.
In the early 1990s, there were a number of failures of life insurance companies.
KILICO's financial statements include provisions for all known assessments that
will be levied against KILICO by various state guaranty associations as well as
an estimate of amounts (net of estimated future premium tax recoveries) that
KILICO believes will be assessed in the future for failures which have occurred
to date and for which the life insurance industry has estimated the cost to
cover losses to policyholders. Assessments levied against KILICO and charged to
expense in 1997, 1996 and 1995 amounted to $1.2 million, $601 thousand and $5.8
million, respectively. Such amounts relate to accrued guaranty fund assessments
of $4.8 million, $5.8 million and $5.0 million at December 31, 1997, 1996 and
1995, respectively. Additional assessments charged to expense reflect accruals
for the life insurance industry's new or revised loss estimates for certain
insolvent insurance companies.
RISK-BASED CAPITAL
Since the early 1990s, reflecting a recessionary environment and the
insolvencies of a few large life insurance companies, both state and federal
legislators have increased scrutiny of the existing insurance regulatory
framework. While various initiatives, such as the codification of statutory
accounting principles, are being considered for future implementation by the
NAIC, it is not presently possible to predict the future impact of potential
regulatory changes on KILICO.
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<PAGE> 62
Under asset adequacy and risk-based capital rules in Illinois, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to assure that
reserves and assets are adequate to cover liabilities under a variety of
economic scenarios. The focus of the capital rules is a risk-based formula that
applies prescribed factors to various risk elements in an insurer's business and
investments to develop a minimum capital requirement designed to be proportional
to the amount of risk assumed by the insurer. KILICO has capital levels
substantially exceeding any which would mandate action under the risk-based
capital rules and is in compliance with applicable asset adequacy rules.
RESERVES AND REINSURANCE
The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
General account annuities..................... $3,137 $3,507
Interest-sensitive life insurance and other... 709 743
Term life reserves............................ 10 7
Ceded future policy benefits.................. 383 427
------ ------
Total............................... $4,239 $4,684
====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions in which KILICO insured liabilities of approximately
$516 million in 1992 and $416 million in 1991 with Fidelity Life Association, A
Mutual Legal Reserve Company ("FLA"), an affiliated mutual insurance company.
FLA shares directors, management, operations and employees with FKLA pursuant to
an administrative and management services agreement. FLA produces policies not
produced by FKLA or KILICO as well as other policies similar to certain FKLA
policies. At December 31, 1997 and 1996, KILICO's reinsurance recoverable from
FLA related to these coinsurance transactions totaled approximately $382.6
million and $427.2 million, respectively. Utilizing FKLA's employees, KILICO is
the servicing company for this coinsured business and is reimbursed by FLA for
the related servicing expenses.
During December 1997, KILICO entered into a funds held reinsurance agreement
with another Zurich affiliated company, EPICENTRE Reinsurance (Bermuda) Limited
("EPICENTRE"). Under the terms of this agreement, KILICO ceded, on a yearly
renewable term basis, ninety percent of the net amount at risk (death benefit
payable to the insured less the insured's separate account cash surrender value)
related to variable BOLI, which is held in KILICO's separate accounts. During
1997, KILICO ceded to EPICENTRE approximately $24.3 million of separate account
fees (cost of insurance charges) paid to KILICO by these policyholders for the
life insurance coverage provided under the terms of each separate account
contract. KILICO has also withheld approximately $23.4 million of such funds due
to EPICENTRE under the
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<PAGE> 63
terms of the reinsurance agreement as a component of benefits and funds payable
in the accompanying consolidated balance sheet in this Prospectus. KILICO
remains primarily liable to its policyholders for these amounts.
During 1996, KILICO assumed on a yearly renewable term basis approximately $14.4
billion (face amount) of term life insurance from FKLA. As a result of this
transaction, KILICO also recorded reserves in 1997 and 1996 of approximately
$7.9 million and $7.3 million, respectively. (See the note captioned
"Reinsurance" in the notes to the consolidated financial statements below.)
COMPETITION
KILICO is in a highly competitive business and competes with a large number of
other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with securities
brokerage and investment advisory firms as well as other institutions that
manage assets, produce financial products or market other types of investment
products.
KILICO's principal methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents. Certain of
KILICO's financial strength ratings and claims-paying/performance ratings,
however, were lower in 1995 than in earlier years, and were under review in
1995, due to uncertainty with respect to Kemper's and KILICO's ownership. These
ratings impacted sales efforts in certain markets; however, increases in
KILICO's financial strength ratings and claims-paying/performance ratings in
January 1996 favorably impacted variable annuity sales during 1997 and 1996 and
should continue to favorably impact future sales.
To address its competition, KILICO has adopted certain business strategies.
These include systematic reductions of investment risk and strengthening of its
capital position; continued focus on existing and new variable annuity and
variable life insurance products; distribution through diversified channels; and
ongoing efforts to continue as a low-cost provider of insurance products and
high-quality services to agents and policyholders through the use of technology.
EMPLOYEES
At December 31, 1997, KILICO utilized the services of approximately 620
employees of FKLA, which are also shared with FLA and Zurich Life Insurance
Company of America ("ZLICA"). On January 5, 1996, KILICO, FKLA, FLA and ZLICA
began to operate under the trade name Zurich Kemper Life. On July 1, 1996,
Kemper acquired 100 percent of the issued and outstanding common stock of ZLICA
from Zurich.
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<PAGE> 64
REGULATION
KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions in which KILICO is licensed to
do business. These departments enforce laws and regulations designed to assure
that insurance companies maintain adequate capital and surplus, manage
investments according to prescribed character, standards and limitations and
comply with a variety of operational standards. The departments also make
periodic examinations of individual companies and review annual and other
reports on the financial condition of each company operating within their
respective jurisdictions. Regulations, which often vary from state to state,
cover most aspects of the life insurance business, including market practices,
forms of policies and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
In addition, certain of KILICO's variable life insurance and annuity products,
and the related separate accounts, are subject to regulation by the Securities
and Exchange Commission (the "SEC").
KILICO believes it is in compliance in all material respects with all applicable
regulations.
INVESTMENTS
A changing marketplace has affected the life insurance industry and to
accommodate customers' increased preference for safety over higher yields,
KILICO has systematically reduced its investment risk and strengthened its
capital position.
KILICO's cash flow is carefully monitored and its investment program is
regularly and systematically planned to provide funds to meet all obligations
and to optimize investment return. For securities, portfolio management is
handled by an affiliated company, Scudder Kemper Investments, Inc. ("SKI"),
formerly Zurich Kemper Investments, Inc. ("ZKI"), and its subsidiaries and
affiliates, with KILICO's real estate-related investments being handled by a
majority-owned Kemper real estate subsidiary. Investment policy is directed by
KILICO's board of directors. KILICO's investment strategies take into account
the nature of each annuity and life insurance product, the respective crediting
rates and the estimated future policy benefit maturities. See "INVESTMENTS"
below.
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<PAGE> 65
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this report
and elsewhere (such as in other filings by KILICO with the Securities and
Exchange Commission, press releases, presentations by KILICO or its management
or oral statements) relative to markets for KILICO's products and trends in
KILICO's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend,"
and other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (i) general economic conditions and other factors, including
prevailing interest rate levels and stock market performance, which may affect
the ability of KILICO to sell its products, the market value of KILICO's
investments and the lapse rate and profitability of KILICO's contracts; (ii)
KILICO's ability to achieve anticipated levels of operational efficiencies
through certain cost-saving initiatives; (iii) customer response to new
products, distribution channels and marketing initiatives; (iv) mortality,
morbidity, and other factors which may affect the profitability of KILICO's
insurance products; (v) changes in the federal income tax laws and regulations
which may affect the relative tax advantages of some of KILICO's products; (vi)
increasing competition which could affect the sale of KILICO's products; (vii)
regulatory changes or actions, including those relating to regulation of
financial services affecting (among other things) bank sales and underwriting of
insurance products, regulations of the sale and underwriting and pricing of
insurance products; and (viii) the risk factors or uncertainties listed from
time to time in KILICO's other filings with the Securities and Exchange
Commission.
PROPERTIES
[TO BE UPDATED BY AMENDMENT]
KILICO shares 99,000 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois.
LEGAL PROCEEDINGS
We have been named as defendant in certain lawsuits incidental to Our insurance
business. Based upon the advice of legal counsel, Our management believes that
the resolution of these various lawsuits will not result in any material adverse
effect on Our consolidated financial position.
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<PAGE> 66
[TO BE UPDATED BY AMENDMENT]
SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1997 and for the opening balance sheet as of the
acquisition date, January 4, 1996. Such information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in this Prospectus. All amounts are shown in millions.
<TABLE>
<CAPTION>
PREACQUISITION
----------------------------------
DECEMBER 31
DECEMBER 31 DECEMBER 31 JANUARY 4 ----------------------------------
1997 1996 1996 1995 1994 1993
----------- ----------- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE............................ $ 425.5 $ 356.2 $ -- $ 68.1(1) $ 330.5 $ 337.4
========= ======== ======== ======== ======== ========
NET INCOME EXCLUDING REALIZED INVESTMENT
RESULTS................................ $ 31.9 $ 25.6 $ -- $ 74.2 $ 61.9 $ 33.7
========= ======== ======== ======== ======== ========
NET INCOME (LOSS)........................ $ 38.7 $ 34.4 $ -- $ (133.0)(1) $ 26.4 $ 14.0
========= ======== ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account assets............ $ 5,122.0 $2,127.2 $1,761.1 $1,761.1 $1,508.0 $1,499.5
========= ======== ======== ======== ======== ========
Total assets............................. $10,589.7 $7,717.9 $7,682.7 $7,581.7 $7,537.1 $8,113.7
========= ======== ======== ======== ======== ========
Future policy benefits................... $ 3,856.9 $4,256.5 $4,585.1 $4,573.2 $4,843.7 $5,040.0
========= ======== ======== ======== ======== ========
Stockholder's equity..................... $ 865.6 $ 751.0 $ 745.6 $ 605.9 $ 434.0 $ 654.6
========= ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Total revenue and net income (loss) for 1995 were adversely impacted by real
estate-related investment losses. Such losses reflect a change in KILICO's
strategy with respect to its real estate-related investments in connection
with the January 4, 1996 acquisition of Kemper by the Zurich-led investor
group. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
60
<PAGE> 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
[TO BE UPDATED BY AMENDMENT]
As discussed in the note captioned "Summary of Significant Accounting Policies"
in the notes to the consolidated financial statements, Kemper, and therefore
KILICO, were acquired on January 4, 1996, by an investor group led by Zurich. In
connection with the acquisition, KILICO's assets and liabilities were marked to
their respective fair values as of the acquisition date in conformity with the
purchase accounting method required under generally accepted accounting
principles.
KILICO's financial statements as of January 4, 1996, and as of and for the year
ended December 31, 1996, have been adjusted to reflect the effects of such
purchase accounting adjustments. KILICO's financial statements for the year
ended December 31, 1995 has been prepared on an historical cost basis and do not
reflect such purchase accounting adjustments.
RESULTS OF OPERATIONS
KILICO recorded net income of $38.7 million in 1997, compared with net income of
$34.4 million in 1996 and with a net loss of $133.0 million in 1995. The
increase in net income in 1997, compared with 1996, was due to a significant
increase in operating earnings before the amortization of goodwill, offset by an
increase in goodwill amortization and a slight decline in net realized capital
gains. The increase in net income in 1996, compared with 1995, was primarily due
to a decrease in the level of real estate-related realized investment losses.
KILICO's strategy with respect to its real estate-related investments changed
dramatically as of year-end 1995 in connection with the Zurich-led investor
group's acquisition of Kemper. This change, as further discussed below, resulted
in significant reductions in real estate-related investments and significant
realized capital losses in the second half of 1995.
The following table reflects the components of net income (loss):
NET INCOME (LOSS)
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
Operating earnings before amortization
of goodwill......................... $ 47.2 $ 35.8 $ 74.2
Amortization of goodwill.............. (15.3) (10.2) --
Net realized investment gains
(losses)............................ 6.8 8.8 (207.2)
------ ------ -------
Net income (loss)........... $ 38.7 $ 34.4 $(133.0)
====== ====== =======
</TABLE>
The following table reflects the major components of realized investment results
included in net income (loss) above. (See "INVESTMENTS" below,
61
<PAGE> 68
and the note captioned "Invested Assets and Related Income" in the notes to the
consolidated financial statements.)
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
Real estate-related gains (losses).... $ 12.8 $ 11.4 $(211.6)
Fixed maturity write-downs............ (2.8) (.9) (4.7)
Other gains (losses), net............. (3.2) (1.7) 9.1
------ ------ -------
Total....................... $ 6.8 $ 8.8 $(207.2)
====== ====== =======
</TABLE>
The higher level of real estate-related losses in 1995, compared with both 1997
and 1996, reflected realized capital losses predominately from real
estate-related bulk sale transactions in December 1995, as well as a higher
level of write-downs on real estate-related investments. These sales and
write-downs in 1995, reflect Zurich's and Insurance Partners' strategies,
adopted by KILICO, with respect to the disposition of real estate-related
investments. Other realized investment gains and losses for 1997, 1996 and 1995
relate primarily to the sale of fixed maturity investments. The fixed maturity
losses generated in 1997 and 1996 arose primarily from the sale of fixed
maturity investments, consisting of lower yielding U.S. Treasury bonds,
collateralized mortgage obligations and corporate bonds, related to ongoing
repositionings of KILICO's fixed maturity investment portfolio. The proceeds
from the repositionings, together with cash and short-term investments, were
reinvested into higher yielding corporate bonds and asset-backed securities in
1997 and 1996. Real estate-related gains in both 1997 and 1996, continue to
reflect KILICO's strategy to reduce its exposure to real estate-related
investments, as well as improving real estate market conditions in most areas of
the country. Fixed maturity write-downs in 1997 primarily reflect
other-than-temporary declines in value of certain U.S. dollar denominated fixed
maturity investments which have significant exposure to countries in Southeast
Asia. (See "INVESTMENTS" below.)
Operating earnings before the amortization of goodwill increased to $47.2
million in 1997, compared with $35.8 million in 1996. Operating earnings
increased in 1997 before the amortization of goodwill, compared with 1996,
primarily due to an increase in spread revenue (investment income earned less
interest credited), an increase in separate account fees and charges, an
increase in premium income and an increase in the deferral of insurance
acquisition costs, offset by an increase in claims incurred and other
policyholder benefits, taxes, licenses and fees, commissions, operating expenses
and an increase in the amortization of the value of business acquired.
Operating earnings before the amortization of goodwill decreased to $35.8
million in 1996, compared with $74.2 million in 1995, primarily due to purchase
accounting adjustments which reduced investment income and increased expenses.
62
<PAGE> 69
Investment income was lower in 1996, compared with 1995, primarily reflecting
purchase accounting adjustments related to the amortization of premiums on fixed
maturity investments. Under purchase accounting, the fair value of KILICO's
fixed maturity investments as of January 4, 1996 became KILICO's new cost basis
in 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 KILICO's fixed maturity investments
was approximately $133.9 million greater than original par. The amortization of
such premiums reduced investment income by approximately $14.1 million in 1997
and $22.7 million in 1996, compared with 1995.
Investment income and interest credited also declined in 1997, compared with
1996 and 1995, as a result of a decrease in both total invested assets and
liabilities for future policy benefits to policyholders. Such decreases were the
result of surrender and withdrawal activity over the last three years.
Investment income was also negatively impacted during 1996, compared with 1995,
by a higher level of cash and short-term investments held in the first quarter
of 1996. The increase in cash and short-term investments in the first quarter of
1996 was caused in part by the cash proceeds received from bulk sales of real
estate-related investments in late December 1995.
Investment income was positively impacted in 1997 and 1996 from the benefits of
capital contributions to KILICO and from the above-mentioned repositionings of
KILICO's investment portfolio.
The following table reflects KILICO's sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
PREACQUISITION
--------------
1997 1996 1995
-------- ------ --------------
<S> <C> <C> <C>
Annuities:
General account..................... $ 145.7 $140.6 $247.6
Separate account.................... 259.8 254.6 151.1
-------- ------ ------
Total annuities.................. 405.5 395.2 398.7
-------- ------ ------
Life Insurance:
Separate account bank-owned variable
universal life ("BOLI").......... 2,700.0 -- --
Separate account variable universal
life............................. 8.6 .2 --
Term life........................... 22.2 7.8 .2
Interest-sensitive life............. -- .6 .2
-------- ------ ------
Total life....................... 2,730.8 8.6 .4
-------- ------ ------
Total sales............ $3,136.3 $403.8 $399.1
======== ====== ======
</TABLE>
63
<PAGE> 70
Sales of annuity products consist of total deposits received. General account
annuity sales increased only slightly in 1997, compared with 1996, due to the
current low interest rate environment. The decrease in 1996 general account
(fixed annuity) sales, compared with 1995, is reflective of the declining
interest rate environments and the stock and bond markets during 1996 and 1995,
respectively, which made variable annuities more attractive to consumers in
1996, and fixed annuities more attractive to consumers during 1995.
The increase in separate account (variable sales) in 1997, compared with 1996
and 1995, was in part due to improvements in KILICO's financial strength and
performance ratings in January 1996, the addition of new separate account
investment fund options, the addition of new investment fund managers and a
strong overall underlying stock and bond market. Sales of variable annuities not
only increase administrative fees earned but they also pose minimal investment
risk for KILICO, as policyholders invest in one or more of several underlying
investment funds which invest in stocks and bonds. KILICO believes that the
increase in its financial strength and performance ratings in January 1996
together with KILICO's association with Zurich, will continue to assist in
KILICO's future sales efforts.
Beginning in late 1995, KILICO introduced a registered flexible individual
variable life insurance product and in 1997 KILICO introduced several non-
registered variable universal life insurance contracts, BOLI and a series of
individual universal life insurance contracts. Sales of these separate account
variable products, like variable annuities, pose minimal investment risk for
KILICO as policyholders also invest in one or more underlying investment funds
which invest in stocks and bonds. KILICO receives premium tax and DAC tax
expense loads from certain contract holders, as well as administrative fees and
cost of insurance charges which compensate KILICO for providing life insurance
coverage to the contractholders in excess of their cash surrender values. Face
amount of new variable universal life insurance business issued amounted to
$59.6 billion in 1997, compared with $4.0 million in 1996.
Beginning in 1995, KILICO began to sell low-cost term life insurance products
offering initial level premiums for 5, 10, 15 and 20 years in order to balance
its product mix and asset-liability structure. In 1997 and 1996, KILICO also
assumed $21.1 million and $7.3 million, respectively, of term life insurance
premiums from FKLA. (See the note captioned "Reinsurance" in the notes to the
consolidated financial statements.) Excluding the amounts assumed from FKLA,
KILICO's total term life sales, including new and renewal premiums, amounted to
$1.1 million in 1997, compared with $565 thousand in 1996 and $236 thousand in
1995. Face amount of new term business issued during 1997, 1996 and 1995
amounted to approximately $278 million, $187 million and $120 million,
respectively.
Included in separate account fees and charges are administrative fees received
from KILICO's separate account products of $31.0 million in 1997, compared with
$25.3 million and $21.9 million in 1996 and 1995, respectively. Administrative
fee revenue increased in each of the last three years due to growth in average
separate account assets.
64
<PAGE> 71
Also included in separate account fees and charges in 1997 are cost of insurance
charges related to variable universal life insurance, primarily BOLI, of $27.6
million, of which $24.3 million of such fees were ceded to EPICENTRE. (See the
note captioned "Reinsurance" in the notes to the consolidated financial
statements.) Separate account fees and charges in 1997 also include premium tax
expense loads of $51.1 million related to BOLI.
Other income includes surrender charge revenue of $5.2 million in 1997, compared
with $5.4 million and $7.7 million in 1996 and 1995, respectively, as total
general account and separate account policyholder surrenders and withdrawals
decreased in 1997 and 1996, compared with 1995. The decrease in surrender charge
revenue in 1997, compared with 1996 and 1995 also reflects that 49 percent of
KILICO's fixed and variable annuity liabilities, excluding BOLI, at December 31,
1997 are subject to minimal (5 percent or less) or no surrender charges,
compared with 57 percent in 1996 and 56 percent in 1995. Also included in other
income in 1995 is a ceding commission experience adjustment which resulted in
income of $4.4 million related to certain reinsurance transactions entered into
by KILICO during 1992. (See the note captioned "Reinsurance" in the notes to the
consolidated financial statements.)
POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
(in millions)
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
General account........................ $703.1 $652.0 $755.9
Separate account....................... 236.2 196.7 205.6
------ ------ ------
Total............................. $939.3 $848.7 $961.5
====== ====== ======
</TABLE>
Reflecting the current interest rate environment and other competitive market
factors, KILICO adjusts its crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and withdrawal
activity. KILICO can also improve spread revenue over time by increasing
investment income. Beginning in late 1994, as a result of rising interest rates
and other competitive market factors, KILICO began to increase crediting rates
on certain interest-sensitive products which adversely impacted spread income.
The declines in interest rates during the last three quarters of 1995, however,
and the current interest rate environment during 1996 and 1997, have mitigated
at present, competitive pressures to increase existing renewal crediting rates
further.
General account surrenders, withdrawals and death benefits increased $51.1
million in 1997, compared with 1996, reflecting an increase of $18.2 million in
claims incurred as a result of the aforementioned term life insurance business
assumed from FKLA as well as an increase in overall surrenders and withdrawals
in 1997, compared with 1996. KILICO expects that the level of surrender and
withdrawal activity experienced in 1997 should remain at a similar level in 1998
given current projections for relatively stable interest rates.
Taxes licenses and fees increased in 1997 to $52.6 million of which $51.1
million of this increase was related to premium taxes on BOLI. Excluding the
taxes
65
<PAGE> 72
due on BOLI, of which KILICO received a corresponding expense load in separate
account fees and other charges, taxes licenses and fees amounted to $1.5
million, compared with $2.2 million in 1996 and $6.9 million in 1995. Taxes,
licenses and fees were lower in 1997 and 1996, compared with 1995, primarily
reflecting the level of guaranty fund assessments in each of those years.
Expenses for such assessments totaled $1.2 million, $601 thousand, and $5.8
million in 1997, 1996 and 1995, respectively. (See "Guaranty association
assessments" above.)
Commissions expense was higher in 1997, compared with both 1996 and 1995, due to
an increase in total sales, excluding BOLI.
Operating expenses declined in 1995, primarily as a result of a decrease in
headcount resulting from the uncertainty concerning KILICO's ownership.
Operating expenses increased in 1997 and 1996, compared with 1995, as a result
of restaffing after the completion of the merger, an increase in evidence costs
related to new term life sales and an increase in data processing expenses. Data
processing expenses increased to $10.8 million in 1997, compared with $4.1
million in 1996 and $3.7 million in 1995, primarily due to infrastructure
improvements related to new product development, a new general ledger and
accounts payable system, development of a data warehouse and costs related to
bringing KILICO's systems in compliance with the year 2000. Data processing
expenses related to bringing KILICO's systems in compliance with the year 2000
amounted to $88 thousand in 1997. KILICO currently anticipates that it will cost
an additional $895 thousand to bring all remaining systems in compliance. (See
"Year 2000 Compliance" above.)
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1997, compared with 1996 and 1995. The deferral of
insurance acquisition costs increased in 1997, compared with both 1996 and 1995
reflecting an increase in commissions expense and operating expenses related
directly to the increase in production of new business.
Operating earnings were negatively impacted by the amortization of insurance
acquisition costs and the amortization of the value of business acquired in 1997
and 1996, compared with the amortization of insurance acquisition costs in 1995.
Deferred insurance acquisition costs, and the related amortization thereof, for
policies sold prior to January 4, 1996 have been replaced under purchase
accounting by the value of business acquired. The value of business acquired
reflects the present value of the right to receive future cash flows from
insurance contracts existing at the date of acquisition. The amortization of the
value of business acquired is calculated assuming an interest rate equal to the
liability or contract rate on the value of the business acquired. (See note
captioned "Summary of Significant Accounting Policies" in the notes to the
consolidated financial statements.) Deferred insurance acquisition costs are
established on all new policies sold after January 4, 1996.
The amortization of the value of business acquired increased in 1997, compared
with 1996, as a result of an increase in net operating earnings related to the
business previously acquired. The amortization of the value of business acquired
in 1997 and 1996 was also adversely affected by net realized capital gains
66
<PAGE> 73
in 1997 and 1996, while the net amortization of insurance acquisition costs in
1995, was positively affected by realized capital losses. Net realized capital
gains tend to accelerate the amortization of both the value of business acquired
and deferred insurance acquisition costs as they tend to decrease KILICO's
projected future estimated gross profits. Net realized capital losses tend to
defer such amortization into future periods as they tend to increase KILICO's
projected future estimated gross profits.
The difference between the cost of acquiring KILICO and the net fair value of
KILICO's assets and liabilities as of January 4, 1996 was recorded as goodwill.
During 1996, KILICO began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, KILICO changed its amortization period
to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, KILICO recorded an
increase in amortization expense of $5.1 million during 1997. The amortization
of goodwill increased expenses by $10.2 million in 1996, compared with 1995.
INVESTMENTS
KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors, its
evaluation of risk and return in various markets, consistency with KILICO's
business strategy and investment guidelines approved by the board of directors,
the interest rate environment, liability durations and changes in market and
business conditions.
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C> <C> <C>
Cash and short-term investments... $ 260 5.8% $ 74 1.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1.............. 3,004 67.1 3,231 71.5
NAIC(1) Class 2.............. 651 14.5 621 13.7
Below investment grade:
Performing................... 14 .3 13 .3
Nonperforming................ -- -- 1 --
Joint venture mortgage loans...... 73 1.6 111 2.4
Third-party mortgage loans........ 103 2.3 107 2.4
Other real estate-related
investments..................... 44 1.0 50 1.1
Policy loans...................... 282 6.3 288 6.4
Equity securities................. 25 .6 10 .2
Other............................. 21 .5 14 .4
------ ----- ------ -----
Total(2)................ $4,477 100.0% $4,520 100.0%
====== ===== ====== =====
</TABLE>
- ---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
the notes to the consolidated financial statements.
67
<PAGE> 74
FIXED MATURITIES
KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's equity, net of any applicable income tax expense. The aggregate
unrealized appreciation (depreciation) on fixed maturities at December 31, 1997
and 1996 was $24.6 million and $(63.2) million, respectively, compared with no
unrealized appreciation or depreciation, at January 4, 1996 as a result of
purchase accounting adjustments. KILICO does not record a net deferred tax
benefit for the aggregate unrealized depreciation on investments. Fair values
are sensitive to movements in interest rates and other economic developments and
can be expected to fluctuate, at times significantly, from period to period.
At December 31, 1997, investment-grade fixed maturities and cash and short-term
investments accounted for 87.4 percent of KILICO's invested assets and cash,
compared with 86.8 percent at December 31, 1996. Approximately 54.0 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1997,
compared with 58.4 percent at December 31, 1996.
Approximately 35.1 percent of KILICO's investment-grade fixed maturities at
December 31, 1997 were mortgage-backed securities, down from 36.4 percent at
December 31, 1996, due to sales and paydowns during 1997. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. KILICO has not made any investments in interest-only
or other similarly volatile tranches of mortgage-backed securities. KILICO's
mortgage-backed investments are generally of AAA credit quality, and the markets
for these investments have been and are expected to remain liquid. KILICO plans
to continue to reduce its holding of such investments over time.
As a result of the previously discussed repositionings of KILICO's fixed
maturity portfolio, approximately 10.8 percent and 8.8 percent of KILICO's
investment-grade fixed maturities at December 31, 1997 and 1996, respectively,
consisted of corporate asset-backed securities. The majority of KILICO's
investments in asset-backed securities were backed by home equity loans (27.7%),
auto loans (22.3%), manufactured housing loans (17.2%), equipment loans (13.7%),
and commercial mortgage backed securities ("CMBs") (10.7%).
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 KILICO'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
68
<PAGE> 75
which would result in reductions of investment income related to such
securities.
At December 31, 1997 and 1996 KILICO had unamortized premiums and discounts
related to mortgage-backed and asset-backed securities as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1997 1996
---- ----
<S> <C> <C>
Unamortized premiums.......................... $19.6 $24.7
===== =====
Unamortized discounts......................... $ 5.2 $ 5.7
===== =====
</TABLE>
KILICO believes that as a result of the purchase accounting adjustments and the
current interest rate environment, anticipated prepayment activity in 1998 is
expected to result in reductions to future investment income similar to or
greater than those reductions experienced by KILICO in 1997.
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.
69
<PAGE> 76
The table below provides information about KILICO's mortgage-backed and
asset-backed securities that are sensitive to changes in interest rates. The
expected maturity dates have been calculated on a security by security basis
using prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current interest
rate and economic environment.
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, --------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1997 1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds....... $1,283.6 $219.1 $232.5 $145.1 $92.2 $64.5 $530.2 $1,283.6 $1,283.6
Average yield............. 6.58% 6.60% 6.61% 6.64% 6.64% 6.63% 6.67% 6.58% 6.58%
Asset-backed bonds.......... $ 353.0 $ 18.9 $ 16.9 $ 30.8 $35.5 $47.2 $203.7 $ 353.0 $ 353.0
Average yield............. 6.81% 6.85% 7.04% 7.05% 7.15% 7.13% 7.20% 6.81% 6.81%
CMBs........................ $ 42.2 $ 0.3 $ 0.4 $ 0.4 $ 0.4 $ 8.0 $ 32.7 $ 42.2 $ 42.2
Average yield............. 6.64% 6.64% 6.64% 6.64% 6.64% 6.63% 6.63% 6.64% 6.64%
-------- -------- --------
$1,678.8 $1,678.8 $1,678.8
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1996 1997 1998 1999 2000 2001 THEREAFTER TOTAL 1996
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds......... $1,402.0 $161.4 $239.0 $261.4 $166.1 $ 61.8 $512.3 $1,402.0 $1,402.0
Average yield............... 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83%
Asset-backed
bonds....................... $ 339.3 $ 31.4 $ 38.1 $ 36.6 $ 44.4 $ 51.0 $137.8 $ 339.3 $ 339.3
Average yield............... 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82%
-------- -------- --------
$1,741.3 $1,741.3 $1,741.3
======== ======== ========
</TABLE>
70
<PAGE> 77
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1997, is 3.8 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately 1.0
year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.3 years.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1996, was 4.6 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately 1.7
years, while a 200 basis point decrease in interest rates would have decreased
the weighted average maturity by approximately 1.3 years.
As of December 31, 1997, KILICO had $54.7 million of U.S. dollar denominated
fixed maturity investments, after write-downs for other-than-temporary declines
in value, which have significant exposure to countries in Southeast Asia.
Approximately $5.6 million of such securities were from Korea, $21.9 million
were from Hong Kong, China, $20.4 million were from Malaysia and the remainder
of such bonds were from a United Kingdom bank with most of its loans issued to
countries in Southeast Asia. Write-downs on such securities, which were
considered to be other-than-temporary, as of December 31, 1997 amounted to $3.1
million. There can be no assurance that the current estimate for
other-than-temporary declines in value for such securities will prove accurate
over time due to changing economic conditions in Southeast Asia.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 9 issuers at December 31, 1997, totaled 0.3 percent
of cash and invested assets at both December 31, 1997 and December 31, 1996.
(See note captioned "Invested Assets and Related Income" in the notes to the
consolidated financial statements.) Below investment-grade securities are
generally unsecured and often subordinated to other creditors of the issuers.
These issuers may have relatively higher levels of indebtedness and be more
sensitive to adverse economic conditions than investment-grade issuers. KILICO
has significantly reduced its exposure to below investment-grade securities
since 1991. This strategy takes into account the more conservative nature of
today's consumer and the resulting demand for higher-quality investments in the
life insurance and annuity marketplace. KILICO expects to increase its holdings
in this category selectively during 1998.
REAL ESTATE-RELATED INVESTMENTS
The $220.0 million real estate-related portfolio held by KILICO, consisting of
joint venture and third-party mortgage loans and other real estate-related
investments, constituted 4.9 percent of cash and invested assets at December 31,
1997, compared with $267.7 million, or 5.9 percent, at December 31, 1996. The
decrease in real estate-related investments during 1997 was primarily due to
asset sales.
As reflected in the "Real estate portfolio" table below, KILICO has continued to
fund both existing projects and legal commitments. The future legal
71
<PAGE> 78
commitments were $75.3 million at December 31, 1997. This amount represented a
net decrease of $122.1 million since December 31, 1996, primarily due to sales
in 1997. As of December 31, 1997, KILICO expects to fund approximately $21.2
million of these legal commitments, along with providing capital to existing
projects. The disparity between total legal commitments and the amount expected
to be funded relates principally to standby financing arrangements that provide
credit enhancements to certain tax-exempt bonds, which KILICO does not presently
expect to fund. The total legal commitments, along with estimated working
capital requirements, are considered in KILICO's evaluation of reserves and
write-downs. (See note captioned "Financial Instruments -- Off-Balance-Sheet
Risk" in the notes to the consolidated financial statements.)
Excluding the $4.0 million of real estate owned and $19.2 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $196.8 million
at December 31, 1997, after reserves and write-downs. Of this amount, $155.0
million are on accrual status with a weighted average interest rate of
approximately 8.82 percent. Of these accrual loans, 9.7 percent have terms
requiring current periodic payments of their full contractual interest, 53.4
percent require only partial payments or payments to the extent of cash flow of
the borrowers, and 36.9 percent defer all interest to maturity.
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<PAGE> 79
The equity investments in real estate at December 31, 1997 consisted of KILICO's
other equity investments in joint ventures. These equity investments include
KILICO's share of periodic operating results. KILICO, as an equity owner or
affiliate thereof, has the ability to fund, and historically has elected to
fund, operating requirements of certain joint ventures.
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
MORTGAGE LOANS OTHER REAL ESTATE-RELATED INVESTMENTS
---------------- ---------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ --------- ------------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996......................... $111.0 $106.6 $ 30.9 $ 7.5 $11.7 $267.7(1)
Additions (deductions):
Fundings....................... 11.8 -- -- -- -- 11.8
Interest added to
principal.................... 5.6 .7 -- -- -- 6.3
Sales/paydowns/distributions... (47.9) (13.8) (10.4) (4.1) (3.0) (79.2)
Operating gain................. -- -- -- -- .8 .8
Transfers...................... (9.1) 9.1 -- -- -- --
Realized investments gains..... 7.6 .4 2.2 .7 8.8 19.7
Other transactions, net........ (6.3) -- (1.6) (.1) .9 (7.1)
------ ------ ------ ----- ----- ------
Balance at December 31,
1997......................... $ 72.7 $103.0 $ 21.1 $ 4.0 $19.2 $220.0(3)
====== ====== ====== ===== ===== ======
</TABLE>
- ---------------
(1) Net of $11.8 million reserve and write-downs. Excludes $9.7 million of real
estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued by KILICO generally to
provide financing for Kemper's or KILICO's joint ventures for various
purposes.
(3) Net of $9.2 million reserve and write-downs. Excludes $9.5 million of real
estate-related accrued interest.
REAL ESTATE CONCENTRATIONS AND OUTLOOK
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships. (See notes
captioned "Unconsolidated Investees" and "Concentration of Credit Risk" in the
notes to the consolidated financial statements.)
As a result of KILICO's ongoing strategy to reduce its exposure to real
estate-related investments, as of December 31, 1997, KILICO had three remaining
properties which account for approximately 83.2 percent of KILICO's $220.0
million real estate-related portfolio.
The largest of these investments at December 31, 1997 amounted to $88.2 million
and consisted of second mortgages on nine hotel properties and two office
buildings in which Patrick M. Nesbitt or his affiliates, a third-party real
estate developer, have ownership interests. These hotels and office buildings
are geographically dispersed and the current market values of the underlying
73
<PAGE> 80
properties substantially exceed the balances due on KILICO's mortgages. These
loans are on accrual status.
KILICO's loans to a master limited partnership (the "MLP") between subsidiaries
of Kemper and subsidiaries of Lumbermens, amounted to $60.5 million at December
31, 1997. The MLP's underlying investment primarily consists of a water
development project located in California's Sacramento River Valley. This
project is currently in the final stages of a permit process with various
federal and California state agencies which will determine the long-term
economic viability of the project. KILICO currently anticipates that the permit
process will be successfully completed in 1998. Loans to the MLP are on accrual
status.
The remaining significant real estate-related investment amounted to $34.4
million at December 31, 1997 and consisted of various zoned and unzoned
residential commercial lots located in Hawaii, as well as a sewer treatment
plant which is located in the same geographical area as the residential lots.
The sewer treatment plant is currently under a sales contract and is expected to
close in early 1998. Due to certain negative zoning restriction developments in
January 1997 and a continuing economic slump in Hawaii, KILICO has placed these
real estate-related investments on nonaccrual status as of December 31, 1996.
KILICO is currently pursuing the zoning of all remaining unzoned properties, as
well as pursuing steps to sell all remaining zoned properties. However, due to
the state of Hawaii's economy, which has lagged behind the economic expansion of
most of the rest of the United States, KILICO anticipates that it could be
several additional years until all of KILICO's investments in Hawaii are
completely disposed of.
KILICO evaluates its real estate-related investments (including accrued
interest) using an estimate of the investments observable market price, net of
estimated costs to sell. (See note captioned "Summary of Significant Accounting
Policies" in the notes to the consolidated financial statements.) Because
KILICO's real estate review process includes estimates, there can be no
assurance that current estimates will prove accurate over time due to changing
economic conditions and other factors. KILICO's real estate-related investments
are expected to continue to decline further through future sales. KILICO's net
income could be materially reduced in future periods if real estate market
conditions worsen in areas where KILICO's portfolio is located, if Kemper's and
KILICO's plans with respect to certain projects change or if necessary
construction or zoning permits are not obtained.
74
<PAGE> 81
The following table is a summary of KILICO's troubled real estate-related
investments:
TROUBLED REAL ESTATE-RELATED INVESTMENTS
(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
Potential problem loans(1).................... $ -- $ 3.2
Past due loans(2)............................. -- --
Nonaccrual loans (primarily Hawaiian
properties)(3).............................. 47.4 43.5
Real estate owned............................. 4.0 7.5
----- -----
Total............................... $51.4 $54.2
===== =====
</TABLE>
- ---------------
(1) These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which KILICO anticipates may go into
nonaccrual, past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful. Loans on
nonaccrual status after reserves and write-downs amounted to $41.8 million
and $38.2 million at December 31, 1997 and December 31, 1996, respectively.
NET INVESTMENT INCOME
KILICO's pre-tax net investment income totaled $296.2 million in 1997, compared
with $299.7 million in 1996 and $348.4 million in 1995. Included in pre-tax net
investment income is KILICO's share of the operating losses from equity
investments in real estate consisting of other income less depreciation,
interest and other expenses. Such operating results exclude interest expense on
loans by KILICO which are on nonaccrual status. As previously discussed,
KILICO's net investment income in 1997 and 1996, compared with 1995, has been
negatively impacted by purchase accounting adjustments.
75
<PAGE> 82
KILICO's total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
FOREGONE INVESTMENT INCOME
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities....................... $ .5 $ .7 $ .4
Real estate-related investments........ 3.9 .5 20.5
---- ---- -----
Total........................... $4.4 $1.2 $20.9
==== ==== =====
Basis points........................... 10 3 43
==== ==== =====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of KILICO's share of interest expense on these loans excluded
from KILICO's share of joint venture operating results. Based on the level of
nonaccrual real estate-related investments at December 31, 1997, KILICO
estimates foregone investment income in 1998 will be similar to the 1997 level.
Any increase in nonperforming securities, and either worsening or stagnant real
estate conditions, would increase the expected adverse effect on KILICO's future
investment income and realized investment results.
REALIZED INVESTMENT RESULTS
Reflected in net income (loss) are after-tax realized investment gains of $6.8
million and $8.8 million in 1997 and 1996, respectively, compared with after-tax
realized investment losses of $207.2 million in 1995. (See note captioned
"Invested Assets and Related Income" in the notes to the consolidated financial
statements.)
Unrealized gains and losses on fixed maturity investments are not reflected in
KILICO's net income (loss). These changes in unrealized value are included
within a separate component of stockholder's equity, net of any applicable
income taxes. If and to the extent a fixed maturity investment suffers an other-
than-temporary decline in value, however, such security is written down to net
realizable value, and the write-down adversely impacts net income.
KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.
A valuation allowance has been established, and is evaluated as of each reported
period end, to reduce the deferred tax asset for investment losses to the amount
that, based upon available evidence, is in management's judgment
76
<PAGE> 83
more likely than not to be realized. (See note captioned "Income Taxes" in the
notes to the consolidated financial statements.)
INTEREST RATES
In 1994, rapidly rising short-term interest rates resulted in a much flatter
yield curve as the Federal Reserve Board raised rates five times during the year
and once during first-quarter 1995. Interest rates subsequently declined through
the remainder of 1995. In 1996, however, interest rates again began to rise,
before declining again in 1997.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, KILICO can adjust its crediting rates on fixed
annuities and other interest-bearing liabilities. However, competitive
conditions and contractual commitments do not always permit the reduction in
crediting rates to fully or immediately reflect reductions in investment yield,
which can result in narrower spreads.
A rising interest rate environment can increase net investment income as well as
contribute to both realized and unrealized fixed maturity investment losses,
while a declining interest rate environment can decrease net investment income
as well as contribute to both realized and unrealized fixed maturity investment
gains. Also, lower renewal crediting rates on annuities, compared with
competitors' higher new money crediting rates, have influenced certain annuity
holders to seek alternative products. KILICO mitigates this risk somewhat by
charging surrender fees, which decrease over time, when annuity holders withdraw
funds prior to maturity on certain annuity products. Approximately 49 percent of
KILICO's fixed and variable annuity liabilities as of December 31, 1997,
however, were no longer subject to significant surrender fees.
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of KILICO's
liquidity are deposits for fixed annuities, premium income, investment income,
separate account fees, other operating revenue and cash provided from maturing
or sold investments. (See the Policyholder surrenders and withdrawals table and
related discussion and "INVESTMENTS" above.)
RATINGS
Ratings are an important factor in establishing the competitive position of life
insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios,
including those of KILICO. Any reductions in KILICO's claims-paying ability or
financial strength ratings could result in its products being less attractive to
consumers. Any reductions in KILICO's parent's ratings could also adversely
impact KILICO's financial flexibility.
77
<PAGE> 84
Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating. (See
"Ranking and ratings" above.)
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $865.6 million at December 31, 1997, compared with
$751.0 million at December 31, 1996, and $745.6 million at January 4, 1996. The
1997 increase in stockholder's equity was primarily due to net income of $38.7
million, a $45.0 million capital contribution and an increase in stockholder's
equity related to the change in unrealized appreciation of $60.1 million related
to KILICO's fixed maturity investment portfolio due to falling interest rates
during 1997, offset by a dividend of $29.2 million to Kemper. The 1996 increase
in stockholder's equity was primarily due to net income of $34.4 million and an
$18.4 million capital contribution, offset by a $47.4 million decrease in
stockholder's equity related to the change in the unrealized loss position of
KILICO's fixed maturity investment portfolio due to rising interest rates during
1996.
EMERGING ISSUES
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses).
This statement requires that all items required to be reported be displayed with
the same prominence as other financial statements. This statement is effective
for fiscal years beginning after December 31, 1997. The impact of implementation
is not expected to be material to KILICO's reported net income before reporting
comprehensive income. Comprehensive income, however, by design, could be
materially different from reported net income, as changes in unrealized
appreciation and depreciation of investments for example will now be included as
a component of reported comprehensive income. Full implementation of SFAS No.
130 is expected in the first quarter of 1998.
In June 1997, the FASB also issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
how to report information about operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement is effective for fiscal years beginning
after December 31, 1997. Full implementation of SFAS No. 131 is expected in
December 1998 and the impact of implementation is not expected to be material to
KILICO.
78
<PAGE> 85
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS. SFAS No. 132 revises standards for
disclosures related to pension and other postretirement benefit plans. This
statement is effective for fiscal years beginning after December 31, 1997. Full
implementation of SFAS No. 132 is expected in December 1998 and the impact of
implementation is not expected to be material to KILICO.
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<PAGE> 86
DIRECTORS AND EXECUTIVE OFFICERS OF KILICO
[TO BE UPDATED BY AMENDMENT]
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR
YEAR OF ELECTION MORE
-------------------- ------------------------------------------------
<S> <C>
John B. Scott (53) Chief Executive Officer, President and Director
Chief Executive Officer since of Federal Kemper Life Assurance Company (FKLA)
February 1992. President since and Fidelity Life Association (FLA) since 1988.
November 1993. Director since 1992. Chief Executive Officer, President and Director
of Zurich Life Insurance Company of America
(ZLICA) and Zurich Direct, Inc. (ZD) since March
1996. Chairman of the Board and Director of
Investors Brokerage Services, Inc. (IBS) and
Investors Brokerage Services Insurance Agency,
Inc. (IBSIA) since 1993. Chairman of the Board
of FKLA and FLA from April 1988 to January 1996.
Chairman of the Board of KILICO from February
1992 to January 1996. Executive Vice President
and Director of Kemper Corporation (Kemper) from
January 1994 and March 1996, respectively.
Executive Vice President of Kemper Financial
Companies, Inc. from January 1994 to January
1996 and Director from 1992 to January 1996.
Eliane C. Frye (50) Executive Vice President of FKLA and FLA since
Executive Vice President since 1995. 1995. Executive Vice President of ZLICA and ZD
since March 1996. Director of FLA since December
1997. Director of ZD from March 1996 to March
1997. Director of IBS and IBSIA since 1995.
Senior Vice President of KILICO, FKLA and FLA
from 1993 to 1995. Vice President of FKLA and
FLA from 1988 to 1993.
</TABLE>
80
<PAGE> 87
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR
YEAR OF ELECTION MORE
-------------------- ------------------------------------------------
<S> <C>
Frederick L. Blackmon (46) Senior Vice President and Chief Financial
Senior Vice President and Chief Officer of FKLA since December 1995. Senior Vice
Financial Officer since December President and Chief Financial Officer of FLA
1995. since January 1996. Senior Vice President and
Chief Financial Officer of ZLICA since March
1996. Senior Vice President and Chief Financial
Officer of ZD since March 1996. Director of ZD
from March 1996 to March 1997. Treasurer and
Chief Financial Officer of Kemper since January
1996. Chief Financial Officer of Alexander
Hamilton Life Insurance Company from April 1989
to November 1995.
James C. Harkensee (39) Senior Vice President of FKLA and FLA since
Senior Vice President since January January 1996. Senior Vice President of ZLICA
1996. since 1995. Senior Vice President of ZD since
1995. Director of ZD from April 1993 to March
1997. Vice President of ZLICA from 1992 to 1995.
Chief Actuary of ZLICA from 1991 to 1994.
Assistant Vice President of ZLICA from 1990 to
1992. Vice President of ZD from 1994 to 1995.
James E. Hohmann (42) Senior Vice President and Chief Actuary of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and
Actuary since December 1995. Chief Actuary of FLA since January 1996. Senior
Vice President and Chief Actuary of ZLICA since
March 1996. Senior Vice President and Chief
Actuary of ZD since March 1996. Director of FLA
since June 1997. Director of ZD from March 1996
to March 1997. Managing Principal (Partner) of
Tillinghast-Towers Perrin from January 1991 to
December 1995. Consultant/Principal (Partner) of
Tillinghast-Towers Perrin from November 1986 to
January 1991.
</TABLE>
81
<PAGE> 88
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR
YEAR OF ELECTION MORE
-------------------- ------------------------------------------------
<S> <C>
Edward K. Loughridge (43) Senior Vice President and Corporate Development
Senior Vice President and Corporate Officer of FKLA and FLA since January 1996.
Development Officer since January Senior Vice President and Corporate Development
1996. Officer for ZLICA and ZD since March 1996.
Senior Vice President of Human Resources of
Zurich-American Insurance Group from February
1992 to March 1996.
Phillip D. Meserve (47) Senior Vice President of FKLA, FLA, ZLICA and ZD
Senior Vice President since March since March 1997. Director of IBSIA and IBS
1997 since March and May, 1997, respectively.
Managing Director of Equitable Distributors from
May 1996 to March 1997. Senior Vice President of
Banker's Trust from April 1995 to April 1996.
Senior Vice President of Fidelity Investments
Insurance Services from February 1992 to March
1995.
Debra P. Rezabek (42) Senior Vice President of FKLA and FLA since
Senior Vice President since 1996. March 1996. Corporate Secretary of FKLA and FLA
General Counsel since 1992. Corporate since January 1996. Vice President of KILICO,
Secretary since January 1996. FKLA and FLA since 1995. General Counsel and
Director of Government Affairs of FKLA and FLA
since 1992 and of KILICO since 1993. Senior Vice
President, General Counsel and Corporate
Secretary of ZLICA since March 1996. Senior Vice
President, General Counsel and Corporate
Secretary of ZD since March 1996. Director of ZD
from March 1996 to March 1997. Secretary of IBS
and IBSIA since 1993. Director of IBS and IBSIA
from 1993 to 1996. Assistant General Counsel of
FKLA and FLA from 1988 to 1992. General Counsel
and Assistant Secretary of KILICO, FKLA and FLA
from 1992 to 1996. Assistant Secretary of Kemper
since January 1996.
Kenneth M. Sapp (52) Senior Vice President of FKLA, FLA and ZLICA
Senior Vice President since January since January 1998. Vice President--Aetna Life
1998. Brokerage of Aetna Life & Annuity Company from
February 1992 to January 1998.
</TABLE>
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<PAGE> 89
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR
YEAR OF ELECTION MORE
-------------------- ------------------------------------------------
<S> <C>
George Vlaisavljevich (55) Senior Vice President of FKLA, FLA and ZLICA
Senior Vice President since October since October 1996. Senior Vice President of ZD
1996. since March 1997. Director of IBS and IBSIA
since October 1996. Executive Vice President of
The Copeland Companies from April 1983 to
September 1996.
Loren J. Alter (59) Director of FKLA, FLA and Scudder Kemper
Director since January 1996. Investments, Inc. (SKI) since January 1996.
Director of ZLICA since May 1979. Executive Vice
President of Zurich Insurance Company since
1979. President, Chief Executive Officer and
Director of Kemper since January 1996.
William H. Bolinder (54) Chairman of the Board and Director of FKLA and
Chairman of the Board and Director FLA since January 1996. Chairman of the Board of
since January 1996. ZLICA and ZD since March 1995. Chairman of the
Board and Director of Kemper since January 1996.
Vice Chairman and Director of SKI since January
1996. Member of the Corporate Executive Board of
Zurich Insurance Group since October 1994.
Chairman of the Board of American Guarantee and
Liability Insurance Company, Zurich American
Insurance Company of Illinois, American Zurich
Insurance Company and Steadfast Insurance
Company since 1995. Chief Executive Officer of
American Guarantee and Liability Insurance
Company, Zurich American Insurance Company of
Illinois, American Zurich Insurance Company and
Steadfast Insurance Company from 1986 to June
1995. President of Zurich Holding Company of
America since 1986. Manager of Zurich Insurance
Company, U.S. Branch since 1986. Underwriter for
Zurich American Lloyds since 1986.
</TABLE>
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<PAGE> 90
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR
YEAR OF ELECTION MORE
-------------------- ------------------------------------------------
<S> <C>
David A. Bowers (51) Director of FKLA and ZLICA since May 1997.
Director since May 1997. Director of FLA since June 1997. Executive Vice
President, Corporate Secretary and General
Counsel of Zurich-American Insurance Group since
August 1985. Vice President, General Council and
Secretary of Kemper since January 1996.
Markus Rohrbasser (43) Director of FKLA, FLA and ZLICA since May 1997.
Director since May 1997. Chief Financial Officer and Member of the
Corporate Executive Board of Zurich Insurance
Company since January 1997. Member of Enlarged
Corporate Executive Board and Chief Executive
Officer of Union Bank of Switzerland (North
America) from 1992 to 1997.
</TABLE>
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<PAGE> 91
EXECUTIVE COMPENSATION
[TO BE UPDATED BY AMENDMENT]
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ --------------------------
OTHER LONG TERM
ANNUAL INCENTIVE PLAN OPTIONS/ ALL OTHER
NAME AND COMPENSATION PAYOUTS SARS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) ($)(3) ($)(2) (#)(4) ($)(5)(6)(7)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John B. Scott.............. 1997 $171,000 $ -- $ -- $-- $ -- $ 63,362
Chief Executive Officer(1) 1996 212,500 94,000 -- 212,500 -- 142,498
1995 172,800 129,600 20,035 -- 15,360 260,106
Eliane C. Frye............. 1997 98,040 47,515 -- 91,590 -- 29,909
Executive Vice President(1) 1996 105,000 41,750 -- 69,750 -- 58,520
1995 91,200 67,200 9,261 -- 10,560 41,546
Frederick L. Blackmon...... 1997 96,300 54,225 -- 112,500 -- 19,699
Senior Vice President and 1996 100,583 47,000 27,924 71,250 -- 11,226
Chief Financial
Officer(1)
George Vlaisavljevich...... 1997 252,500 146,000 39,922 243,000 -- 9,491
Senior Vice President(1)
Phillip D. Meserve......... 1997 231,818 150,500 172,526 280,500 -- --
Senior Vice President(1)
</TABLE>
- ---------------
(1) Also served in same positions for FKLA, ZLICA and FLA. An allocation of the
time devoted to duties as executive officer of KILICO has been made. All
compensation items reported in the Summary Compensation Table reflect this
allocation.
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<PAGE> 92
(2) Annual bonuses are paid pursuant to annual incentive plans. The amounts of
the bonuses earned in 1997 for Mr. Scott were not available as of the date
of this filing.
(3) The amounts disclosed in this column include:
(a) Amounts paid as non-preferential dividend equivalents on shares of
restricted stock and phantom stock units.
(b) The cash value of shares of Kemper common stock when awarded under the
Kemper Anniversary Award Plan. Employees were awarded shares on an
increasing scale beginning with their 10th year of employment and every 5
years thereafter, with a pro rata award at retirement.
(c) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.
(d) Relocation expense reimbursements of $21,437 in 1996 for Mr. Blackmon
and $24,498 and $52,526, respectively, for Messrs. Vlaisavljevich and
Meserve in 1997.
(e) Sign-on payment of $120,000 for Mr. Meserve in 1997.
(4) Options were granted under Kemper stock option plans maintained for selected
officers and employees of Kemper and its subsidiaries.
(5) The amounts in this column include:
(a) The amounts of employer contributions allocated to the accounts of
the named persons under defined contribution plans or under supplemental
plans maintained to provide benefits in excess of applicable ERISA
limitations.
(b) Distributions from the Kemper and FKLA supplemental plans.
(6) Pursuant to the Conseco Merger Agreement, which was an agreement that was
subsequently terminated as the result of a failed merger attempt by Conseco,
the restricted stock awards for 1993 and 1994 were cancelled. To replace
these awards, on June 30, 1994, the Committee, under the Kemper Bonus
Restoration Plan and in its sole discretion, granted cash awards to the
named executive officers and other affected executives entitling each of
them to receive an amount in cash immediately prior to the effective time of
the then-planned Conseco merger equal to the product of the number of shares
of restricted stock previously granted to such individual under the 1993
Senior Executive Long-Term Incentive Plan multiplied by the consideration
payable in the merger. As a result of the termination of the Conseco Merger
Agreement, no cash awards were paid pursuant to the Kemper Bonus Restoration
Plan.
86
<PAGE> 93
In January 1995, the board of directors, upon the advice of the Committee,
approved the adoption of the Kemper 1995 Executive Incentive Plan under
which active employee holders of the previously cancelled shares of
restricted stock were granted phantom stock units by the Committee equal to
the number of shares cancelled plus an added amount representing 20 percent
of the aggregate cancelled shares. The 20 percent supplement was awarded in
recognition of the imposition of new vesting periods on the phantom awards
(to the extent the restricted stock held prior to cancellation would
otherwise have vested in June 1994 had stockholder approval of the affected
restricted stock plan been obtained as earlier anticipated).
By their terms, the phantom stock units associated with cancelled shares of
restricted stock originally awarded in 1993, as supplemented, would have
vested on December 31, 1995 and entitle the holders to a cash payment (net
of any required tax withholding) determined by the value of Kemper's common
stock based on an average trading range to December 31, 1995, and those
phantom stock units associated with the cancelled restricted stock
originally awarded in 1994 could similarly have vested and been paid on
December 31, 1996, subject to ongoing employment to the respective vesting
dates. Notwithstanding these vesting provisions, the phantom stock units
earlier vested and entitled payment upon the consummation of a "change of
control" of Kemper. Dividend equivalents were payable to holders of the
phantom stock units as compensation income when and as dividends were paid
on Kemper's outstanding common stock, and the Executive Incentive Plan
provided for standard anti-dilution adjustments.
Phantom stock units awarded to the named executive officers subject to
vesting on December 31, 1995 and December 31, 1996, were Mr. Scott 5,400 and
12,600 phantom units, respectively, and Ms. Frye 1,680 and 1,680 phantom
units, respectively. All phantom stock units vested and were paid
immediately prior to the effectiveness of the January 4, 1996 acquisition of
Kemper by Zurich and Insurance Partners. Mr. Scott and Ms. Frye received
allocated cash out payments of $430,272, and $80,317, respectively, in 1996.
(7) Pursuant to the terms of a Termination Protection Agreement with Kemper
dated March 17, 1994, Mr. Scott received payments in 1995 and 1996. These
payments were made by Kemper and no portion of the payments were allocated
to KILICO.
87
<PAGE> 94
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements; Independent Auditors' Report, Financial
Statements of the Separate Account. Please read the Statement of Additional
Information in conjunction with this Prospectus.
FINANCIAL STATEMENTS
[TO BE UPDATED BY AMENDMENT]
Our included financial statements should be considered primarily as bearing on
our ability to meet our obligations under the Contracts. The Contracts are not
entitled to participate in earnings, dividends or surplus of KILICO.
CHANGE OF ACCOUNTANTS
[TO BE UPDATED BY AMENDMENT]
On September 12, 1997, Kemper Investors Life Insurance Company ("KILICO")
appointed the accounting firm of PricewaterhouseCoopers LLP (on July 1, 1998,
Coopers & Lybrand L.L.P. merged with Price Waterhouse LLP to form
PricewaterhouseCoopers LLP) as independent accountants for the year ended
December 31, 1997 to replace KPMG LLP effective with such appointment. KILICO's
Board of Directors approved the selection of PricewaterhouseCoopers LLP as the
new independent accountants. Management had not consulted with
PricewaterhouseCoopers LLP on any accounting, auditing or reporting matter,
prior to that time.
During the two most recent fiscal years ended December 31, 1996, there have been
no disagreements with KPMG LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure or any
reportable events. KPMG LLP's report on the financial statements for the past
two years contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
There were no disagreements with PricewaterhouseCoopers LLP on accounting or
financial disclosures for the year ended December 31, 1997.
88
<PAGE> 95
[TO BE UPDATED BY AMENDMENT]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder's
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated balance sheet of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the year then ended. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as listed in
the accompanying index. These consolidated financial statements and the
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audit. The
financial statements of Kemper Investors Life Insurance Company and subsidiaries
for the period from January 4, 1996 to December 31, 1996 (post-acquisition
basis) and for the year ended December 31, 1995 (pre-acquisition basis), were
audited by other auditors, whose unqualified report, dated March 21, 1997,
included an explanatory paragraph that described the acquisition of Kemper
Investors Life Insurance Company as discussed in Note 1 to the financial
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kemper
Investors Life Insurance Company and subsidiaries as of December 31, 1997, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
/s/ PricewaterhouseCoopers LLP
Coopers & Lybrand L.L.P.
Chicago, Illinois
March 18, 1998
89
<PAGE> 96
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated balance sheet of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the period from January 4, 1996 to December 31, 1996 (post-acquisition), and for
the year ended December 31, 1995 (pre-acquisition). In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedules as of December 31, 1996 and 1995 as listed in the
accompanying index. These consolidated financial statements and the financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedules based on our 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 the results of their operations and their cash flows for the post-
acquisition period, in conformity with generally accepted accounting principles.
Also, in our opinion, the aforementioned pre-acquisition consolidated financial
statements present fairly, in all material respects, the results of their
operations and their cash flows for the pre-acquisition period, in conformity
with generally accepted accounting principles. Further, in our opinion, the
aforementioned financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
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 Corporation, the parent 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 period
after the acquisition is presented on a different cost basis than that for the
period before the acquisition and, therefore, is not comparable.
KPMG LLP
Chicago, Illinois
March 21, 1997
90
<PAGE> 97
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1997, $3,644,075;
December 31, 1996, $3,929,650)................... $ 3,668,643 $3,866,431
Short-term investments............................. 236,057 71,696
Joint venture mortgage loans....................... 72,663 110,971
Third-party mortgage loans......................... 102,974 106,585
Other real estate-related investments.............. 44,409 50,157
Policy loans....................................... 282,439 288,302
Equity securities.................................. 24,839 9,910
Other invested assets.............................. 20,820 13,597
----------- ----------
Total investments......................... 4,452,844 4,517,649
Cash............................................... 23,868 2,776
Accrued investment income.......................... 117,789 115,199
Goodwill........................................... 229,393 244,688
Value of business acquired......................... 138,482 189,639
Deferred insurance acquisition costs............... 59,459 26,811
Deferred income taxes.............................. 39,993 --
Reinsurance recoverable............................ 382,609 427,165
Receivable on sales of securities.................. 20,076 32,569
Other assets and receivables....................... 3,187 34,117
Assets held in separate accounts................... 5,121,950 2,127,247
----------- ----------
Total assets.............................. $10,589,650 $7,717,860
=========== ==========
LIABILITIES
Future policy benefits............................. $ 3,856,871 $4,256,521
Ceded future policy benefits....................... 382,609 427,165
Benefits and funds payable......................... 150,524 36,142
Other accounts payable and liabilities............. 212,133 59,462
Deferred income taxes.............................. -- 60,362
Liabilities related to separate accounts........... 5,121,950 2,127,247
----------- ----------
Total liabilities......................... 9,724,087 6,966,899
----------- ----------
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......................... 806,538 761,538
Unrealized gain (loss) on investments.............. 12,637 (47,498)
Retained earnings.................................. 43,888 34,421
----------- ----------
Total stockholder's equity................ 865,563 750,961
----------- ----------
Total liabilities and stockholder's
equity.................................. $10,589,650 $7,717,860
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
91
<PAGE> 98
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUE
Net investment income........... $296,195 $299,688 $ 348,448
Realized investment gains
(losses)...................... 10,546 13,602 (318,700)
Premium income.................. 22,239 7,822 236
Separate account fees and
charges....................... 85,413 25,309 21,909
Other income.................... 11,087 9,786 16,192
-------- -------- ---------
Total revenue......... 425,480 356,207 68,085
-------- -------- ---------
BENEFITS AND EXPENSES
Interest credited to
policyholders................. 199,782 223,094 237,984
Claims incurred and other
policyholder benefits......... 28,372 14,255 7,631
Taxes, licenses and fees........ 52,608 2,173 6,912
Commissions..................... 32,602 25,962 24,881
Operating expenses.............. 36,837 24,678 20,837
Deferral of insurance
acquisition costs............. (38,177) (27,820) (36,870)
Amortization of insurance
acquisition costs............. 3,204 2,316 14,423
Amortization of value of
business acquired............. 24,948 21,530 --
Amortization of goodwill........ 15,295 10,195 --
-------- -------- ---------
Total benefits and
expenses............ 355,471 296,383 275,798
-------- -------- ---------
Income (loss) before income tax
expense (benefit)............. 70,009 59,824 (207,713)
Income tax expense (benefit).... 31,292 25,403 (74,664)
-------- -------- ---------
Net income (loss)..... $ 38,717 $ 34,421 $(133,049)
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
92
<PAGE> 99
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
----------- ----------- --------- -----------
<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....... 761,538 743,104 491,994 491,994
Capital contributions from
parent.................... 45,000 18,434 -- --
Adjustment to reflect
purchase accounting
method.................... -- -- 251,110 --
-------- -------- -------- ---------
End of period...... 806,538 761,538 743,104 491,994
-------- -------- -------- ---------
UNREALIZED GAIN (LOSS) ON
INVESTMENTS, beginning of
period.................... (47,498) -- 68,502 (236,443)
Unrealized gain (loss) on
revaluation of
investments, net.......... 60,135 (47,498) -- 304,945
Adjustment to reflect
purchase accounting
method.................... -- -- (68,502) --
-------- -------- -------- ---------
End of period...... 12,637 (47,498) -- 68,502
-------- -------- -------- ---------
RETAINED EARNINGS, beginning
of period................. 34,421 -- 42,880 175,929
Net income (loss)........... 38,717 34,421 -- (133,049)
Dividends to parent......... (29,250) -- -- --
Adjustment to reflect
purchase accounting
method.................... -- -- (42,880) --
-------- -------- -------- ---------
End of period...... 43,888 34,421 -- 42,880
-------- -------- -------- ---------
Total stockholder's
equity........... $865,563 $750,961 $745,604 $ 605,876
======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
93
<PAGE> 100
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................... $ 38,717 $ 34,421 $(133,049)
Reconcilement of net income (loss) to net
cash provided:
Realized investment losses (gains)....... (10,546) (13,602) 318,700
Interest credited and other charges...... 198,206 230,298 237,984
Deferred insurance acquisition costs..... (34,973) (25,504) (22,447)
Amortization of value of business
acquired............................... 24,948 21,530 --
Amortization of goodwill................. 15,295 10,195 --
Amortization of discount and premium on
investments............................ 17,866 25,743 4,586
Deferred income taxes.................... (99,370) (897) 38,423
Net change in current federal income
taxes.................................. 97,386 108,806 (86,990)
Benefits and premium taxes due related to
separate account bank-owned life
insurance.............................. 180,546 -- --
Other, net............................... 17,168 (22,283) (29,905)
--------- ----------- ---------
Net cash provided from operating
activities......................... 445,243 368,707 327,302
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity........ 229,208 264,383 320,143
Fixed maturities sold prior to
maturity............................... 633,872 891,995 297,637
Mortgage loans, policy loans and other
invested assets........................ 131,866 168,727 450,573
Cost of investments purchased or loans
originated:
Fixed maturities......................... (606,028) (1,369,091) (549,867)
Mortgage loans, policy loans and other
invested assets........................ (76,350) (119,044) (131,966)
Short-term investments, net................ (164,361) 300,819 (168,351)
Net change in receivable and payable for
securities transactions.................. 29,746 (31,667) (1,397)
Net reductions in other assets............. 244 115 1,996
--------- ----------- ---------
Net cash provided by investing
activities......................... 178,197 106,237 218,768
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits................................. 145,687 141,159 247,778
Withdrawals.............................. (745,510) (700,084) (755,917)
Capital contributions from parent.......... 45,000 18,434 --
Dividends to parent........................ (29,250) -- --
Other...................................... (18,275) 42,512 (35,309)
--------- ----------- ---------
Net cash used in financing
activities......................... (602,348) (497,979) (543,448)
--------- ----------- ---------
Net increase (decrease) in
cash........................... 21,092 (23,035) 2,622
CASH, beginning of period.................... 2,776 25,811 23,189
--------- ----------- ---------
CASH, end of period.......................... $ 23,868 $ 2,776 $ 25,811
========= =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
94
<PAGE> 101
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 that change in control, Zurich and Insurance Partners owned 80
percent and 20 percent, respectively, of Kemper and therefore the Company. On
February 27, 1998, Zurich acquired Insurance Partner's remaining 20 percent
interest for cash. As a result of this transaction, Kemper and the Company
became wholly-owned subsidiaries of Zurich.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements in order for them to conform to the 1997
presentation.
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 years ended December 31, 1996 and 1997, 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 where appropriate 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 values as of the acquisition date. The difference between
the cost of acquiring the Company and the net fair values of the Company's
assets and liabilities as of the acquisition date has been recorded as
95
<PAGE> 102
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
goodwill. 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 began to amortize goodwill during 1996 on a straight-line basis over
twenty-five years. In December of 1997, the Company changed its amortization
period to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, the Company
recorded an increase in goodwill amortization expense of $5.1 million during
1997.
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, 1997, 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 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
96
<PAGE> 103
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2002 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(in thousands) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ---------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1996 (actual).......... $190,222 $(31,427) $ 9,897 $168,692
1997 (actual).......... 168,692 (34,906) 9,958 143,744
1998................... 143,744 (25,633) 8,933 127,044
1999................... 127,044 (23,701) 7,873 111,216
2000................... 111,216 (21,668) 6,876 96,424
2001................... 96,424 (19,122) 5,973 83,275
2002................... 83,275 (17,835) 5,134 70,574
</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, 1997 and
1996, this adjustment increased (decreased) the value of business acquired by
$(5.3) million and $20.9 million, respectively, and stockholder's equity by
approximately $(3.4) 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.
97
<PAGE> 104
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs. 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, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life insurance products are being
amortized over the estimated contract life in relation to the present value of
estimated gross profits. Deferred insurance acquisition costs related to such
interest-sensitive products also reflect the estimated impact of unrealized
gains or losses on fixed maturities held as available for sale in the investment
portfolio, through a credit or charge to 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 3.0 percent to 7.3 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 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
98
<PAGE> 105
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and equity securities 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 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; 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.
99
<PAGE> 106
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.
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 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
100
<PAGE> 107
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) CASH FLOW INFORMATION (CONTINUED)
for the period from January 1, 1996 to January 4, 1996 and for the years ended
December 31, 1995 amounted to $108.8 million and $25.2 million, respectively.
The Company paid federal income taxes of $29.0 million and $28.1 million
directly to the United States Treasury Department during 1997 and 1996,
respectively.
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale. The carrying
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, 1997
U.S. treasury securities and obligations
of U.S. government agencies and
authorities........................... $ 6,258 $ 6,298 $ 4 $ (44)
Obligations of states and political
subdivisions, special revenue and
nonguaranteed......................... 29,330 29,308 160 (138)
Debt securities issued by foreign
governments........................... 92,563 92,722 188 (347)
Corporate securities.................... 1,861,655 1,846,588 24,733 (9,666)
Mortgage and asset-backed securities.... 1,678,837 1,669,159 10,035 (357)
---------- ---------- ------- --------
Total fixed maturities............ $3,668,643 $3,644,075 $35,120 $(10,552)
========== ========== ======= ========
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)
========== ========== ======= ========
</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
101
<PAGE> 108
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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 $220.0 million real estate portfolio at December 31, 1997 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1997 and 1996, total impaired real estate-related
loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross....... $39.3 $39.8
Impaired loans with reserves--gross.......... 2.2 7.6
----- -----
Total gross impaired loans............ 41.5 47.4
Reserves related to impaired loans........... (2.1) (4.4)
----- -----
Net impaired loans.................... $39.4 $43.0
===== =====
</TABLE>
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. At December 31, 1997 and 1996, the Company's deficit
in equity investments considered in determining reserves and write-downs
amounted to $0 and $5.9 million, respectively. The Company had an average
balance of $45.2 million and $30.8 million in impaired loans for 1997 and 1996,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance.
At December 31, 1997 and December 31, 1996, loans on nonaccrual status, before
reserves and write-downs, amounted to $47.4 million and $43.5 million,
respectively. The Company's nonaccrual loans are generally included in impaired
loans.
102
<PAGE> 109
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
At December 31, 1997, securities carried at approximately $6.3 million were on
deposit with governmental agencies as required by law.
Proceeds from sales of investments in fixed maturities prior to maturity were
$633.9 million, $892.0 million and $297.6 million during 1997, 1996 and 1995,
respectively. Gross gains of $3.1 million, $9.9 million and $21.2 million and
gross losses of $13.7 million, $16.2 million and $11.9 million were realized on
sales and write-downs of fixed maturities in 1997, 1996 and 1995, respectively.
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1997, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST VALUE
(in thousands) -------- ----------
<S> <C> <C>
One year or less............................ $ 47,724 $ 47,797
Over one year through five.................. 649,279 648,291
Over five years through ten................. 988,849 984,495
Over ten years.............................. 303,954 294,333
Securities not due at a single maturity
date, primarily mortgage and asset-backed
securities(1)............................. 1,678,837 1,669,159
---------- ----------
Total fixed maturities............... $3,668,643 $3,644,075
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 3.8 years.
103
<PAGE> 110
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Interest and dividends on
fixed maturities............ $250,170 $250,683 $269,934
Dividends on equity
securities.................. 2,123 646 681
Income from short-term
investments................. 4,128 9,130 13,159
Income from mortgage loans.... 16,283 20,257 40,494
Income from policy loans...... 20,549 20,700 19,658
Income from other real estate-
related investments......... 6,631 4,917 15,565
Income from other loans and
investments................. 2,045 2,480 1,555
-------- -------- --------
Total investment
income.............. 301,929 308,813 361,046
Investment expense............ (5,734) (9,125) (12,598)
-------- -------- --------
Net investment
income.............. $296,195 $299,688 $348,448
======== ======== ========
</TABLE>
Realized gains (losses) for the years ended December 31, 1997, 1996 and 1995,
were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-----------------------------------------------
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Real estate-related........... $ 19,758 $17,462 $(325,611)
Fixed maturities.............. (10,656) (6,344) 9,336
Equity securities............. 914 -- (346)
Other......................... 530 2,484 (2,079)
-------- ------- ---------
Realized investment gains
(losses) before income
tax expense (benefit).... 10,546 13,602 (318,700)
Income tax expense (benefit) 3,691 4,761 (111,545)
-------- ------- ---------
Net realized investment
gains (losses)........... $ 6,855 $ 8,841 $(207,155)
======== ======= =========
</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)
104
<PAGE> 111
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
by class of investment for the years ended December 31, 1997, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
---------------------------------------------------------
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
(in thousands) ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Fixed maturities......... $ 87,787 $(63,219) $ $351,964
Equity and other
securities............. (103) 1,256 -- 180
Adjustment to deferred
insurance acquisition
costs.................. (2,325) 1,307 -- (14,277)
Adjustment to value of
business acquired...... (26,209) 20,947 -- --
-------- -------- -- --------
Unrealized gain (loss)
before income tax
expense............. 59,150 (39,709) -- 337,867
Income tax expense
(benefit).............. (985) 7,789 -- 32,922
-------- -------- -- --------
Net unrealized
gain (loss) on
investments.... $ 60,135 $(47,498) $-- $304,945
======== ======== == ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1997 and 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, 1997 and December 31, 1996, the Company's net equity
investment in unconsolidated investees amounted to $19.3 million and $11.7
million, respectively. The Company's share of net income related to such
unconsolidated investees amounted to $835 thousand and $223 thousand in 1997 and
1996, respectively, and a net loss of $453 thousand in 1995.
105
<PAGE> 112
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
Approximately 35.1 percent of the Company's investment-grade fixed maturities at
December 31, 1997 were mortgage-backed securities, down from 36.4 percent at
December 31, 1996, due to sales and paydowns during 1997. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
Approximately 10.8 percent and 8.8 percent of the Company's investment-grade
fixed maturities at December 31, 1997 and 1996, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (27.7%), auto loans
(22.3%), manufactured housing loans (17.2%), equipment loans (13.7%), and
commercial mortgage backed securities (10.7%).
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, 1997
<TABLE>
<S> <C>
California........................................... 38.2%
Hawaii............................................... 14.2
Colorado............................................. 9.8
Oregon............................................... 9.2
Washington........................................... 9.1
Florida.............................................. 6.4
Texas................................................ 5.1
Michigan............................................. 3.7
Ohio................................................. 3.3
Illinois............................................. 1.0
-----
Total...................................... 100.0%
=====
</TABLE>
106
<PAGE> 113
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
Hotel................................................ 41.3%
Land................................................. 28.2
Residential.......................................... 13.1
Retail............................................... 3.3
Office............................................... 3.1
Industrial........................................... .9
Other................................................ 10.1
-----
Total...................................... 100.0%
=====
</TABLE>
Undeveloped land represented approximately 28.2 percent of the Company's real
estate portfolio at December 31, 1997. 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 mortgage loans are on properties
or projects where the Company, Kemper, or their affiliates have taken ownership
positions in joint ventures with a small number of partners. (See note captioned
"Unconsolidated Investees".)
At December 31, 1997, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $88.2 million, or
40.1 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1997,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.
At December 31, 1997, loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens Mutual
107
<PAGE> 114
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
Casualty Company ("Lumbermens"), a former affiliate, constituted approximately
$60.5 million, or 27.5 percent, of the Company's real estate portfolio. Kemper's
interest is 75 percent at December 31, 1997. At December 31, 1997, MLP-related
commitments accounted for approximately $7.4 million of the Company's
off-balance-sheet legal commitments, which the Company expects to fund.
At December 31, 1997, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold or written-down to zero. However, the Company
continues to have Prime Group-related commitments, which accounted for $25.7
million of the Company's off-balance-sheet legal commitments at December 31,
1997. The Company does not expect to fund any of these commitments.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Current..................... $130,662 $26,300 $(113,087)
Deferred.................... (99,370) (897) 38,423
-------- ------- ---------
Total............. $ 31,292 $25,403 $ (74,664)
======== ======= =========
</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 each filed 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.
108
<PAGE> 115
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The actual income tax expense (benefit) for 1997, 1996 and 1995 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 1997, 1996, and 1995 to income (loss) before
income tax expense (benefit).
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Computed expected tax expense
(benefit).................. $24,503 $20,938 $(72,700)
Difference between "expected"
and actual tax expense
(benefit):
State taxes................ 1,801 913 (1,370)
Amortization of goodwill... 5,353 3,568 --
Foreign tax credit......... (278) -- (183)
Other, net................. (87) (16) (411)
------- ------- --------
Total actual tax
expense
(benefit)........ $31,292 $25,403 $(74,664)
======= ======= ========
</TABLE>
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company only records deferred tax
assets if future realization of the tax benefit is more likely than not, with a
valuation allowance recorded for the portion that is not likely to be realized.
The valuation allowance is subject to future adjustments based upon, among other
items, the Company's estimates of future operating earnings and capital gains.
The Company has established a valuation allowance to reduce the deferred federal
tax asset related to real estate and other investments to the amount that, based
upon available evidence, is, in management's judgment, more likely than not to
be realized. Any reversals of the valuation allowance are contingent upon the
recognition of future capital gains in the Company's federal income tax return
or a change in circumstances which causes the recognition of the benefits to
become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred federal tax asset or liability from
unrealized gains or losses on investments.
109
<PAGE> 116
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 asset or liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 JANUARY 4
1997 1996 1996
(in thousands) ----------- ----------- ---------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition
costs...................... $ 75,522 $ 4,520 $ --
Unrealized losses on
investments................ -- 16,624 --
Life policy reserves.......... 43,337 46,452 46,654
Unearned revenue.............. 37,243 -- --
Real estate-related........... 13,400 20,642 27,736
Other investment-related...... 3,298 5,409 1,773
Other......................... 4,371 3,639 9,750
-------- -------- --------
Total deferred federal tax
assets................... 177,171 97,286 85,913
Valuation allowance........... (15,201) (31,825) (15,201)
-------- -------- --------
Total deferred federal tax
assets after valuation
allowance................ 161,970 65,461 70,712
-------- -------- --------
Deferred federal tax
liabilities:
Value of business acquired.... 48,469 66,373 66,578
Deferred insurance acquisition
costs...................... 20,811 9,384 --
Depreciation and
amortization............... 20,201 15,473 15,490
Other investment-related...... 18,774 28,855 37,919
Unrealized gains on
investments................ 9,002 -- --
Other......................... 4,720 5,738 4,197
-------- -------- --------
Total deferred federal tax
liabilities.............. 121,977 125,823 124,184
-------- -------- --------
Net deferred federal tax assets
(liabilities)................. $ 39,993 $(60,362) $(53,472)
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the tax on
deferred insurance acquisition costs ("DAC Tax") associated with $2.7 billion of
new 1997 sales from a non-registered individual and group variable bank-owned
life insurance contract ("BOLI"). As a result of proposed tax law changes, as
more fully discussed below, the level of DAC Tax experienced in 1997 is not
anticipated to occur in future periods and it is expected that the Company will
return to its normalized earnings patterns in 1998. Management believes that it
is more likely, than not, that the results of future operations will generate
sufficient taxable income over the ten year amortization period of the unearned
revenue and DAC Tax to realize such deferred tax assets.
110
<PAGE> 117
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
In early 1998, the Clinton Administration's Fiscal Year 1998 Budget ("Budget")
was released and contained certain proposals to change the taxation of
non-qualified fixed and variable annuities and variable life insurance
contracts, including BOLI. It is currently unknown whether or not such proposals
will be accepted, amended or omitted in the final 1999 Budget approved by
Congress. If the current Budget proposals are accepted, certain of the Company's
non-qualified fixed and variable annuities and certain of its variable life
insurance products, including BOLI and the non-registered individual variable
universal life insurance contract introduced during 1997, may no longer be tax
advantaged products and therefore no longer attractive to those customers who
purchase them because of their favorable tax attributes. Additionally, sales of
such products during 1998 may also be negatively impacted until the likelihood
of the current proposals being enacted into law has been determined.
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 $45.0 million and $18.4
million during 1997 and 1996, respectively. The Company paid cash dividends of
$29.3 million to Kemper during 1997.
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, 1997 and December 31, 1996, joint venture
mortgage loans totaled $72.7 million and $111.0 million, respectively, and
during 1997, 1996 and 1995, the Company earned interest income on these joint
venture loans of $7.5 million, $9.5 million and $19.6 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper
Investments, Inc., an affiliated company, and the information systems of Kemper
Service Company ("KSvC"), an SKI subsidiary, based on the Company's share of
administrative, legal, marketing, investment management, information systems and
operation and support services. During 1997, 1996 and 1995, expenses allocated
to the Company from SKI and KSvC amounted to $114 thousand, $1.7 million and
$4.4 million, respectively. The
111
<PAGE> 118
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
Company also paid to SKI investment management fees of $3.5 million, $3.6
million and $3.4 million during 1997, 1996 and 1995, respectively. In addition,
expenses allocated to the Company from FKLA during 1997, 1996 and 1995 amounted
to $30.0 million, $10.5 million and $14.3 million, respectively.
During 1995, the Company sold certain mortgages and real estate-related
investments, net of reserves, amounting to approximately $3.5 million 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 an affiliated non-life
realty subsidiary for cash. The Company also paid to Kemper real estate
subsidiaries $2.2 million, $1.8 million and $1.8 million in 1997, 1996 and 1995,
respectively, related to the management of the Company's real estate portfolio.
(8) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
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 Fidelity Life Association, a Mutual Legal Reserve
Company ("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,
1997 and 1996, the reinsurance recoverable related to the fixed-rate annuity
liabilities ceded to FLA amounted to $382.6 million and $427.2 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
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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
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. Premiums assumed during 1997 under the
terms of the treaty amounted to $21.1 million and the face amount which remained
outstanding at December 31, 1997 amounted to $12.6 billion.
The Company's retention limit on term life insurance prior to 1997 was $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. Effective January 1, 1997, the Company ceded 90 percent of all new
term life insurance premiums to outside reinsurers. Term life reserves ceded to
outside reinsurers on the Company's direct business amounted to approximately
$139 thousand and $102 thousand as of December 31, 1997 and 1996, respectively.
During December 1997, the Company entered into a funds held reinsurance
agreement with a Zurich affiliated company, EPICENTRE Reinsurance (Bermuda)
Limited ("EPICENTRE"). Under the terms of this agreement, the Company ceded, on
a yearly renewable term basis, ninety percent of the net amount at risk (death
benefit payable to the insured less the insured's separate account cash
surrender value) related to a new product developed in 1997, a non-registered
variable bank-owned life insurance contract ("BOLI"), which is held in the
Company's separate accounts. During 1997, the Company issued $59.3 billion (face
amount) of new BOLI business and ceded $51.1 billion (face amount) to EPICENTRE
under the terms of the treaty. During 1997, the Company also ceded $24.3 million
of separate account fees (cost of insurance charges) to EPICENTRE. The Company
has also withheld approximately $23.4 million of such funds due to EPICENTRE
under the terms of the reinsurance agreement as a component of benefits and
funds payable in the accompanying consolidated balance sheet as of December 31,
1997.
(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
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<PAGE> 120
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
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 $1.9 million and $1.7 million at December 31, 1997 and 1996,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.25 percent and 7.75 percent for 1997 and 1996, respectively.
The assumed health care trend rate used was based on projected experience for
1997 and 1998, 8 percent in 1999, gradually declining to 5.0 percent by the year
2002 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, 1997 and 1996 by $242 thousand and $191 thousand, respectively.
The Company also provides certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company 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
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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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
1997 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, 1997.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1997, the Company had future legal loan commitments and stand-by
financing agreements totaling $75.3 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 $21.2 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 estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
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<PAGE> 122
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. (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 were determined by using
market quotations, or independent pricing services that use prices provided by
market makers or estimates of fair values obtained from yield data relating to
instruments or securities with similar characteristics, or fair value as
determined in good faith by the Company's portfolio manager, SKI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty of estimating the fair value of real estate due to the lack
of a liquid quotable market.
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<PAGE> 123
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 1997 and 1996 to be 5.25 percent and 4.75 percent,
respectively, while the assumed average market crediting rate was 6.0 percent
and 5.8 percent in 1997 and 1996, respectively.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) -------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial instruments
recorded as assets:
Fixed maturities........ $3,668,643 $3,668,643 $3,866,431 $3,866,431
Cash and short-term
investments........... 259,925 259,925 74,472 74,472
Mortgage loans and other
real estate-related
assets................ 220,046 220,046 267,713 267,713
Policy loans............ 282,439 282,439 288,302 288,302
Equity securities....... 24,839 24,839 9,910 9,910
Other invested assets... 20,820 24,404 13,597 13,597
Financial instruments
recorded as liabilities:
Life policy benefits,
excluding term life
reserves.............. 3,846,023 4,050,852 4,249,264 4,101,588
</TABLE>
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which can
be paid by the Company without prior approval in 1998 is $58.4 million.
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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS (CONTINUED)
The Company paid cash dividends of $29.3 million to Kemper during 1997. The
Company paid no cash dividends in 1996 or 1995.
The Company's net income (loss) and capital and surplus as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Net income (loss).................. $ 58,372 $ 37,287 $(64,707)
======== ======== ========
Statutory capital and surplus...... $476,924 $411,837 $383,374
======== ======== ========
</TABLE>
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997 OPERATING SUMMARY
Net investment income...... $74,249 $74,050 $72,950 $ 74,946
Realized investment gains
(losses)................. 889 8,161 (3,032) 4,528
Premium income............. 5,008 4,121 3,938 9,172
Separate account fees and
other income............. 8,909 12,961 12,215 62,415(1)
------- ------- ------- --------
Total revenue....... 89,055 99,293 86,071 151,061
------- ------- ------- --------
Interest credited and
benefits to
policyholders............ 57,859 56,643 57,965 55,687
Commissions, taxes,
licenses and fees........ 8,023 9,475 8,389 59,323(1)
Operating expenses......... 7,175 8,780 10,014 10,868
Net deferral of insurance
acquisition costs........ (7,216) (6,877) (7,471) (13,409)
Amortization of value of
business acquired........ 4,821 6,991 6,743 6,393
Amortization of goodwill... 2,547 2,552 2,549 7,647(2)
------- ------- ------- --------
Total benefits and
expenses.......... 73,209 77,564 78,189 126,509
------- ------- ------- --------
Income before income tax
expense.................. 15,846 21,729 7,882 24,552
Income tax expense......... 5,678 8,723 3,778 13,113
------- ------- ------- --------
Net income.......... $10,168 $13,006 $ 4,104 $ 11,439
======= ======= ======= ========
</TABLE>
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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996 OPERATING SUMMARY
Net investment income...... $72,302 $74,647 $76,070 $ 76,669
Realized investment gains
(losses)................. (1,248) (2,439) 13,518 3,771
Premium income............. 130 109 150 7,433(3)
Separate account fees and
other income............. 8,028 9,419 8,478 9,170
------- ------- ------- --------
Total revenue....... 79,212 81,736 98,216 97,043
------- ------- ------- --------
Interest credited and
benefits to
policyholders............ 58,296 57,335 57,512 64,206
Commissions, taxes,
licenses and fees........ 6,868 6,486 6,819 7,962
Operating expenses......... 5,440 4,920 6,974 7,344
Net deferral of insurance
acquisition costs........ (5,032) (7,302) (5,434) (7,736)
Amortization of value of
business acquired........ 4,234 2,787 11,582 2,927
Amortization of goodwill... 2,547 2,552 2,549 2,547
------- ------- ------- --------
Total benefits and
expenses.......... 72,353 66,778 80,002 77,250
------- ------- ------- --------
Income before income tax
expense.................. 6,859 14,958 18,214 19,793
Income tax expense......... 3,513 6,402 7,391 8,097
------- ------- ------- --------
Net income.......... $ 3,346 $ 8,556 $10,823 $ 11,696
======= ======= ======= ========
</TABLE>
- ---------------
Notes:
(1) Reflects premium tax expense loads received and premium taxes incurred of
$49.1 million related to new BOLI sales of $2.6 billion in the fourth
quarter of 1997.
(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
years.
(3) Reflects the assumption of term life insurance business from FKLA.
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APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Certificate upon a withdrawal. The
5% assumed Guaranteed Interest Rate is the rate required to be used in the
"Summary of Expenses." In these examples, the withdrawal occurs one year after
the Date of Issue. The Market Value Adjustment operates in a similar manner for
transfers. No Withdrawal Charge applies to transfers.
The Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at
the end of the five-year Guarantee Period. After one year, when the withdrawals
occur in these examples, the Guarantee Period Value is $42,000.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate KILICO is then crediting
(at the time of the withdrawal) on new Certificates with the same Guarantee
Period as the time remaining in your Guarantee Period rounded to the next higher
number of complete years. One year after the Purchase Payment there would have
been four years remaining in your Guarantee Period. These examples also show the
Withdrawal Charge (if any) which would be calculated separately after the Market
Value Adjustment.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment and KILICO is then crediting 6.5%
for a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:
4
(1 + .05) -1
-.0551589* = [----------]
(1 + .065)
The Market Value Adjustment is a reduction of $2,316.67 from the Guarantee
Period Value:
- 2,316.67 = -.0551589 X 42,000.00
- ---------------
* Actual calculation utilizes 10 decimal places.
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<PAGE> 127
The Market Adjusted Value would be:
$39,683.33 = $42,000.00 - $2,316.67
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 10% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$2,142.90 = $39,683.33 X .90 X .06
Thus, the amount payable on a full withdrawal would be:
$37,540.43 = $39,683.33 - $2,142.90
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,158.34 = -.0551589 X $21,000.00
The Market Adjusted Value would be:
$19,841.66 = $21,000.00 - $1,158.34
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$952.39 = ($19,841.46 - .10 X $39,683.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$18.889.07 = $19,841.46 -$952.39
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and KILICO is then crediting 4% for a four-year Guarantee Period. Upon a
full withdrawal, the market value adjustment factor would be:
4
+.0390198 = (1 + .05) -1
[----------]
(1 + .04)
The Market Value Adjustment is an increase of $1638.83 to the Guarantee Period
Value:
$1,638.83 = $42,000.00 X .0390198
The Market Adjusted Value would be:
$43,638.33 = $42,000.00 +$1,638.83
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<PAGE> 128
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,356.47 = $43,638.33 X .90 X .06
Thus, the amount payable on withdrawal would be:
$41,281.85 = $43,638.33 - $2,356.47
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$819.42 = $21,000.00 X .0390198
The Market Adjusted Value of $21,000.00 would be:
$21,819.42 = $21,000.00 + $819.42
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$1,047.34 = ($21,819.42 - .1 X $43,638.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$20,772.08 = $21,819.42 - $1,047.34
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
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APPENDIX B
KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND VARIABLE ANNUITY IRA,
ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT
This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of Individual Retirement Annuities (IRAs), Roth
Individual Retirement Annuities (Roth IRAs) and Simple Individual Retirement
Annuities (SIMPLE IRAs). Internal Revenue Service regulations require that this
be given to each person desiring to establish an IRA, Roth IRA or a SIMPLE IRA.
Further information can be obtained from Kemper Investors Life Insurance Company
and from any district office of the Internal Revenue Service.
A. REVOCATION
Within 7 days of the date you signed your enrollment application, you may revoke
the Contract and receive back 100% of your money. To do so, wire Kemper
Investors Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049, or
call 1-800-621-5001.
B. STATUTORY REQUIREMENTS
This Contract is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), Section 408A of the Code for use as a Roth IRA, or
of Section 408(p) of the Code for use as a SIMPLE IRA, whichever is applicable.
The Contract has not been approved as to form for use as an IRA, Roth IRA or a
SIMPLE IRA by the Internal Revenue Service. Such approval by the Internal
Revenue Service is a determination only as to form of the Contract, and does not
represent a determination on the merits of the Contract.
1. The amount in your IRA, Roth IRA, and SIMPLE IRA, whichever is applicable,
must be fully vested at all times and the entire interest of the owner must be
nonforfeitable.
2. The Contract must be nontransferable by the owner.
3. The Contract must have flexible premiums.
4. For IRAs and SIMPLE IRAs, you must start receiving distributions on or before
April 1 of the year following the year in which you reach age 70 1/2 (the
required beginning date)(see "Required Distributions"). However, section
401(a)(9)(A) of the Code (relating to minimum distributions required to commence
at age 70 1/2), and the incidental death benefit requirements of section 401(a)
of the Code, do not apply to Roth IRAs.
If you die before your entire interest in your Contract is distributed, unless
otherwise permitted under applicable law, any remaining interest in the Contract
must be distributed to your beneficiary by December 31 of the calendar year
containing the fifth anniversary of your death; except that: (1) if the
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<PAGE> 130
interest is payable to an individual who is your designated beneficiary (within
the meaning of section 401(a)(9) of the Code), the designated beneficiary may
elect to receive the entire interest over his or her life, or over a period
certain not extending beyond his or her life expectancy, commencing on or before
December 31 of the calendar year immediately following the calendar year in
which you die; and (2) if the designated beneficiary is your spouse, the
Contract will be treated as his or her own IRA, or, where applicable, Roth IRA.
5. Except in the case of a rollover contribution or a direct transfer (see
"Rollovers and Direct Transfers"), or a contribution made in accordance with the
terms of a Simplified Employee Pension (SEP), (1) all contributions to an IRA,
including a Roth IRA, must be cash contributions which do not exceed $2,000 for
any taxable year, and (2) all contributions to a SIMPLE IRA must be cash
contributions, including matching or nonelective employer contributions (see
"SIMPLE IRAs"), which do not exceed $6,000 for any year (as adjusted for
inflation).
6. The Contract must be for the exclusive benefit of you and your beneficiaries.
C. ROLLOVERS AND DIRECT TRANSFERS FOR IRAS AND SIMPLE IRAS
1. A rollover is a tax-free transfer from one retirement program to another that
you cannot deduct on your tax return. There are two kinds of tax-free rollover
payments under an IRA. In one, you transfer amounts from one IRA to another.
With the other, you transfer amounts from a qualified employee benefit plan or
tax-sheltered annuity to an IRA. Tax-free rollovers can be made from a SIMPLE
IRA to another SIMPLE IRA or to a SIMPLE Individual Retirement Account under
section 408(p) of the Code. An individual can make a tax-free rollover to an IRA
from a SIMPLE IRA after a two-year period has expired since the individual first
participated in a SIMPLE plan.
2. You must complete the transfer by the 60th day after the day you receive the
distribution from your IRA or other qualified employee benefit plan or SIMPLE
IRA.
3. A rollover distribution may be made to you only once a year. The one-year
period begins on the date you receive the rollover distribution, not on the date
you roll it over (reinvest it).
4. A direct transfer to an IRA of funds in an IRA from one trustee or insurance
company to another is not a rollover. It is a transfer that is not affected by
the one-year waiting period.
5. All or a part of the premium for this Contract used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or tax-
sheltered annuity, or from a direct transfer from another IRA. All or part of
the premium for this Contract used as a SIMPLE IRA may be paid from a rollover
from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the extent
permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE Individual
Retirement Account.
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<PAGE> 131
6. Beginning January 1, 1993, a distribution that is eligible for rollover
treatment from a qualified employee benefit plan or tax-sheltered annuity will
be subject to twenty percent (20%) withholding by the Internal Revenue Service
even if you roll the distribution over within the 60-day rollover period. One
way to avoid this withholding is to make the distribution as a direct transfer
to the IRA trustee or insurance company.
D. CONTRIBUTION LIMITS AND ALLOWANCE OF DEDUCTION FOR IRAS
1. In general, the amount you can contribute each year to an IRA is the lesser
of $2,000 or your taxable compensation for the year. If you have more than one
IRA, the limit applies to the total contributions made to your own IRAs for the
year. Generally, if you work the amount that you earn is compensation. Wages,
salaries, tips, professional fees, bonuses and other amounts you receive for
providing personal services are compensation. If you own and operate your own
business as a sole proprietor, your net earnings reduced by your deductible
contributions on your behalf to self-employed retirement plans is compensation.
If you are an active partner in a partnership and provide services to the
partnership, your share of partnership income reduced by deductible
contributions made on your behalf to qualified retirement plans is compensation.
All taxable alimony and separate maintenance payments received under a decree of
divorce or separate maintenance is compensation.
2. Beginning in 1997, in the case of a married couple filing a joint return, up
to $2,000 can be contributed to each spouse's IRA, even if one spouse has little
or no compensation. This means that the total combined contributions that can be
made to both IRAs can be as much as $4,000 for the year. Previously, if one
spouse had no compensation or elected to be treated as having no compensation,
the total combined contributions to both IRAs could no be more than $2,250.
3. Also beginning in 1997, in the case of a married couple with unequal
compensation who file a joint return, the limit on the deductible contributions
to the IRA of the spouse with less compensation is the smaller of:
a. $2,000, or
b. The total compensation of both spouses, reduced by any deduction allowed
for contributions to IRAs of the spouse with more compensation.
The deduction for contributions to both spouses' IRAs may be further limited if
either spouse is covered by an employer retirement plan.
4. Beginning in 1998, even if your spouse is covered by an employer retirement
plan, you may be able to deduct your contributions to an IRA if you are not
covered by an employer plan. The deduction is limited to $2,000 and it must be
reduced if your adjusted gross income on a joint return is more than $150,000
but less than $160,000. Your deduction is eliminated if your income on a joint
return is $160,000 or more.
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5. Contributions to your IRA can be made at any time. If you make the
contribution between January 1 and April 15, however, you may elect to treat the
contribution as made either in that year or in the preceding year. You may file
a tax return claiming a deduction for your IRA contribution before the
contribution is actually made. You must, however, make the contribution by the
due date of your return not including extensions.
6. You cannot make a contribution other than a rollover contribution to your IRA
for the year in which you reach age 70 1/2 or thereafter.
E. SEP-IRA'S
1. The maximum deductible contribution for a Simplified Employee Pension (SEP)
IRA is the lesser of $30,000 or 15% of compensation.
2. A SEP must be established and maintained by an employer (corporation,
partnership, sole proprietor). Information about the Kemper SEP is available
upon request.
F. SIMPLE IRAS
1. A SIMPLE IRA must be established with your employer using a qualified salary
reduction agreement.
2. You may elect to have your employer contribute to your SIMPLE IRA, under a
qualified salary reduction agreement, an amount (expressed as a percentage of
your compensation) not to exceed $6,000 (as adjusted for inflation) for the
year. In addition to these employee elective contributions, your employer is
required to make each year either (1) a matching contribution equal to up to 3
percent, and not less than 1 percent, of your SIMPLE IRA contribution for the
year, or (2) a nonelective contribution equal to 2 percent of your compensation
for the year (up to $150,000 of compensation, as adjusted for inflation). No
other contributions may be made to a SIMPLE IRA.
3. Employee elective contributions and employer contributions (i.e., matching
contributions and nonelective contributions) to your SIMPLE IRA are excluded
from your gross income.
4. To the extent an individual with a SIMPLE IRA is no longer participating in a
SIMPLE plan (e.g., the individual has terminated employment), and two years has
passed since the individual first participated in the plan, the individual may
treat the SIMPLE IRA as an IRA.
G. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS FOR IRAS AND SIMPLE IRAS
1. Earnings of your IRA annuity contract are not taxed until they are
distributed to you.
2. In general, taxable distributions are included in your gross income in the
year you receive them.
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3. Distributions under your IRA are non-taxable to the extent they represent a
return of non-deductible contributions (if any). The non-taxable percentage of a
distribution is determined by dividing your total undistributed, non-deductible
IRA contributions by the value of all your IRAs (including SEPs and rollovers).
4. You cannot choose the special five-year or ten-year averaging that may apply
to lump sum distributions from qualified employer plans.
H. REQUIRED DISTRIBUTIONS FOR IRAS AND SIMPLE IRAS
You must start receiving minimum distributions required under the Contract and
Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum
distribution for a particular year must be received by December 31 of that year.
However, you may delay the required minimum distribution for the year you reach
age 70 1/2 until April 1 of the following year (i.e., the required beginning
date).
Annuity payments which begin by April 1 of the year following your 70 1/2 year
satisfy the minimum distribution requirement if they provide for non-increasing
payments over the life or the lives of you and your spouse, provided that, if
installments are guaranteed, the guaranty period does not exceed the lesser of
20 years or the applicable life expectancy.
The applicable life expectancy is your remaining life expectancy or the
remaining joint life and last survivor expectancy of you and your designated
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." To
obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS
toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your
area as shown in your income tax return instructions.
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.
If the actual distribution from your Contract is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. ROTH IRAS
1. If your contract is a special type of individual retirement plan known as a
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to
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an "IRA" are to an "individual retirement plan," within the meaning of section
7701(a)(37) of the Code, other than a Roth IRA.) Roth IRAs are treated the same
as other IRAs, except as described here. However, the provisions of the Code
governing Roth IRAs may be modified by pending legislation. We will notify you
of any such changes.
2. The IRS is not presently accepting submissions for opinion letters approving
annuities as Roth IRAs, but will issue in the future procedures for requesting
such opinion letters. We will apply for approval as soon as possible after the
IRS issues its procedures on this matter. Such approval will be a determination
only as to the form of the annuity, and will not represent a determination of
the merits of the annuity.
3. If your Contract is a Roth IRA, we will send you a Roth IRA endorsement to be
attached to, and to amend, your contract after we obtain approval of the
endorsement from the IRS and your state insurance department. The Company
reserves the right to amend the contract as necessary or advisable from time to
time to comply with future changes in the Internal Revenue Code, regulations or
other requirements imposed by the IRS to obtain or maintain its approval of the
annuity as a Roth IRA.
4. Earnings in your Roth IRA are not taxed until they are distributed to you,
and will not be taxed if they are paid as a "qualified distribution," as
described to you in section L, below.
J. ELIGIBILITY AND CONTRIBUTIONS FOR ROTH IRAS
1. Generally, you are eligible to establish or make a contribution to your Roth
IRA on or after January 1, 1998, only if you meet certain income limits. No
deduction is allowed for contributions to your Roth IRA. Contributions to your
Roth IRA may be made even after you attain age 70 1/2.
2. The aggregate amount of contributions for any taxable year to all IRAs,
including all Roth IRAs, maintained for your benefit (the "contribution limit")
generally is the lesser of $2,000 and 100% of your compensation for the taxable
year. However, if you file a joint return and receive less compensation for the
taxable year than your spouse, the contribution limit for the taxable year is
the lesser of $2,000 and the sum of (1) your compensation for the taxable year,
and (2) your spouse's compensation for the taxable year reduced by any
deductible contributions to an IRA of your spouse, and by any contributions to a
Roth IRA for your spouse, for the taxable year.
The contribution limit for any taxable year is reduced (but not below zero) by
the amount which bears the same ratio to such amount as:
(a) the excess of (i) your adjusted gross income for the taxable year, over
(ii) the "applicable dollar amount," bears to
(b) $15,000 (or $10,000 if you are married).
For this purpose, "adjusted gross income" is determined in accordance with
section 219(g)(3) of the Code and (1) excludes any amount included in gross
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<PAGE> 135
income as a result of any rollover from, transfer from, or conversion of an IRA
to a Roth IRA, and (2) is reduced by any deductible IRA contribution. In
addition, the "applicable dollar amount" is equal to $150,000 for a married
individual filing a joint return, $0 for a married individual filing a separate
return, and $95,000 for any other individual.
A "qualified rollover contribution" (discussed in section K, below), and a non-
taxable transfer from another Roth IRA, are not taken into account for purposes
of determining the contribution limit.
K. ROLLOVERS, TRANSFERS AND CONVERSIONS TO ROTH IRAS
1. Rollovers And Transfers--A rollover may be made to a Roth IRA only if it is a
"qualified rollover contribution." A "qualified rollover contribution" is a
rollover to a Roth IRA from another Roth IRA or from an IRA, but only if such
rollover contribution also meets the rollover requirements for IRAs under
section 408(d)(3). In addition, a transfer may be made to a Roth IRA directly
from another Roth IRA or from an IRA.
You may not make a qualified rollover contribution or transfer in a taxable year
from an IRA to a Roth IRA if (a) your adjusted gross income for the taxable year
exceeds $100,000 or (b) you are married and file a separate return.
The rollover requirements of section 408(d)(3) are complex and should be
carefully considered before you make a rollover. One of the requirements is that
the amount received be paid into another IRA (or Roth IRA) within 60 days after
receipt of the distribution. In addition, a rollover contribution from a Roth
IRA may be made by you only once a year. The one-year period begins on the date
you receive the Roth IRA distribution, not on the date you roll it over
(reinvest it) into another Roth IRA. If you withdraw assets from a Roth IRA, you
may roll over part of the withdrawal tax free into another Roth IRA and keep the
rest of it. A portion of the amount you keep may be included in your gross
income.
2. Taxation of Rollovers And Transfers to Roth IRAs--A qualified rollover
contribution or transfer from a Roth IRA maintained for your benefit to another
Roth IRA maintained for your benefit which meets the rollover requirements for
IRAs under section 408(d)(3) is tax-free.
In the case of a qualified rollover contribution or a transfer from an IRA
maintained for your benefit to a Roth IRA maintained for your benefit, any
portion of the amount rolled over or transferred which would be includible in
your gross income were it not part of a qualified rollover contribution or a
nontaxable transfer will be includible in your gross income. However, section
72(t) of the Code (relating to the 10 percent penalty tax on premature
distributions) will not apply. If such a rollover or transfer occurs before
January 1, 1999, any portion of the amount rolled over or transferred which is
required to be included in gross income will be so included ratably over the 4-
taxable year period beginning with the taxable year in which the rollover or
transfer is made.
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Pending legislation may modify these rules retroactively to January 1, 1998.
3. Transfers of Excess IRA Contributions to Roth IRAs--If, before the due date
of your federal income tax return for any taxable year (not including
extensions), you transfer, from an IRA, contributions for such taxable year (and
earnings thereon) to a Roth IRA, such amounts will not be includible in gross
income to the extent that no deduction was allowed with respect to such amount.
4. Taxation of Conversions of IRAs to Roth IRAs--All or part of amounts in an
IRA maintained for your benefit may be converted into a Roth IRA maintained for
your benefit. The conversion of an IRA to a Roth IRA is treated as special type
of qualified rollover contribution. Hence, you must be eligible to make a
qualified rollover contribution in order to convert an IRA to a Roth IRA. A
conversion typically will result in the inclusion of some or all of your IRA's
value in gross income, as described above.
A conversion of an IRA to a Roth IRA can be made without taking an actual
distribution from your IRA. For example, an individual may make a conversion by
notifying the IRA issuer or trustee, whichever is applicable.
UNDER SOME CIRCUMSTANCES, IT MIGHT NOT BE ADVISABLE TO ROLLOVER, TRANSFER, OR
CONVERT ALL OR PART OF AN IRA TO A ROTH IRA. WHETHER YOU SHOULD DO SO WILL
DEPEND ON YOUR PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING, BUT NOT LIMITED
TO, SUCH FACTORS AS WHETHER YOU QUALIFY TO MAKE SUCH A ROLLOVER, TRANSFER, OR
CONVERSION, YOUR FINANCIAL SITUATION, AGE, CURRENT AND FUTURE INCOME NEEDS,
YEARS TO RETIREMENT, CURRENT AND FUTURE TAX RATES, YOUR ABILITY AND DESIRE TO
PAY CURRENT INCOME TAXES WITH RESPECT TO AMOUNTS ROLLED OVER, TRANSFERRED, OR
CONVERTED, AND WHETHER SUCH TAXES MIGHT NEED TO BE PAID WITH WITHDRAWALS FROM
YOUR ROTH IRA (SEE DISCUSSION BELOW OF "NONQUALIFIED DISTRIBUTIONS"). YOU SHOULD
CONSULT A QUALIFIED TAX ADVISOR BEFORE ROLLING OVER, TRANSFERRING, OR CONVERTING
ALL OR PART OF AN IRA TO A ROTH IRA.
5. Separate Roth IRAs--Due to the complexity of, and proposed changes to, the
tax law, it may be advantageous to maintain amounts rolled over, transferred, or
converted from an IRA in separate Roth IRAs from those containing regular Roth
IRA contributions. For the same reason, you should consider maintaining a
separate Roth IRA for each amount rolled over, transferred, or converted from an
IRA. These considerations should be balanced against the additional costs you
may incur from maintaining multiple Roth IRAs. You should consult your tax
advisor if you intend to contribute rollover, transfer, or conversion amounts to
your Policy, or if you intend to roll over or transfer amounts from your Policy
to another Roth IRA maintained for your benefit.
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L. INCOME TAX CONSEQUENCES OF ROTH IRAS
1. Qualified Distributions--Any "qualified distribution" from a Roth IRA is
excludible from gross income. A "qualified distribution" is a payment or
distribution which satisfies two requirements. First, the payment or
distribution must be (a) made after you attain 59 1/2, (b) made after your
death, (c) attributable to your being disabled, or (d) a "qualified special
purpose distribution" (I.E., a qualified first-time homebuyer distribution under
section 72(t)(2)(F) of the Code). Second, the payment or distribution must be
made in a taxable year that is at least five years after (1) the first taxable
year for which a contribution was made to any Roth IRA established for you, or
(2) in the case of a rollover from, or a conversion of, an IRA to a Roth IRA,
the taxable year in which the rollover or conversion was made if the payment or
distribution is allocable (as determined in the manner set forth in guidance
issued by the IRS) to the rollover contribution or conversion (or to income
allocable thereto).
2. Nonqualified Distributions--A distribution from a Roth IRA which is not a
qualified distribution is taxed under section 72 (relating to annuities), except
that such distribution is treated as made first from contributions to the Roth
IRA to the extent that such distribution, when added to all previous
distributions from the Roth IRA, does not exceed the aggregate amount of
contributions to the Roth IRA. For purposes of determining the amount taxed, (a)
all Roth IRAs established for you will be treated as one contract, (b) all
distributions during any taxable year from Roth IRAs established for you will be
treated as one distribution, and (c) the value of the contract, income on the
contract, and investment in the contract, if applicable, will be computed as of
the close of the calendar year in which the taxable year begins.
An additional tax of 10% is imposed on nonqualified distributions (including
amounts deemed distributed as the result of a prohibited loan or use of your
Roth IRA as security for a loan) made before the benefited individual has
attained age 59 1/2, unless one of the exceptions discussed in Section N
applies.
M. TAX ON EXCESS CONTRIBUTIONS
1. You must pay a 6% excise tax each year on excess contributions that remain in
your Contract. Generally, an excess contribution is the amount contributed to
your Contract that is more than you can contribute. The excess is taxed for the
year of the excess contribution and for each year after that until you correct
it.
2. You will not have to pay the 6% excise tax if you withdraw the excess amount
by the date your tax return is due including extensions for the year of the
contribution. You do not have to include in your gross income an excess
contribution that you withdraw from your Contract before your tax return is due
if the income earned on the excess was also withdrawn and no deduction was
allowed for the excess contribution. You must include in your gross income the
income earned on the excess contribution.
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N. TAX ON PREMATURE DISTRIBUTIONS
There is an additional tax on premature distributions from your IRA, Roth IRA,
or SIMPLE IRA, equal to 10% of the amount of the premature distribution that you
must include in your gross income. For premature distributions from a SIMPLE IRA
made within the first 2 years you participate in a SIMPLE plan, the additional
tax is equal to 25% of the amount of the premature distribution that must be
included in gross income. Premature distributions are generally amounts you
withdraw before you are age 59 1/2. However, the tax on premature distributions
does not apply:
1. To amounts that are rolled over tax free;
2. To a distribution which is made on or after your death, or on account of you
being disabled within the meaning of section 72(m)(7) of the Code;
3. To a distribution which is part of a series of substantially equal periodic
payments (made at least annually) over your life or your life expectancy or the
joint life or joint life expectancy of you and your beneficiary; or
4. To a distribution which is used for qualified first-time homebuyer expenses,
qualified higher education expenses, certain medical expenses, or by an
unemployed individual to pay health insurance premiums.
O. EXCISE TAX REPORTING
Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA, SIMPLE IRA or Roth IRA excise taxes,
you do not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
P. BORROWING
If you borrow money against your Contract or use it as security for a loan, the
Contract will lose its classification as an IRA, Roth IRA, or SIMPLE IRA,
whichever is applicable, and you must include in gross income the fair market
value of the Contract as of the first day of your tax year. In addition, you may
be subject to the tax on premature distributions described above. (Note: This
Contract does not allow borrowings against it, nor may it be assigned or pledged
as collateral for a loan.)
Q. REPORTING
We will provide you with any reports required by the Internal Revenue Service.
R. ESTATE TAX
Generally, the value of your IRA, including your Roth IRA, is included in your
gross estate for federal estate tax purposes.
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S. FINANCIAL DISCLOSURE
1. If contributions to the Contract are made by other than rollover
contributions and direct transfers, the following information based on the
charts shown on the next pages, which assumes you were to make a level
contribution to the fixed account at the beginning of each year of $1,000 must
be completed prior to your signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- --------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- --------------------------------------------------------------------------
2 65
- --------------------------------------------------------------------------
3 70
- --------------------------------------------------------------------------
4
- --------------------------------------------------------------------------
5
- --------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
2. If contributions to the Contract are made by rollover contributions and/or
direct transfers, the following information, based on the charts shown on the
next page, and all of which assumes you make one contribution to the fixed
account of $1,000 at the beginning of this year, must be completed prior to your
signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- --------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- --------------------------------------------------------------------------
2 65
- --------------------------------------------------------------------------
3 70
- --------------------------------------------------------------------------
4
- --------------------------------------------------------------------------
5
- --------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
T. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.40% per annum. If you elected the Guaranteed Retirement Income
Benefit option, an additional charge of .25% of the
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<PAGE> 140
Contract Value will be assessed against the Separate Account, Fixed Account and
Guarantee Periods on a pro-rata basis.
2. An annual records maintenance charge of $30.00 will be assessed ratably each
quarter against the Separate Account, Fixed Account and Guarantee Periods.
3. Withdrawal (early annuitization) charges will be assessed based on the years
elapsed since the purchase payments (in a given contract year) were received by
KILICO; under 1 year, 7%; over 1 to 2 years, 6%; over 2 to 3 years, 5%; over 3
to 4 years, 5%; over 4 to 5 years, 4%; over 5 to 6 years, 3%; over 6 to 7 years,
2%; over 7 years and thereafter, 0%.
4. The method used to compute and allocate the annual earnings is contained in
the Prospectus under the heading "Accumulation Unit Value."
5. The growth in value of your contract is neither guaranteed nor projected but
is based on the investment experience of the Separate Account.
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GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 937.00 14 $16,798.32 27 $40,421.63 40 $ 75,113.26
2 1,913.00 15 18,310.91 28 42,642.92 41 78,375.30
3 2,928.90 16 19,868.88 29 44,930.85 42 81,735.20
4 3,976.63 17 21,473.59 30 47,287.42 43 85,195.89
5 5,066.14 18 23,126.44 31 49,714.68 44 88,760.41
6 6,198.41 19 24,828.87 32 52,214.76 45 92,431.86
7 7,374.46 20 26,582.37 33 54,789.84 46 96,213.46
8 8,604.34 21 28,388.49 34 57,442.18 47 100,108.50
9 9,871.11 22 30,248.78 35 60,174.08 48 104,120.40
10 11,175.88 23 32,164.88 36 62,987.94 49 108,252.65
11 12,519.80 24 34,138.47 37 65,886.22 50 112,508.87
12 13,904.03 25 36,171.26 38 68,871.45
13 15,329.79 26 38,265.04 39 71,946.23
</TABLE>
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GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR Values*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 937 14 $1,000 27 $1,000 40 $1,000
2 946 15 1,000 28 1,000 41 1,000
3 955 16 1,000 29 1,000 42 1,000
4 955 17 1,000 30 1,000 43 1,000
5 964 18 1,000 31 1,000 44 1,000
6 973 19 1,000 32 1,000 45 1,000
7 982 20 1,000 33 1,000 46 1,000
8 1,000 21 1,000 34 1,000 47 1,000
9 1,000 22 1,000 35 1,000 48 1,000
10 1,000 23 1,000 36 1,000 49 1,000
11 1,000 24 1,000 37 1,000 50 1,000
12 1,000 25 1,000 38 1,000
13 1,000 26 1,000 39 1,000
</TABLE>
* Includes applicable withdrawal charges.
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PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE,
FIXED AND MARKET
VALUE ADJUSTED DEFERRED ANNUITY
CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
OF
KEMPER INVESTORS LIFE INSURANCE COMPANY
This prospectus describes Variable, Fixed and Market Value Adjusted Deferred
Annuity Contracts of Kemper Investors Life Insurance Company that are designed
to provide benefits under retirement plans which may qualify for certain federal
tax advantages. Depending on particular state requirements, the Contracts may be
issued on a group or individual basis. Contracts issued on an individual basis
are represented by a Certificate. All discussion of "Contracts" includes
Contracts issued on an individual or group basis.
(Continued)
THE CONTRACTS ARE NOT INSURED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND ARE NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR
SAVINGS INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE CONTRACTS THAT YOU
SHOULD KNOW BEFORE INVESTING. YOU SHOULD READ IT BEFORE INVESTING AND KEEP IT
FOR FUTURE REFERENCE. WE HAVE FILED A STATEMENT OF ADDITIONAL INFORMATION
("SAI") WITH THE SECURITIES AND EXCHANGE COMMISSION. THE CURRENT SAI HAS THE
SAME DATE AS THIS PROSPECTUS [AND IS INCORPORATED BY REFERENCE IN THIS
PROSPECTUS]. YOU MAY OBTAIN A FREE COPY BY WRITING US OR CALLING (847) 550-
5500. A TABLE OF CONTENTS FOR THE SAI APPEARS ON PAGE 85. YOU MAY ALSO FIND THIS
PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC") AT THE SEC'S WEB SITE AT
HTTP://WWW.SEC.GOV.
THE DATE OF THIS PROSPECTUS IS , 1999.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 144
You may allocate purchase payments to one or more of the variable options, the
fixed option or the fixed option subject to a market value adjustment. The
Contract currently offers twelve investment options, each of which is a
Subaccount of KILICO Variable Annuity Separate Account. Currently, you may
choose among the following Portfolios:
INVESTORS FUND SERIES: Kemper Government Securities; Kemper High Yield; Kemper
Small Cap Growth; Kemper-Dreman High Return Equity.
SCUDDER VARIABLE LIFE INVESTMENT FUND: Scudder VLIF Money Market; Scudder VLIF
Growth and Income (Class A Shares); Scudder VLIF International (Class A Shares);
Scudder VLIF Bond (Class A Shares).
JANUS ASPEN SERIES: Janus Capital Appreciation
PIMCO VARIABLE INSURANCE TRUST: PIMCO Low Duration Bond; PIMCO Foreign Bond.
TEMPLETON VARIABLE PRODUCTS SERIES FUND: Templeton Developing Markets Fund
(Class 2 Shares).
Subaccounts and Portfolios may be added or deleted in the future. Contract
values allocated to any of the Subaccounts vary, reflecting the investment
experience of the selected Subaccounts. Contract values allocated to the Fixed
Account or one or more Guarantee Periods of the Market Value Adjustment Option
accumulate on a fixed basis.
<PAGE> 145
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 4
SUMMARY OF EXPENSES......................................... 7
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 11
FIXED ACCOUNT OPTION........................................ 19
THE CONTRACTS............................................... 19
CONTRACT CHARGES AND EXPENSES............................... 29
THE ANNUITY PERIOD.......................................... 33
FEDERAL INCOME TAXES........................................ 37
DISTRIBUTION OF CONTRACTS................................... 44
VOTING RIGHTS............................................... 44
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 45
DOLLAR COST AVERAGING....................................... 45
SYSTEMATIC WITHDRAWAL PLAN.................................. 46
EXPERTS..................................................... 46
LEGAL MATTERS............................................... 47
SPECIAL CONSIDERATIONS...................................... 47
AVAILABLE INFORMATION....................................... 47
BUSINESS.................................................... 48
PROPERTIES.................................................. 57
LEGAL PROCEEDINGS........................................... 57
SELECTED FINANCIAL DATA..................................... 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 59
DIRECTORS AND EXECUTIVE OFFICERS OF KILICO.................. 78
EXECUTIVE COMPENSATION...................................... 82
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 85
FINANCIAL STATEMENTS........................................ 85
CHANGE OF ACCOUNTANTS....................................... 85
</TABLE>
<PAGE> 146
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATED GUARANTEE PERIOD VALUE--The sum of an Owner's Guarantee Period
Values.
ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments and upon the continuation of whose life annuity payments
involving life contingencies depend.
ANNUITY DATE--The date on which annuity payments are to commence.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person designated to receive any benefits under a Contract
upon the death of the Annuitant or the Owner prior to the Annuity Period.
COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.
CONTRACT--A Variable, Fixed and Market Value Adjusted Annuity Contract
offered by this Prospectus.
CONTRACT VALUE--The sum of the values of the Owner's Separate Account
Contract Value, Accumulated Guarantee Period Value and Fixed Account
Contract Value.
CONTRACT YEAR--Period between anniversaries of the Contract's Date of
Issue.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Contract's
Date of Issue.
CONTRIBUTION YEAR--Each one year period following the date a Purchase
Payment is made.
DATE OF ISSUE--The date on which the first Contract Year commences.
FIXED ACCOUNT--The General Account of KILICO to which a Contract Owner may
allocate all or a portion of Purchase Payments or Contract Value. We
guarantee a minimum rate of interest on Purchase Payments allocated to the
Fixed Account.
FIXED ACCOUNT CONTRACT VALUE--The value of the Owner's Contract interest in
the Fixed Account.
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FIXED ANNUITY--An annuity under which the amount of each annuity payment
does not vary with the investment experience of a Subaccount and is
guaranteed by KILICO.
FUND OR FUNDS--Investors Fund Series, Scudder Variable Life Investment
Fund, Janus Aspen Series PIMCO Variable Insurance Trust and Templeton
Variable Products Series Fund including any Portfolios thereunder.
GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
separate account.
GUARANTEED INTEREST RATE--The rate of interest we establish for a given
Guarantee Period.
GUARANTEE PERIOD--The time when an amount is credited with a Guaranteed
Interest Rate. Guarantee Period options may range from one to ten years, at
our option.
GUARANTEE PERIOD VALUE--The Guarantee Period Value is the sum of the
Owner's: (1) Purchase Payment allocated or amount transferred to a
Guarantee Period; plus (2) interest credited; minus (3) withdrawals,
previously assessed Withdrawal Charges and transfers; and (4) as adjusted
for any applicable Market Value Adjustment previously made.
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula on any date prior to the end of a Guarantee
Period.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula prior to the end of
that Guarantee Period. The adjustment reflects the change in the value of
the Guarantee Period Value due to changes in interest rates since the date
the Guarantee Period commenced. The adjustment is computed using the market
value adjustment formula stated in the Contract.
NON-QUALIFIED PLAN CONTRACT--A Contract which does not receive favorable
tax treatment as an Individual Retirement Annuity, as a Simplified Employee
Pension-IRA or as a Roth Individual Retirement Annuity under the Internal
Revenue Code.
OWNER OR OWNER--The person designated in the Contract as having the
privileges of ownership defined in the Contract.
PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to herein as a
Fund.
PURCHASE PAYMENTS--Amounts paid to us for an Owner.
QUALIFIED PLAN CONTRACT--A Contract issued in connection with a retirement
plan which receives favorable tax treatment as an Individual Retirement
Annuity, as a Simplified Employee Pension--IRA or as a Roth Individual
Retirement Annuity under the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
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<PAGE> 148
SEPARATE ACCOUNT CONTRACT VALUE--The sum of the Owner's Contract interest
in the Subaccount(s).
SUBACCOUNTS--The thirteen subdivisions of the Separate Account, the assets
of which consist solely of shares of the corresponding Portfolios.
SUBACCOUNT VALUE--The value of the Owner's Contract interest in each
Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which the Owner's
Contract has an interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Contract Value in the first seven Contribution Years
after a Purchase Payment is made or against certain annuitizations of
Contract Value in the first seven Contribution Years after a Purchase
Payment is made.
WITHDRAWAL VALUE--Contract Value, plus or minus any applicable Market Value
Adjustment, less any premium tax payable if the Contract is being
annuitized, minus any Withdrawal Charge applicable to that Contract.
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<PAGE> 149
SUMMARY
Because this is a summary, it does not contain all of the information that may
be important. Read the entire prospectus and Statement of Additional Information
before deciding to invest.
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified Plan and Qualified Plan Contracts are described in
this Prospectus.
The minimum initial Purchase Payment is $1,000 and, subject to certain
exceptions, the minimum subsequent payment is $500. An allocation to a
Subaccount, Fixed Account or Guarantee Period must be at least $500. Our prior
approval is required for Purchase Payments over $1,000,000. (See "The
Contracts," page 19.)
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts selected by the Owner. Each Subaccount invests in one
of the following corresponding Portfolios:
- - Kemper Government Securities
- - Kemper High Yield
- - Kemper Small Cap Growth
- - Kemper-Dreman High Return Equity
- - Scudder VLIF Money Market
- - Scudder VLIF Growth and Income (A-Shares)
- - Scudder VLIF International (A-Shares)
- - Scudder VLIF Bond (A-Shares)
- - Janus Aspen Capital Appreciation Portfolio
- - PIMCO Low Duration Bond
- - PIMCO Foreign Bond
- - Templeton Developing Markets Fund (Class 2 Shares)
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccounts.
The Fixed Account has fixed accumulations and benefits. We guarantee that
Purchase Payments allocated to the Fixed Account earn a minimum fixed interest
rate of 3%. In our discretion, we may credit interest in excess of 3%. (See
"Fixed Account Option," page 19.)
The MVA Option also provides fixed accumulations. The MVA Option is only
available during the Accumulation Period. An Owner may allocate amounts to one
or more Guarantee Periods. We may offer additional Guarantee Periods at our
discretion. For new Contracts, we may limit the number of Guarantee Period
options available to three (3). We credit interest daily to amounts allocated to
the MVA Option. We declare the rate at our sole discretion. We guarantee amounts
allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee
Periods selected by the Owner. These guaranteed amounts are subject to any
applicable Withdrawal Charge, Market Value Adjustment or Records Maintenance
Charge. We will not change a Guaranteed Interest Rate for the duration of the
Guarantee Period. However, Guaranteed Interest Rates for subsequent Guarantee
Periods are set at our discretion. At the end of a Guarantee Period, a new
Guarantee Period for the same duration starts, unless the Owner
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<PAGE> 150
timely elects another Guarantee Period. The interests under the Contract
relating to the MVA Option are registered under the Securities Act of 1933 but
are not registered under the Investment Company Act of 1940. (See "The MVA
Option," page 11.)
The investment risk under the Contracts is borne by the Owner, unless Contract
Values are allocated to:
- the MVA Option and are guaranteed to receive the Guaranteed Interest Rate
or
- the Fixed Option and are guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization,
subject to certain limitations. A transfer from a Guarantee Period is subject to
a Market Value Adjustment unless effected within 30 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 24 and 35, respectively.)
An Owner may withdraw Contract Value subject to Withdrawal Charges, any
applicable Market Value Adjustment and other specified conditions. (See
"Withdrawal During Accumulation Period," page 25.)
We do not deduct sales charges from Purchase Payments. Each Contract Year, an
Owner may withdraw, without Withdrawal Charge, the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of Contract Value. If the Owner withdraws a larger amount, the excess
Purchase Payments withdrawn are subject to a Withdrawal Charge.
The Withdrawal Charge is:
- 7% in the first Contribution Year
- 6% in the second Contribution Year
- 5% in the third and fourth Contribution Years
- 4% in the fifth Contribution Year
- 3% in the sixth Contribution Year
- 2% in the seventh Contribution Year
- 0% thereafter
(See "Withdrawal Charge," page 30.) The Withdrawal Charge also applies at the
annuitization of Accumulation Units in their seventh Contribution Year or
earlier, except as set forth under "Withdrawal Charge." Withdrawals may be
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<PAGE> 151
subject to income tax, a 10% penalty tax, and other tax consequences. (See
"Federal Income Taxes," page 37.)
Contract charges include:
- mortality and expense risk
- administrative expenses
- records maintenance
- applicable premium taxes
- Guaranteed Retirement Income Benefit
(See "Charges Against the Separate Account," page 29.) In addition, the
investment advisers to the Funds deduct varying charges against the assets of
the Funds for which they provide investment advisory services. (See the Funds'
prospectuses for such information.)
The Contract may be purchased as an Individual Retirement Annuity, Simplified
Employee Pension--IRA, Roth Individual Retirement Annuity, and as a non-
qualified annuity. (See "Taxation of Annuities in General," page 37 and
"Qualified Plans," page 41.)
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period will depend on the state in
which the Contract is issued. However, it will be at least ten days from the
date the Owner receives the Contract. (See "The Contracts," page 19.) In
addition, a special free look period applies in some circumstances to Contracts
issued as Individual Retirement Annuities, Simplified Employee Pensions--IRAs or
as Roth Individual Retirement Annuities.
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<PAGE> 152
- --------------------------------------------------------------------------------
SUMMARY OF EXPENSES
- --------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments).............................. None
Contingent Deferred Sales Load (as a percentage of amount surrendered)(1)
Year of Withdrawal After Purchase
First year........................... 7%
Second year.......................... 6%
Third year........................... 5%
Fourth year.......................... 5%
Fifth year........................... 4%
Sixth year........................... 3%
Seventh year......................... 2%
Eighth year and following............ 0%
Surrender Fees...................................................................................... None
Exchange Fee(2)..................................................................................... $25
ANNUAL CONTRACT FEE (Records Maintenance Charge)(3)................................................. $30
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense
Risk.................................. 1.25%
Administration.......................... .15%
Account Fees and
Expenses.............................. 0%
---------
Total Separate Account
Annual Expenses....................... 1.40%
=========
GUARANTEED RETIREMENT INCOME BENEFIT
CHARGE
Annual Expense (as a percentage of
Contract Value)....................... .25%
</TABLE>
FUND ANNUAL EXPENSES(After Fee Waivers and Expense
Reductions)
(as percentage of each Portfolio's average net assets for
the period ended December 31, 1997)
<TABLE>
<CAPTION>
MANAGEMENT RULE 12B-1 OTHER TOTAL PORTFOLIO
FEES FEES EXPENSES ANNUAL EXPENSES
---------- ---------- -------- ---------------
<S> <C> <C> <C> <C>
Kemper
Government
Securities... .55% --% .09% .64%
Kemper
High
Yield... .60 -- .05 .65
Kemper
Small
Cap
Growth... .65 -- .06 .71
Kemper-Dreman
High
Return
Equity(4)... .75 -- .12 .87
Scudder
VLIF
Money
Market... .37 -- .09 .46
Scudder
VLIF
Growth
and
Income... .48 -- .10 .58
Scudder
VLIF
International... .88 -- .12 1.00
Scudder
VLIF
Bond... .48 -- .14 .62
Janus
Aspen
Capital
Appreciation(5)... .23 -- 1.03 1.26
PIMCO
Law
Duration
Bond(6)... .65 -- -- .65
PIMCO
Foreign
Bond(6)... .90 -- -- .90
Templeton
Developing
Markets
Fund(7)... 1.25 .25 .33 1.83
</TABLE>
- --------------------------------------------------------------------------------
(1) A Contract Owner may withdraw up to the greater of (i) the excess of
Contract Value over total Purchase Payments subject to Withdrawal Charges
less prior withdrawals that were previously assessed a Withdrawal Charge,
and (ii) 10% of the Contract Value in any Contract Year without assessment
of any charge. In certain circumstances We may reduce or waive the
contingent deferred sales charge.
(2) We reserve the right to charge a fee of $25 for each transfer of Contract
Value in excess of 12 transfers per calendar year.
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<PAGE> 153
(3) Applies to Contracts with a Contract Value less than $50,000 on the date of
assessment. In certain circumstances We may reduce or waive the annual
Records Maintenance Charge.
(4) Portfolio commenced operations 5/1/98. "Other Expenses" have been estimated.
(5) Based on annualized expenses incurred during the initial fiscal period
(5/1/97 (inception) to 12/31/97). The expense figures shown are net of
certain fee waivers or reductions from Janus Capital Corporation. Without
such waivers, Management Fees, Other Expenses and Total Portfolio Annual
Expenses for the Portfolio for the fiscal year ended December 31, 1997 would
have been: 1.14%, 1.05% and 2.19%, respectively, for the Janus Aspen Capital
Appreciation Portfolio. See the prospectus and Statement of Additional
Information of Janus Aspen Series for a description of these waivers.
(6) As of the date of this prospectus, the Portfolios have not commenced
operations. For the Portfolios, management fees include fixed advisory and
administrative fees. The administrative fee covers most of the expenses of
the Portfolios. However, the Portfolios are responsible for bearing certain
expenses associated with their operations that are not covered by the
administrative fee. While it is expected that these expenses generally will
not have a material effect on the Portfolio expense ratios, they may have a
material effect in certain circumstances, such as when the average net
assets of a Portfolio are lower than anticipated.
(7) Because Class 2 Shares were not offered until 5/1/97, figures (other than
Rule 12b-1 Fees) have been estimated based on the historical expenses of the
portfolio's Class 1 Shares for the fiscal year ended December 31, 1997.
8
<PAGE> 154
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
If you surrender your Contract at the Kemper Government Securities $ 93 $120 $158 $242
end of the periods shown, you would pay Kemper High Yield 93 120 159 243
the following expenses on a $1,000 Kemper Small Cap Growth 94 122 162 249
investment, assuming 5% annual return on Kemper-Dreman High Return 95 127 -- --
assets: Equity
Scudder VLIF Money Market #1(1) 92 115 149 222
Scudder VLIF Growth and Income 93 118 -- --
Scudder VLIF International 97 130 -- --
Scudder VLIF Bond 93 119 157 240
Janus Aspen Capital Appreciation 99 138 -- --
PIMCO Law Duration Bond 93 120 -- --
PIMCO Foreign Bond 96 127 -- --
Templeton Developing Markets 105 154 -- --
Kemper Government Securities 21 65 112 242
Kemper High Yield 21 66 113 243
Kemper Small Cap Growth 22 68 116 249
Kemper-Dreman High Return 24 73 -- --
Equity
If you do not surrender your Contract, Scudder VLIF Money Market#1(1) 19 60 103 222
you would pay the following expenses on Scudder VLIF Growth and Income 21 64 -- --
a $1,000 investment, assuming 5% annual Scudder VLIF International 25 77 -- --
return on assets: Scudder VLIF Bond 21 65 111 240
Janus Aspen Capital Appreciation 28 85 -- --
PIMCO Low Duration Bond 21 66 -- --
PIMCO Foreign Bond 24 73 -- --
Templeton Developing Markets 33 102 -- --
</TABLE>
9
<PAGE> 155
The purpose of the preceding table which includes the "SUMMARY OF EXPENSES" on
the prior page, is to assist Contract Owners in understanding the various costs
and expenses that a Contract Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH
MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. "Management Fees", "Rule 12b-1 Fees" and "Other Expenses"
in the "SUMMARY OF EXPENSES" for the Portfolios have been provided by Scudder
Kemper Investments, Inc., Janus Capital Corporation, Pacific Investment
Management Company and Templeton Asset Management Ltd., as applicable, and have
not been independently verified. The Example assumes a 5% annual rate of return
pursuant to requirements of the Securities and Exchange Commission. This
hypothetical rate of return is not intended to be representative of past or
future performance of any Subaccount. The Records Maintenance Charge is a single
charge, it is not a separate charge for each Subaccount. In addition, the effect
of the Records Maintenance Charge has been reflected in the Example by applying
the percentage derived by dividing the total amounts of annual Records
Maintenance Charge collected by the total net assets of all the Subaccounts in
the Separate Account. See "Contract Charges and Expenses" for more information
regarding the various costs and expenses.
(1)Money Market Subaccount #2 is not shown because it is available only for
dollar cost averaging that will deplete an Owner's subaccount value entirely
at least by the end of the first Contribution Year.
10
<PAGE> 156
KILICO, THE MVA OPTION,
THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
Kemper Corporation is a wholly-owned subsidiary of Zurich Holding Company of
America ("ZHCA"), which is a wholly-owned subsidiary of Zurich Insurance Company
("Zurich"). Zurich is a wholly-owned subsidiary of Zurich Financial Services
("ZFS"). ZFS was formed in the September, 1998 merger of the Zurich Group with
the financial services business of B.A.T. Industries. ZFS is owned by Zurich
Allied A.G. and Allied Zurich p.l.c., fifty-seven percent and forty-three
percent, respectively.
THE MVA OPTION
An Owner may allocate amounts in the Market Value Adjustment ("MVA") Option to
one or more Guarantee Periods with durations of one to ten years during the
Accumulation Period. At our discretion, We may offer additional Guarantee
Periods or limit, for new Contracts, the number of Guarantee Periods available
to three.
The amounts allocated to the MVA Option under the Contracts are invested under
the laws regulating our General Account. Assets supporting the amounts allocated
to Guarantee Periods are held in a "non-unitized" separate account. However, our
General Account assets are available to fund benefits under the Contracts. A
non-unitized separate account is a separate account in which the Owner does not
participate in the performance of the assets through unit values. There are no
discrete units for this separate account. The assets of the non-unitized
separate account are held as reserves for our guaranteed obligations. The assets
of the separate account are not chargeable with liabilities arising out of the
business conducted by any other separate account or out of any other business we
may conduct.
State insurance laws concerning the nature and quality of investments regulate
our General Account investments and any non-unitized separate account
investments. These laws generally permit investment in federal, state and
municipal obligations, preferred and common stocks, corporate bonds, real estate
mortgages, real estate and certain other investments. (See "Management's
Discussion and Analysis--INVESTMENTS" and "FINANCIAL STATEMENTS" for information
on KILICO's investments.) Our affiliate, Scudder Kemper Investments, Inc.
("SKI"), manages our General Account.
We consider the return available on the instruments in which Contract proceeds
are invested when establishing Guaranteed Interest Rates. This return is only
one of many factors considered in establishing Guaranteed Interest
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<PAGE> 157
Rates. (See "The Accumulation Period--4. Establishment of Guaranteed Interest
Rates.")
Our investment strategy for the non-unitized separate account is generally to
match Guarantee Period liabilities with assets, such as debt instruments. We
expect to invest in debt instruments such as:
- securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the
United States Government;
- debt securities which have an investment grade, at the time of purchase,
within the four (4) highest grades assigned by Moody's Investors
Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other
nationally recognized rating service; and
- other debt instruments including issues of or guaranteed by banks or bank
holding companies and corporations, which obligations, although not rated
by Moody's or Standard & Poor's, are deemed by our management to have an
investment quality comparable to securities which may be otherwise
purchased
- options and futures transactions on fixed income securities.
[TO BE UPDATED BY AMENDMENT] KILICO's invested assets portfolio at December 31,
1997 included approximately 87.4 percent in U.S. Treasuries, investment grade
corporate, foreign and municipal bonds, and commercial paper, .3 percent in
below investment grade (high risk) bonds, 4.9 percent in mortgage loans and
other real estate-related investments and 7.4 percent in all other investments.
(See "Management's Discussion and Analysis--INVESTMENTS.")
We are not obligated to invest the amounts allocated to the MVA Option according
to any particular strategy, except as state insurance laws may require. (See
"Management's Discussion and Analysis--INVESTMENTS.")
THE SEPARATE ACCOUNT
We established the KILICO Variable Annuity Separate Account on May 29, 1981
pursuant to Illinois law as the KILICO Money Market Separate Account. KILICO
Money Market Separate Account was initially registered with the Securities and
Exchange Commission ("SEC") as an open-end, diversified management investment
company. On November 2, 1989, contract owners approved a Reorganization under
which the Separate Account was restructured as a unit investment trust. The SEC
does not supervise the management, investment practices or policies of the
Separate Account or KILICO.
Benefits provided under the Contracts are Our obligations. Although the assets
in the Separate Account are Our property, they are held separately from Our
other assets and are not chargeable with liabilities arising out of any other
business We may conduct. Income, capital gains and capital losses, whether or
not realized, from the assets allocated to the Separate Account are credited to
12
<PAGE> 158
or charged against the Separate Account without regard to the income, capital
gains and capital losses arising out of any other business We may conduct.
Twelve Subaccounts of the Separate Account are currently available. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios.
We may add or delete Subaccounts in the future.
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges and to transfer assets from one Subaccount to another as
requested by Owners. All dividends and capital gains distributions received by
the Separate Account from a Portfolio are reinvested in that Portfolio at net
asset value and retained as assets of the corresponding Subaccount.
The Separate Account's financial statements appear in the Statement of
Additional Information.
THE FUNDS
The Separate Account invests in shares of the following open-end, management
investment companies:
- Investors Fund Series
- Scudder Variable Life Investment Fund
- Janus Aspen Series
- PIMCO Variable Insurance Trust
- Templeton Variable Products Series Fund
The Funds provide investment vehicles for variable life insurance and variable
annuity contracts and, in the case of Janus Aspen Series and PIMCO Variable
Insurance Trust, certain qualified retirement plans. Shares of the Funds are
sold only to insurance company separate accounts and qualified retirement plans.
Shares of the Funds may be sold to separate accounts of other insurance
companies, whether or not affiliated with Us. It is conceivable that in the
future it may be disadvantageous for variable life insurance separate accounts
and variable annuity separate accounts of companies unaffiliated with Us, or for
variable life insurance separate accounts, variable annuity separate accounts
and qualified retirement plans to invest simultaneously in the Funds. Currently,
We do not foresee disadvantages to variable life insurance owners, variable
annuity owners or qualified retirement plans. The Funds monitor events for
material conflicts between owners and determine what action, if any, should be
taken. In addition, if we believe that a Fund's response to any of those events
or conflicts insufficiently protects Owners, we will take appropriate action.
A Fund may consist of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio.
13
<PAGE> 159
The twelve Portfolios are summarized below:
INVESTORS FUND SERIES
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO seeks to achieve a high rate of total
return.
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF MONEY MARKET PORTFOLIO seeks stability and current income from a
portfolio of money market instruments.
SCUDDER VLIF GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
SCUDDER VLIF BOND PORTFOLIO seeks high income from a high quality portfolio of
bonds.
JANUS ASPEN SERIES
JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO seeks long-term growth of capital.
PIMCO VARIABLE INSURANCE TRUST
PIMCO LOW DURATION BOND PORTFOLIO seeks to maximize total return, consistent
with preservation of capital and prudent investment management.
PIMCO FOREIGN BOND PORTFOLIO seeks to maximize total return, consistent with
preservation of capital and prudent investment management.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON DEVELOPING MARKETS FUND seeks long-term capital appreciation.
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<PAGE> 160
The Portfolios may not achieve their stated objective. More detailed
information, including a description of risks involved in investing in the
Portfolios is found in the Funds' prospectuses and Statements of Additional
Information, available from us upon request.
Scudder Kemper Investments, Inc. ("SKI") is the investment manager for the four
available Portfolios of Investors Fund Series and the four available Portfolios
of Scudder Variable Life Investment Fund. Dreman Value Management L.L.C. ("DVM")
serves as sub-adviser for the Kemper-Dreman High Return Equity Portfolio. Under
the terms of the sub-advisory agreement between SKI and DVM manages the
investment and reinvestment of the Portfolio's assets in accordance with the
investment objectives, policies and limitations and subject to the supervision
of SKI and the Board of Trustees. Janus Capital Corporation is the investment
adviser for the available Portfolio of the Janus Aspen Series. Pacific
Investment Management Company is the investment adviser for the two available
Portfolios of the PIMCO Variable Insurance Trust. Templeton Asset Management
Ltd. is the investment manager for the available portfolio of the Templeton
Variable Products Series Fund. The investment advisers are paid fees for their
services by the Funds they manage. KILICO may receive compensation from the
Funds or the investment advisers of the Funds for services related to the Funds.
Such compensation will be consistent with the services rendered or the cost
savings resulting from the arrangement.
For their services to the Portfolios, the managers receive compensation at the
following rates: [TO BE UPDATED BY AMENDMENT]
INVESTORS FUND SERIES
For its services, SKI is paid a management fee based upon the average daily net
assets of each Portfolio, as follows: Kemper Government Securities (.55 of 1%),
Kemper High Yield (.60 of 1%), Kemper Small Cap Growth (.65 of 1%), and
Kemper-Dreman High Return Equity (.75% for the first $250 million, .72% for the
next $750 million, .70% for the next $1.5 billion, .68% for the next $2.5
billion, .65% for the next $2.5 billion, .64% for the next $2.5 billion, .63%
for the next $2.5 billion and .62% over $12.5 billion). SKI pays DVM for its
services as sub-adviser for the Kemper-Dreman High Return Equity Portfolio a
sub-advisory fee, payable monthly, at the annual rate of .24% of the first $250
million of the Portfolio's average daily net assets, .23% of the average daily
net assets between $250 million and $1 billion, .224% of average daily net
assets between $1 billion and $2.5 billion, .218% of average daily net assets
between $2.5 billion and $5 billion, .208% of average daily net assets between
$5 billion and $7.5 billion, .205% of average daily net assets between $7.5
billion and $10 billion, .202% of average daily net assets between $10 billion
and $12.5 billion and .198% of each Portfolio's average daily net assets over
$12 billion.
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<PAGE> 161
SCUDDER VARIABLE LIFE INVESTMENT FUND
For its investment management services to the Portfolios, SKI receives
compensation monthly at the following annual rate for each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF THE AVERAGE
DAILY NET ASSET VALUES
PORTFOLIO OF EACH PORTFOLIO
--------- ----------------------
<S> <C>
Scudder VLIF Money Market........................... .370%
Scudder VLIF Growth and Income...................... .475%
Scudder VLIF International.......................... .875%
Scudder VLIF Bond................................... .475%
</TABLE>
JANUS ASPEN SERIES
Janus Capital Corporation receives a monthly advisory fee for the Janus Aspen
Capital Appreciation Portfolio based on the following schedule (expressed as an
annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
------------------- -----------
<S> <C>
First $300,000,000.......... .75%
Next $200,000,000........... .70%
Over $500,000,000........... .65%
</TABLE>
However, Janus Capital Corporation has agreed to reduce the above Portfolio's
advisory fee to the extent that such fee exceeds the effective rate of a fund
managed by Janus Capital Corporation with similar investment objective and
policies.
PIMCO VARIABLE INSURANCE TRUST
The PIMCO Low Duration Bond and PIMCO Foreign Bond Portfolios feature fixed
advisory and administrative fee rates. Pacific Investment Management Company
receives monthly advisory fees and administrative fees from each Portfolio at an
annual rate based on the average daily net assets of the Portfolio, as follows:
PIMCO Low Duration Bond .40% and .25%, respectively, and PIMCO Foreign Bond .60%
and .30%, respectively. The administrative fee covers most of the expenses of
the Portfolios, including legal, audit, custody, transfer agency and certain
other services, and is responsible for the costs of registration of PIMCO
Variable Insurance Trust shares and the printing of prospectuses and shareholder
reports for current shareholders or other appropriate parties. The Portfolios
are responsible for bearing certain expenses associated with their operations
that are not provided or procured by Pacific Investment Management Company.
While it is expected that these expenses generally will not have a material
effect on the Portfolio expense ratios, they may have a material effect in
certain circumstances, such as when the average net assets of a Portfolio are
lower than anticipated.
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<PAGE> 162
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Asset Management Ltd. receives in management fees 1.25% of the average
net assets of the Class 2 shares of the Templeton Developing Markets Fund.
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We reserve the right to eliminate the shares of any of the Portfolios
and to substitute shares of another Portfolio or of another investment company,
if the shares of a Portfolio are no longer available for investment, or if in
our judgment further investment in any Portfolio becomes inappropriate in view
of the purposes of the Separate Account. We will not substitute any shares
attributable to an Owner's interest in a Subaccount without prior notice and the
SEC's prior approval, if required. The Separate Account may purchase other
securities for other series or classes of policies, or permit a conversion
between series or classes of policies on the basis of requests made by Owners.
We may establish additional subaccounts of the Separate Account, each of which
would invest in a new portfolio of the Funds, or in shares of another investment
company. New subaccounts may be established when, in our discretion, marketing
needs or investment conditions warrant. New subaccounts may be made available to
existing Owners as we determine. We may also eliminate or combine one or more
subaccounts, transfer assets, or substitute one subaccount for another
subaccount, if, in our discretion, marketing, tax, or investment conditions
warrant. We will notify all Owners of any such changes.
If we deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be: (a) operated as a management company
under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with our other separate
accounts. To the extent permitted by law, we may transfer the assets of the
Separate Account to another separate account or to the General Account.
PERFORMANCE INFORMATION
The Separate Account may advertise several types of performance information for
the Subaccounts. All Subaccounts may advertise standardized "average annual
total return" and nonstandardized "total return." The Kemper High Yield
Subaccount, Kemper Government Securities Subaccount, Scudder VLIF Bond
Subaccount, PIMCO Low Duration Bond Subaccount and PIMCO Foreign Bond Subaccount
may also advertise "yield". The Scudder VLIF Money Market Subaccount may
advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of a Subaccount's
future performance.
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<PAGE> 163
Standardized average annual total return and nonstandardized total return
calculations measure a Subaccount's net income plus the effect of any realized
or unrealized appreciation or depreciation of the Subaccount's underlying
investments. Standardized average annual total return and nonstandardized total
return will be quoted for periods of at least one year, three years, five years
and ten years, if applicable. In addition, we will show standardized average
annual total return for the life of the Subaccount, meaning the time the
underlying Portfolio has been held in the Subaccount. We will show
nonstandardized total return for the life of the Portfolio, meaning the time the
underlying Portfolio has been in existence. Standardized average annual total
return will be current to the most recent calendar quarter. Nonstandardized
total return will be current to the most recent calendar month. Standardized
average annual total return figures are annualized and, therefore, represent the
average annual percentage change in the value of a Subaccount investment over
the applicable period. Nonstandardized total return may include annualized and
nonannualized (cumulative) figures. Nonannualized figures represent the actual
percentage change over the applicable period.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for the Scudder VLIF Money
Market Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period, compounded on a semi-annual basis. The effective yield for the
Scudder VLIF Money Market Subaccount is calculated similarly, but includes the
effect of assumed compounding calculated under rules prescribed by the SEC. The
Scudder VLIF Money Market Subaccount's effective yield will be slightly higher
than its yield due to this compounding effect.
The Subaccounts' units are sold at Accumulation Unit value. The Subaccounts'
performance figures and Accumulation Unit values fluctuate. Subaccount units are
redeemable by an Owner at Accumulation Unit value, which may be more or less
than original cost. The performance figures reflect the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first seven years may be subject to a Withdrawal
Charge that ranges from 7% the first year to 0% after seven years. Yield,
effective yield and nonstandardized total return figures do not include the
effect of any Withdrawal Charge that may be imposed upon the redemption of
units, and thus may be higher than if such charges were deducted. Standardized
average annual total return figures include the effect of the applicable
Withdrawal Charge that may be imposed at the end of the period.
The Subaccounts may be compared to relevant indices and performance data from
independent sources. 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.
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<PAGE> 164
Additional information concerning a Subaccount's performance and these indices
and independent sources is provided in the Statement of Additional Information.
FIXED ACCOUNT OPTION
Amounts allocated or transferred to the Fixed Account are part of our General
Account, supporting insurance and annuity obligations. Interests in the Fixed
Account are not registered under the Securities Act of 1933 ("1933 Act"), and
the Fixed Account is not registered as an investment company under the
Investment Company Act of 1940 ("1940 Act"). Accordingly, neither the Fixed
Account nor any interests therein generally are subject to the provisions of the
1933 or 1940 Acts. We have been advised that the staff of the SEC has not
reviewed the disclosures in this Prospectus relating to the Fixed Account.
Disclosures regarding the Fixed Account, however, may be subject to the general
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
Under the Fixed Account Option, we pay a fixed interest rate for stated periods.
This Prospectus describes only the aspects of the Contract involving the
Separate Account, unless we refer to fixed accumulation and annuity elements.
We guarantee that payments allocated to the Fixed Account earn a minimum fixed
interest rate of 3%. At our discretion, We may credit interest in excess of 3%.
We reserve the right to change the rate of excess interest credited. We also
reserve the right to declare different rates of excess interest depending on
when amounts are allocated or transferred to the Fixed Account. As a result,
amounts at any designated time may be credited with a different rate of excess
interest than the rate previously credited to such amounts and to amounts
allocated or transferred at any other designated time.
THE CONTRACTS
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $1,000, and the minimum subsequent
payment is $500. The minimum subsequent payment is $100 if an Owner authorizes
us to draw on an account via check or electronic debit. Cumulative Purchase
Payments in excess of $1,000,000 require our prior approval. The Internal
Revenue Code may also limit the maximum annual amount of Purchase Payments. An
allocation to a Subaccount, the Fixed Account or a Guarantee Period must be at
least $500.
We may at any time amend the Contract in accordance with changes in the law,
including applicable tax laws, regulations or rulings, and for other purposes.
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period depends upon the state in which
the Contract is issued. However, it will be at least 10 days from the date
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<PAGE> 165
the Owner receives the Contract. The amount of the refund depends on the state
in which the Contract is issued. Generally, it will be an amount at least equal
to the Separate Account Contract Value plus amounts allocated to the General
Account and the Guarantee Periods on the date We receive the returned Contract,
without any deduction for Withdrawal Charges or Records Maintenance Charges.
Some states require the return of the Purchase Payment. In addition, a special
free look period applies in some circumstances to Contracts issued as Individual
Retirement Annuities, Simplified Employee Pensions--IRAs or as Roth Individual
Retirement Annuities.
During the Accumulation Period, the Owner may assign the Contract or change a
Beneficiary at any time by signing our form. No assignment or Beneficiary change
is binding on us until we receive it. We assume no responsibility for the
validity of the assignment or Beneficiary change. An assignment will subject the
Owner to immediate tax liability and may subject the Owner to a 10% tax penalty.
(See "Tax Treatment of Withdrawals, Loans and Assignments.")
Amounts payable during the Annuity Period may not be assigned or encumbered. In
addition, to the extent permitted by law, annuity payments are not subject to
levy, attachment or other judicial process for the payment of the payee's debts
or obligations.
The Owner designates the Beneficiary. If the Annuitant or Owner dies, and no
designated Beneficiary or contingent beneficiary is alive at that time, we will
pay the Annuitant's or Owner's estate.
Under a Qualified Plan Contract, the provisions of the applicable plan may
prohibit a change of Beneficiary. Generally, an interest in a Qualified Plan
Contract may not be assigned.
B. THE ACCUMULATION PERIOD.
1. APPLICATION OF PURCHASE PAYMENTS.
The Owner selects the allocation of Purchase Payments to the Subaccount(s),
Guarantee Periods, or Fixed Account. The amount of each Purchase Payment
allocated to a Subaccount is based on the value of an Accumulation Unit, as
computed after we receive the Purchase Payment. Generally, we determine the
value of an Accumulation Unit by 3:00 p.m. Chicago time on each day that the New
York Stock Exchange is open for trading. Purchase Payments allocated to a
Guarantee Period or to the Fixed Account begin earning interest one day after we
receive them. However, with respect to initial Purchase Payments, the amount is
credited only after we determine to issue the Contract, but no later than the
second day after we receive the Purchase Payment. After the initial purchase, we
determine the number of Accumulation Units credited by dividing the Purchase
Payment allocated to a Subaccount by the Subaccount's Accumulation Unit value,
as computed after we receive the Purchase Payment.
The number of Accumulation Units will not change due to investment experience.
Accumulation Unit value varies to reflect the investment experience of the
Subaccount and the assessment of charges against the Subaccount, other than
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<PAGE> 166
the Records Maintenance Charge and Guaranteed Retirement Income Benefit Charge.
The number of Accumulation Units is reduced when the Records Maintenance Charge
and Guaranteed Retirement Income Benefit Charge are assessed.
If we are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, we will promptly request the
necessary information. If the requested information is not furnished within five
(5) business days after we receive the initial Purchase Payment, or if we
determine that we cannot issue the Contract within the five (5) day period, we
will return the initial Purchase Payment to the Owner, unless the Owner consents
to our retaining the Purchase Payment until the application is completed.
We will issue a Contract without a signed application if:
- a dealer provides us with application information, electronically or in
writing
- we receive the initial Purchase Payment
- the Owner confirms in writing, after the Contract is delivered, that all
information in the Contract is correct.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units purchased is based on
the Subaccount's Accumulation Unit value at the end of the current Valuation
Period. When amounts are transferred out of or deducted from a Subaccount, units
are redeemed in a similar manner.
The Accumulation Unit value for each subsequent Valuation Period is the
investment experience factor for that Valuation Period times the Accumulation
Unit value for the preceding Valuation Period. Each Valuation Period has a
single Accumulation Unit value which applies to each day in the Valuation
Period.
Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
Valuation Period.
The investment experience factor of a Subaccount for any Valuation Period is
determined by the following formula:
(1 / 2) - 3, where:
(1) is the net result of:
- the net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period;
plus
- the per share amount of any dividend or capital gain distributions
made by the investments held in the Subaccount, if the "ex-
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dividend" date occurs during the current Valuation Period; plus or
minus
- a charge or credit for any taxes reserved for the current Valuation
Period which we determine have resulted from the investment operations
of the Subaccount;
(2) is the net asset value per share of the investment held in the
Subaccount determined at the end of the preceding Valuation Period;
(3) is the factor representing the mortality and expense risk and
administration charges.
3. GUARANTEE PERIODS OF THE MVA OPTION.
An Owner may allocate Purchase Payments to one or more Guarantee Periods with
durations of one to ten years. Each Guarantee Period has a Guaranteed Interest
Rate which will not change during the Guarantee Period. Interest is credited
daily at the effective annual rate.
The following example illustrates how we credit Guarantee Period interest.
EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 4.0% Effective Annual Rate
</TABLE>
<TABLE>
<CAPTION>
INTEREST CREDITED CUMULATIVE
YEAR DURING YEAR INTEREST CREDITED
- ---- ----------------- -----------------
<S> <C> <C>
1........................ $1,600.00 $1,600.00
2........................ 1,664.00 3,264.00
3........................ 1,730.56 4,994.56
4........................ 1,799.78 6,794.34
5........................ 1,871.77 8,666.11
</TABLE>
Accumulated value at the end of 5 years is:
$40,000 + $8,666.11 = $48,666.11
NOTE: THIS EXAMPLE ASSUMES THAT NO WITHDRAWALS ARE MADE DURING THE FIVE-YEAR
PERIOD. IF THE OWNER MAKES WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET
VALUE ADJUSTMENTS AND WITHDRAWAL CHARGES APPLY.
THE HYPOTHETICAL INTEREST RATE IS NOT INTENDED TO PREDICT FUTURE GUARANTEED
INTEREST RATES. ACTUAL GUARANTEED INTEREST RATES FOR ANY GUARANTEE PERIOD MAY BE
MORE OR LESS THAN THOSE SHOWN.
At the end of any Guarantee Period, we send written notice of the beginning of a
new Guarantee Period. A new Guarantee Period for the same duration starts unless
the Owner elects another Guarantee Period within thirty days after the end of
the terminating Guarantee Period. The Owner may choose a different Guarantee
Period by preauthorized telephone instructions or by giving us written notice.
An Owner should not select a new Guarantee Period extending
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<PAGE> 168
beyond the Annuity Date. Otherwise, the guarantee period amount available for
annuitization is subject to Market Value Adjustments and Withdrawal Charges.
(See "Market Value Adjustment" below.)
The amount reinvested at the beginning of a new Guarantee Period is the
Guarantee Period Value for the Guarantee Period just ended. The Guaranteed
Interest Rate in effect when the new Guarantee Period begins applies for the
duration of the new Guarantee Period.
An Owner may call Us at 1-800-621-5001 or write to us at 1 Kemper Drive, Long
Grove, Illinois 60049 for the new Guaranteed Interest Rates.
4. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
We declare the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate. Once
established, rates are guaranteed for the respective Guarantee Periods. We
advise an Owner of the Guaranteed Interest Rate for a chosen Guarantee Period
when we receive a Purchase Payment, when a transfer is effectuated or when a
Guarantee Period renews. Withdrawals of Accumulated Guarantee Period Value are
subject to Withdrawal Charges and Records Maintenance Charges and may be subject
to a Market Value Adjustment. (See "Market Value Adjustment" below.)
We have no specific formula for establishing the Guaranteed Interest Rates. The
determination may be influenced by, but not necessarily correspond to, the
current interest rate environment. (See "The MVA Option".) We may also consider,
among other factors, the duration of a Guarantee Period, regulatory and tax
requirements, sales commissions and administrative expenses we bear, and general
economic trends.
WE MAKE THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED.
WE CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE GUARANTEED INTEREST RATES.
5. CONTRACT VALUE.
On any Valuation Date, Contract Value equals the total of:
- the number of Accumulation Units credited to each Subaccount times
- the value of a corresponding Accumulation Unit for each Subaccount plus
- the Owner's Accumulated Guarantee Period Value in the MVA Option plus
- the Owner's interest in the Fixed Account.
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<PAGE> 169
6. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, an Owner may transfer the Contract Value among
the Subaccounts, the Guarantee Periods and the Fixed Account subject to the
following provisions:
- the amount transferred must be at least $100 unless the total Contract
Value attributable to a Subaccount, Guarantee Period or Fixed Account is
transferred;
- the Contract Value remaining in a Subaccount, Guarantee Period or Fixed
Account must be at least $500 unless the total value is transferred;
- transfers may not be made from any Subaccount to the Fixed Account over
the six months following any transfer from the Fixed Account into one or
more Subaccounts;
- transfers from the Fixed Account may be made one time during the Contract
Year during the thirty days following an anniversary of a Contract Year.
We reserve the right to charge a $25 fee for each transfer in excess of 12
transfers per calendar year. In addition, transfers of Guarantee Period Value
are subject to Market Value Adjustment unless the transfer is made within thirty
days of the end of the Guarantee Period. Because a transfer before the end of a
Guarantee Period is subject to a Market Value Adjustment, the amount transferred
from the Guarantee Period may be more or less than the requested dollar amount.
We make transfers pursuant to written or telephone instructions specifying in
detail the requested changes. Transfers involving a Subaccount are based upon
the Accumulation Unit values, as calculated after we receive transfer
instructions. We may suspend, modify or terminate the transfer provision. We
disclaim all liability if we follow in good faith instructions given in
accordance with our procedures, including requests for personal identifying
information, that are designed to limit unauthorized use of the privilege.
Therefore, an Owner bears the risk of loss in the event of a fraudulent
telephone transfer.
If an Owner authorizes a third party to transact transfers on the Owner's
behalf, we will reallocate the Contract Value pursuant to the authorized asset
allocation program. However, we do not offer or participate in any asset
allocation program and we take no responsibility for any third party asset
allocation program. We may suspend or cancel acceptance of a third party's
instructions at any time and may restrict the investment options available for
transfer under third party authorizations.
An Owner may elect to have transfers made automatically among the Subaccounts on
an annual, semiannual or quarterly basis so that Contract Value is reallocated
to match the percentage allocations in the Owner's predefined allocation
elections. Transfers under this program are not be subject to the $100 minimum
transfer limitation. An election to participate in the automatic asset
reallocation program must be in writing on our form and returned to Us.
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<PAGE> 170
7. WITHDRAWAL DURING ACCUMULATION PERIOD.
The Owner may redeem some or all of the Contract Value and previous withdrawals,
plus or minus any applicable Market Value Adjustment and minus any Withdrawal
Charge. Withdrawals will have tax consequences. (See "Federal Tax Matters.") A
withdrawal of the entire Contract Value is called a surrender.
In any Contract Year, an Owner may withdraw, without Withdrawal Charge, up to
the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of the Contract Value.
If the Owner withdraws a larger amount, the Purchase Payments withdrawn are
subject to a Withdrawal Charge. The Withdrawal Charge is:
- 7% in the first Contribution Year
- 6% in the second Contribution Year
- 5% in the third and fourth Contribution Years
- 4% in the fifth Contribution Year
- 3% in the sixth Contribution Year
- 2% in the seventh Contribution Year
- 0% in the eighth and later Contribution Years
If Contract Value is allocated to more than one investment option, an Owner must
specify the source of the partial withdrawal. If an Owner does not specify the
source, we redeem Accumulation Units on a pro rata basis from all investment
options in which the Owner has an interest. Accumulation Units attributable to
the earliest Contribution Years are redeemed first.
Partial withdrawals are subject to the following:
- Partial withdrawals are not permitted from the Fixed Account in the first
Contract Year.
- The minimum withdrawal is $100 (before any Market Value Adjustment), or
the Owner's entire interest in the investment option(s) from which
withdrawal is requested.
- The Owner must leave at least $500 in each investment option from which
the withdrawal is requested, unless the total value is withdrawn.
Election to withdraw shall be made in writing to us at Suite 102, 1290 Silas
Deane Highway, Wethersfield, CT 06109 and should be accompanied by the Contract
if surrender is requested. Withdrawal requests are processed only on days when
the New York Stock Exchange is open. The Withdrawal Value attributable to the
Subaccounts is determined on the basis of the Accumulation Unit values, as
calculated after we receive the request. The Withdrawal Value
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<PAGE> 171
attributable to the Subaccounts is paid within seven (7) days after we receive
the request. However, we may suspend withdrawals or delay payment:
- during any period when the New York Stock Exchange is closed
- when trading in a Portfolio is restricted or the SEC determines that an
emergency exists
- as the SEC by order may permit.
For withdrawal requests from the MVA Option and the Fixed Account, we may defer
any payment for up to six months, as permitted by state law. During the deferral
period, we will continue to credit interest at the current Guaranteed Interest
Rate for the same Guarantee Period.
8. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected during the "free look" period or within 30 days after a Guarantee
Period ends, may be adjusted up or down by a Market Value Adjustment. The Market
Value Adjustment applies before deduction of a Withdrawal Charge.
The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, the Market Value Adjustment
reduces Market Adjusted Value and results in a lower payment. Thus, if interest
rates increase, the withdrawal could be less than the original Purchase Payment
or the original amount allocated to a Guarantee Period. Conversely, if the
Guaranteed Interest Rate is higher than the applicable Current Interest Rate,
the Market Value Adjustment increases Market Adjusted Value and results in a
higher payment.
The Market Value Adjustment (MVA) uses this formula:
(1 + I) (t/365)
MVA = MPV X [[-------] -1]
(1 + J)
Where I is the Guaranteed Interest Rate being credited to the Guarantee
Period Value (MPV) subject to the Market Value Adjustment,
J is the Current Interest Rate we declare, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
Guarantee Period the length of which is equal to the balance of the
Guarantee Period for the Guarantee Period Value subject to the Market Value
Adjustment, rounded to the next higher number of complete years, and
t is the number of days remaining in the Guarantee Period.
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For an illustration showing an upward and a downward adjustment, see Appendix A.
9. GUARANTEED DEATH BENEFIT.
We will pay a death benefit is paid to the Beneficiary if any of the following
occurs during the Accumulation Period:
- the Owner, or a joint owner, dies
- the Annuitant dies with no living contingent annuitant
- the contingent annuitant dies after the Annuitant
The amount of the death benefit depends on the age of the deceased Owner or
Annuitant when the death benefit becomes payable. If the deceased Owner or
Annuitant dies before age 91, we will pay the Beneficiary the greater of the
following:
- Purchase Payments, minus all previous withdrawals
- Contract Value
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the deceased's age 80 or the date of
death, plus Purchase Payments minus all withdrawals from age 80 to the
date of death
- the greatest anniversary value before death
The greatest anniversary value equals:
- the highest of the Contract Values on each Contract anniversary prior to
the deceased's age 81, plus the dollar amount of any Purchase Payments
made since that anniversary, minus
- withdrawals since that anniversary.
We pay Contract Value to the Beneficiary if the Owner or Annuitant dies after
age 91. The Owner or Beneficiary, as appropriate, may elect to have all or a
part of the death proceeds paid to the Beneficiary under one of the Annuity
Options described under "Annuity Options" below.
For Non-Qualified Plan Contracts, if the Beneficiary is the Owner's surviving
spouse, the surviving spouse may elect to be treated as the successor Owner of
the Contract with no requirement to begin Death Benefit distribution.
10. GUARANTEED RETIREMENT INCOME BENEFIT.
Guaranteed Retirement Income Benefit (GRIB) is an optional Contract benefit.
GRIB provides a minimum fixed annuity guaranteed lifetime income to the
Annuitant as described below. The Owner must elect GRIB on the initial Contract
application. GRIB may be discontinued after the seventh Contract anniversary by
written notice to us. Once discontinued, GRIB may not be elected again.
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GRIB may be exercised only within thirty days after the seventh or later
Contract anniversary. In addition, GRIB must be exercised between the
Annuitant's 60th and 91st birthdays. However, if the Annuitant is younger than
age 44 on the Date of Issue, GRIB may be exercised after the Contract's 15th
Anniversary.
GRIB payments are based on the greater of:
- the income provided by applying the GRIB base to the guaranteed annuity
factors; and
- the income provided by applying Contract Value to the current annuity
factors.
The GRIB base is the greater of:
- Purchase Payments minus all previous withdrawals
- Contract Value
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the Annuitant's age 80 or the GRIB
exercise date plus Purchase Payments minus all withdrawals from age 80 to
the GRIB exercise date
- the greatest anniversary value before the exercise date
The greatest anniversary value equals:
- the highest of the Contract Values on each Contract anniversary prior to
the Annuitant's age 81, plus
- the dollar amount of any Purchase Payments made since that anniversary,
minus
- withdrawals since that anniversary.
The guaranteed annuity factors are based on the 1983a table projected using
projection scale G, with interest at 2.5% (the "Annuity 2000" table). However,
if GRIB is exercised on or after the 10th Contract anniversary, interest at
3.50% is assumed.
Because GRIB is based on conservative actuarial factors, the income guaranteed
may often be less than the income provided by applying Contract Value to current
annuity factors.
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GRIB is paid for the life of the Annuitant with a period certain based on the
Annuitant's age at the GRIB exercise date and the type of Contract, as follows:
<TABLE>
<CAPTION>
PERIOD CERTAIN YEARS
-----------------------------
ANNUITANT'S AGE QUALIFIED NON-QUALIFIED
AT EXERCISE PLAN CONTRACT PLAN CONTRACT
- --------------- ------------- -------------
<S> <C> <C>
15 to 75 10 10
76 9 10
77 8 10
78 7 10
79 7 10
80 7 10
81 7 9
82 7 8
83 7 7
84 6 6
85 to 90 5 5
</TABLE>
CONTRACT CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk
- administrative expenses
- Records Maintenance Charge
- Withdrawal Charge
- Guaranteed Retirement Income Benefit charge, if elected
Subject to certain expense limitations, investment management fees and other
Fund expenses are indirectly borne by the Owner.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
1. MORTALITY AND EXPENSE RISK CHARGE.
We assess each Subaccount a daily asset charge for mortality and expense risks
at a rate of 1.25% per annum. Variable Annuity payments reflect the investment
experience of each Subaccount but are not affected by changes in actual
mortality experience or by actual expenses incurred by Us.
The mortality risk we assume arises from two contractual obligations. First, if
the Owner or Annuitant dies before age 91 and before the Annuity Date, we may,
in some cases, pay more than Contract Value. (See "Guaranteed Death Benefit",
page 28) Second, when Annuity Options involving life contingencies are selected,
we assume the risk that Annuitants will live beyond actuarial life expectancies.
We also assume an expense risk. Actual expenses of administering the Contracts
may exceed the amounts we recover from the Records Maintenance Charge or the
administrative cost portion of the daily asset charge.
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2. ADMINISTRATIVE COSTS.
We assess each Subaccount a daily asset charge for administrative costs at a
rate of .15% per annum. This charge reimburses us for expenses incurred for
administering the Contracts. These expenses include Owner inquiries, changes in
allocations, Owner reports, Contract maintenance costs, and data processing
costs. The administrative charge covers the average anticipated administrative
expenses incurred while the Contracts are in force. There is not necessarily a
direct relationship between the amount of the charge and the administrative
costs of a particular Contract
3. RECORDS MAINTENANCE CHARGE.
We deduct an annual Records Maintenance Charge of $30 during the Accumulation
Period. The charge is assessed:
- at the end of each Contract Year,
- on Contract surrender and
- upon annuitization.
However, We do not deduct the Records Maintenance Charge for Contracts with
Contract Value of at least $50,000 on the assessment date.
This charge reimburses us for the expenses of establishing and maintaining
Contract records. The Records Maintenance Charge reduces the net assets of each
Subaccount, Guarantee Period and the Fixed Account.
The Records Maintenance Charge is assessed equally among all investment options
in which the Owner has an interest.
4. WITHDRAWAL CHARGE.
We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal
Charge covers Contract sales expenses, including commissions and other promotion
and acquisition expenses.
Each Contract Year, an Owner may withdraw, without Withdrawal Charge, the
greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of the current Contract Value.
If the Owner withdraws a larger amount, the excess Purchase Payments withdrawn
are subject to a Withdrawal Charge. The Withdrawal Charge applies
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in the first seven Contribution Years following each Purchase Payment as
follows:
<TABLE>
<CAPTION>
CONTRIBUTION WITHDRAWAL
YEAR CHARGE
------------ ----------
<S> <C>
First............................. 7%
Second............................ 6%
Third............................. 5%
Fourth............................ 5%
Fifth............................. 4%
Sixth............................. 3%
Seventh........................... 2%
Eighth and following.............. 0%
</TABLE>
Purchase Payments are deemed surrendered in the order in which they were
received.
When a withdrawal is requested, the Owner receives a check in the amount
requested. If a Withdrawal Charge applies, Contract Value is reduced by the
Withdrawal Charge, plus the dollar amount sent to the Owner.
Because Contribution Years are based on the date each Purchase Payment is made,
Owners may be subject to a Withdrawal Charge, even though the Contract may have
been issued many years earlier. (For additional details, see "Withdrawal During
Accumulation Period.")
Subject to certain exceptions and state approvals, withdrawal charges are not
assessed on withdrawals:
- after an Owner has been confined in a hospital or skilled health care
facility for at least thirty days and the Owner remains confined at the
time of the request;
- within thirty days following an Owner's discharge from a hospital or
skilled health care facility after a confinement of at least thirty days;
or
- if the Owner or Annuitant becomes disabled after the Contract is issued
and before age 65.
Restrictions and provisions related to the nursing care or hospitalization
disability waivers are described in Contract endorsements.
The Withdrawal Charge compensates us for Contract distribution expense.
Currently, we anticipate Withdrawal Charges will not fully cover distribution
expenses. Unrecovered distribution expenses may be recovered from our general
assets. Those assets may include proceeds from the mortality and expense risk
charge.
The Withdrawal Charge also applies at annuitization to amounts attributable to
Purchase Payments in their seventh Contribution Year or earlier. No Withdrawal
Charge applies upon annuitization if the Owner selects Annuity Options 2, 3 or 4
or if payments under Annuity Option 1 are scheduled to continue for at least
five years.
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We may reduce or eliminate the Withdrawal Charge if We anticipate that We will
incur lower sales expenses or perform fewer services because of economies due to
the size of a group, the average contribution per participant, or the use of
mass enrollment procedures. No Withdrawal Charge applies to Contracts sold to
officers, directors and employees of KILICO and Investors Fund Series (IFS), IFS
investment advisers and principal underwriter or certain affiliated companies,
or to any trust, pension, profit-sharing or other benefit plan for such persons.
5. GUARANTEED RETIREMENT INCOME BENEFIT CHARGE.
The annual charge for GRIB is 0.25% of Contract Value. We deduct a pro rata
portion of the charge on each Contract Quarter anniversary. The quarterly charge
is deducted pro rata from the investment options in which the Owner has an
interest. We no longer charge for GRIB after the Annuitant's 91st birthday.
6. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deduction of investment management
fees and certain general operating expenses. Subject to limitations, Owners
indirectly bear these fees and expenses. Investment management fees appear on
page 7. Further detail is provided in the attached prospectuses for the
Portfolios and the Funds' Statements of Additional Information.
7. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If We pay state premium taxes, we may charge the amount
paid against Contract Value upon annuitization. See "Appendix--State Premium Tax
Chart" in the Statement of Additional Information.
8. EXCEPTIONS.
We may decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, We guarantee
that they will not increase. We bear the risk that such charges will not cover
Our costs. On the other hand, should such charges exceed Our costs, We will not
refund any charges. Any profit is available for corporate purposes including,
among other things, payment of distribution expenses.
We may also offer reduced fees and charges, including but not limited to,
Records Maintenance Charge and mortality and expense risk and administrative
charges, for certain sales that may result in cost savings. Reductions in these
fees and charges will not unfairly discriminate against any Owner.
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THE ANNUITY PERIOD
In addition to GRIB, Contracts may be annuitized under one of several Annuity
Options. Annuity payments begin on the Annuity Date and under the selected
Annuity Option. The Annuity Date must be at least one year after the Date of
Issue. Subject to state variation, the Annuity Date may not be deferred beyond
the Annuitant's 91st birthday (100th birthday if the Contract is part of a
Charitable Remainder Trust).
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
- the selected Annuity Option, and
- the investment performance of the selected Subaccount(s) (if variable
annuitization is elected).
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly. Annuity payments may be subject to a Withdrawal Charge. (For
additional details, see "Withdrawal Charge.")
2. ANNUITY OPTIONS.
The Owner may elect one of the Contract's Annuity Options. The Owner may decide
at any time (subject to the provisions of any applicable retirement plan and
state variations) to begin annuity payments before the Annuitant's 91st birthday
(100th birthday if the Contract is part of a Charitable Remainder Trust). The
Owner may change the Annuity Option before the Annuity Date. If no other Annuity
Option is elected, monthly annuity payments are made in accordance with Option 3
below with a ten (10) year period certain. Generally, annuity payments are made
in monthly installments. However, we may make a lump sum payment if the net
proceeds available to apply under an Annuity Option are less than $2,000. In
addition, if the first monthly payment is less than $25, we may change the
frequency of payments to quarterly, semiannual or annual intervals so that the
initial payment is at least $25.
The amount of periodic annuity payments may depend upon:
- the Annuity Option selected;
- the age and sex of the payee; and
- the investment experience of the selected Subaccount(s).
For example:
- if Option 1, income for a specified period, is selected, shorter
periods result in fewer payments with higher values.
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- if Option 2, life income, is selected, it is likely that each payment
will be smaller than would result if income for a short period were
specified.
- if Option 3, life income with installments guaranteed, is selected,
each payment will probably be smaller than would result if the life
income option were selected.
- if Option 4, the joint and survivor annuity, is selected, each payment
is smaller than those measured by an individual life income option.
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. The sex of the payee influences the amount of periodic payments
because females live longer than males, resulting in smaller payments. Finally,
if the Owner participates in a Subaccount with higher investment performance, it
is likely the Owner will receive a higher periodic payment.
If the Owner dies before the Annuity Date, available Annuity Options are
limited. The Annuity Options available are:
- Option 2 or
- Option 1 or 3 for a period no longer than the life expectancy of the
Beneficiary (but not less than 5 years from the Owner's death).
If the Beneficiary is not an individual, the entire interest must be distributed
within 5 years of the Owner's death. The Death Benefit distribution must begin
no later than one year from the Owner's death, unless a later date is prescribed
by federal regulation.
OPTION 1--INCOME FOR SPECIFIED PERIOD.
Option 1 provides an annuity payable monthly for a selected number of years
ranging from five to thirty. Upon the payee's death, if the Beneficiary is an
individual, we automatically continue payments to the Beneficiary for the
remainder of the period specified. If the Beneficiary is not an individual
(e.g., an estate or trust), we pay the discounted value of the remaining
payments in the specified period. Although there is no life contingency risk
associated with Option 1, we continue to deduct the daily asset charges for
mortality and expense risks and administrative costs.
Payees may elect to cancel all or part of the remaining payments due under
Option 1. We will then pay the discounted value of the remaining payments.
OPTION 2--LIFE INCOME.
Option 2 provides an annuity over the lifetime of the payee. If Option 2 is
elected, annuity payments terminate automatically and immediately on the payee's
death without regard to the number or total amount of payments made. Thus, it is
possible for an individual to receive only one payment if death occurred prior
to the date the second payment was due.
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<PAGE> 180
OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.
Option 3 provides an annuity payable monthly during the payee's lifetime.
However, Option 3 also provides for the automatic continuation of payments for
the remainder of the specified period if the Beneficiary is an individual and
payments have been made for less than the specified period. The period specified
maybe five, ten, fifteen or twenty years. If the Beneficiary is not an
individual, we pay the discounted value of the remaining payments in the
specified period.
OPTION 4--JOINT AND SURVIVOR ANNUITY.
Option 4 provides an annuity payable monthly while both payees are living. Upon
either payee's death, the monthly income payable continues over the life of the
surviving payee at a percentage specified when Option 4 is elected. Annuity
payments terminate automatically and immediately upon the surviving payee's
death without regard to the number or total amount of payments received.
3. ALLOCATION OF ANNUITY.
The Owner may elect payments on a fixed or variable basis, or a combination. Any
Fixed Account Contract Value or Guarantee Period Value is annuitized on a fixed
basis. Any Separate Account Contract Value is annuitized on a variable basis.
The MVA Option is not available during the Annuity Period. An Owner may exercise
the transfer privilege during the Accumulation Period. Transfers during the
Annuity Period are subject to certain limitations.
4. TRANSFER DURING ANNUITY PERIOD.
During the Annuity Period, the payee may, by written request, transfer
Subaccount Value from one Subaccount to another Subaccount or to the Fixed
Account, subject to the following limitations:
- Transfers to a Subaccount are prohibited during the first year of the
Annuity Period; subsequent transfers are limited to one per year.
- All interest in a Subaccount must be transferred.
- If We receive notice of transfer to a Subaccount more than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the date we receive the notice.
- If We receive notice of transfer to a Subaccount less than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the annuity payment date.
- Transfers to the Fixed Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least thirty (30) days
prior to the anniversary.
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
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5. ANNUITY UNIT VALUE.
Annuity Unit value is determined independently for each Subaccount.
Annuity Unit value for any Valuation Period is:
- Annuity Unit value for the preceding Valuation Period times
- the net investment factor for the current Valuation Period times
- an interest factor which offsets the 2.5% per annum rate of investment
earnings assumed by the Contract's annuity tables.
The net investment factor for a Subaccount for any Valuation Period is:
- the Subaccount's Accumulation Unit value at the end of the current
Valuation Period, plus or minus the per share charge or credit for taxes
reserved; divided by
- the Subaccount's Accumulation Unit value at the end of the preceding
Valuation Period, plus or minus the per share charge or credit for taxes
reserved.
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
When annuity payments begin, the value of the Owner's Contract interest is:
- Accumulation Unit values at the end of the Valuation Period falling on
the 20th or 7th day of the month before the first annuity payment is due
times
- the number of Accumulation Units credited at the end of the Valuation
Period minus
- premium taxes and Withdrawal Charges
The first annuity payment is determined by multiplying the benefit per $1,000 of
value shown in the applicable annuity table by the number of thousands of
dollars of Contract Value.
A 2.5% per annum rate of investment earnings is assumed by the Contract's
annuity tables. If the actual net investment earnings rate exceeds 2.5% per
annum, payments increase accordingly. Conversely, if the actual rate is less
than 2.5% per annum, annuity payments decrease.
7. SUBSEQUENT PERIODIC PAYMENTS UNDER VARIABLE ANNUITY.
Subsequent annuity payments are determined by multiplying the number of Annuity
Units by the Annuity Unit value at the Valuation Period before each annuity
payment is due. The first annuity payment is divided by the Annuity Unit value
as of the Annuity Date to establish the number of Annuity Units representing
each annuity payment. This number does not change.
8. FIXED ANNUITY PAYMENTS.
Each Fixed Annuity payment is determined from tables we prepare. These tables
show the monthly payment for each $1,000 of Contract Value allocated
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to a Fixed Annuity. Payment is based on the Contract Value at the date before
the annuity payment is due. Fixed Annuity payments do not change regardless of
investment, mortality or expense experience.
9. DEATH PROCEEDS.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, depend upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
FEDERAL INCOME TAXES
A. INTRODUCTION
This discussion is not exhaustive and is not intended as tax advice. A qualified
tax adviser should always be consulted with regard to the application of the law
to individual circumstances. This discussion is based on the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Department regulations, and
interpretations existing on the date of this Prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and
judicial decisions.
This discussion does not address state or local tax consequences associated with
buying a Contract. In addition, WE MAKE NO GUARANTEE REGARDING ANY TAX
TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CONTRACT OR OF ANY TRANSACTION
INVOLVING A CONTRACT.
B. OUR TAX STATUS
We are taxed as a life insurance company and the operations of the Separate
Account are treated as a part of our total operations. The Separate Account is
not separately taxed as a "regulated investment company". Investment income and
capital gains of the Separate Account are not taxed to the extent they are
applied under a Contract. We do not anticipate that we will incur federal income
tax liability attributable to the income and gains of the Separate Account, and
therefore we do not intend to provide for these taxes. If we are taxed on
investment income or capital gains of the Separate Account, then we may impose a
charge against the Separate Account to provide for these taxes.
C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under the Code, except as described below, increases in the Contract Value of a
Non-Qualified Plan Contract are generally not taxable to the Owner or Annuitant
until received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
- the Contract must be owned by an individual
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- Separate Account investments must be "adequately diversified"
- We, rather than the Owner, must be considered the owner of Separate
Account assets for federal tax purposes, and
- annuity payments must appropriately amortize Purchase Payments and
Contract earnings.
NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons", such as corporations, trusts or similar entities, are not
annuity contracts for federal income tax purposes. The investment income on
these contracts is taxed as ordinary income received or accrued by the non-
natural owner. There are exceptions to this general rule for non-natural owners.
Contracts are generally treated as held by a natural person if the nominal owner
is a trust or other entity holding the contract as an agent for a natural
person. However, this special exception does not apply to an employer who is the
nominal owner of a contract under a non-qualified deferred compensation plan for
its employees.
Additional exceptions to this rule include:
- contracts acquired by a decedent's estate
- certain Qualified Plan Contracts
- Contracts purchased by employers at termination of certain qualified
plans
- Contracts used with structured settlement agreements
- Contracts purchased with a single premium when the annuity starting date
is no later than a year from Contract purchase and substantially equal
periodic payments are made at least annually.
DIVERSIFICATION REQUIREMENTS. For a contract to be treated as an annuity for
federal income tax purposes, separate account investments must be "adequately
diversified". The Treasury Secretary issued regulations prescribing standards
for adequately diversifying separate account investments. If the Separate
Account failed to comply with these diversification standards, the Contract
would not be treated as an annuity contract for federal income tax purposes and
the Owner would generally be taxed on the difference between Contract Value and
Purchase Payments.
Although we do not control Fund investments, we expect the Fund will comply with
these regulations so that the Separate Account will be considered "adequately
diversified."
OWNERSHIP TREATMENT. In certain circumstances, a variable annuity contract owner
may be considered the owner of the assets of the separate account supporting the
contract. In those circumstances, income and gains from separate account assets
are includible in the owner's gross income. The IRS, in published rulings,
stated that a variable contract owner will be considered the owner of separate
account assets if the owner possesses the ability to exercise investment control
over the assets. As of the date of this Prospectus, no investor control guidance
is available.
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We may modify the Contract as necessary to attempt to prevent the Owner from
being considered the owner of the Separate Account assets.
DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur)
when the Annuitant has reached an advanced age, E.G., past age 85, the Contract
might not be treated as an annuity for federal income tax purposes. In that
event, the income and gains under the Contract could be currently includible in
the Owner's income.
The following discussion assumes that the Contract is treated as an annuity
contract for tax purposes and that we are treated as the owner of Separate
Account assets.
2. TAXATION OF PARTIAL AND FULL WITHDRAWALS
Partial withdrawals from a Non-Qualified Plan Contract are includible in income
if Contract Value before the withdrawal exceeds the "investment in the
contract." Full withdrawals are also includible in income if they exceed the
"investment in the contract." Investment in the contract equals the total of
Purchase Payments minus amounts previously received from the Contract.
Any assignment or pledge (or agreement to assign or pledge) of Contract Value,
is treated as a withdrawal. Investment in the contract is increased by the
amount includible in income with respect to such assignment or pledge. If an
individual transfers a Contract interest without adequate consideration to
someone other than the Owner's spouse (or to a former spouse incident to
divorce), the Owner is taxed on the difference between Contract Value and the
"investment in the contract." In this case, the transferee's investment in the
contract is increased to reflect the increase in the transferor's income.
The Contract's death benefit may exceed Purchase Payments or Contract Value. As
described in this Prospectus, we impose certain charges with respect to the
death benefit. It is possible that those charges (or some portion) could be
treated as a partial withdrawal.
There may be special income tax issues present in situations where the Owner and
the Annuitant are not the same person and are not married to one another. A tax
adviser should be consulted in those situations.
3. TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as income equals the
payment minus the exclusion amount. The exclusion amount for variable annuity
payments is the "investment in the contract" allocated to the variable annuity
option and adjusted for any period certain or refund feature, divided by the
number of payments expected to be made. The exclusion amount for fixed annuity
payments is the payment times the ratio of the investment in the
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contract allocated to the fixed annuity option and adjusted for any period
certain or refund feature, to expected value of all annuity payments.
Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments stop because
the Annuitant dies before the total amount of the investment in the contract is
recovered, the unrecovered amount generally is allowed as a deduction to the
Annuitant in the last taxable year.
4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon the Owner's or Annuitant's death. Before the
Annuity Date, death benefits are includible in income and:
- if distributed in a lump sum are taxed like a full withdrawal, or
- if distributed under an annuity option are taxed like annuity payments.
After the Annuity Date, where a guaranteed period exists and the Annuitant dies
before the end of that period, payments made to the Beneficiary for the
remainder of that period are includible in income and:
- if received in a lump sum are includible in income if they exceed the
unrecovered investment, or
- if distributed in accordance with the selected annuity option are fully
excludable from income until the remaining investment in the contract is
deemed to be recovered.
Thereafter, all annuity payments are fully includible in income.
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
A 10% penalty tax applies to a taxable payment from a Non-Qualified Plan
Contract unless:
- received on or after the Owner reaches age 59 1/2
- attributable to the Owner's disability
- made to a Beneficiary after the Owner's death or, for non-natural Owners,
after the primary Annuitant's death
- made as a series of substantially equal periodic payments (at least
annually) for the life (or life expectancy) of the Annuitant or for the
joint lives (or joint life expectancies) of the Annuitant and designated
Beneficiary
- made under a Contract purchased with a single premium when the annuity
starting date is no later than a year from Contract purchase and
substantially equal periodic payments are made at least annually
- made with annuities used with structured settlement agreements
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6. AGGREGATION OF CONTRACTS
The taxable amount of an annuity payment or withdrawal from a Non-Qualified Plan
Contract is determined by combining some or all of the Non-Qualified Plan
Contracts owned by an individual. For example, if a person purchases a Contract
and also purchases an immediate annuity at approximately the same time, the IRS
may treat the two contracts as one contract. In addition, if a person purchases
two or more deferred annuity contracts from the same company (or its affiliates)
during any calendar year, these contracts are treated as one contract. The
effects of this aggregation are not clear. However, it could affect the taxable
amount of an annuity payment or withdrawal and the amount which might be subject
to the 10% penalty tax.
7. LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
For Contracts issued after June 8, 1997 to a non-natural owner, otherwise
deductible interest may no longer be deductible by the owner. However, this
interest deduction disallowance does not affect Contracts generating taxable
income. Entities considering purchasing the Contract, or entities that will be
beneficiaries under a Contract, should consult a tax adviser.
D. QUALIFIED PLANS
Qualified Plan Contracts are used with retirement plans which receive favorable
tax treatment as Individual Retirement Annuities, Simplified Employee
Pensions -- IRAs or as Roth Individual Retirement Annuities ("Qualified Plans").
Numerous special tax rules apply to Qualified Plans and to Qualified Plan
Contracts. Therefore, We make no attempt to provide more than general
information about the use of Qualified Plan Contracts.
The tax rules applicable to Qualified Plans vary according to the type, terms
and conditions of the plan. For example, for both withdrawals and annuity
payments under certain Qualified Plan Contracts, there may be no "investment in
the contract" and the total amount received may be taxable. Both the amount of
the permitted contribution, and the corresponding deduction or exclusion, are
limited under Qualified Plans. In Qualified Plan Contracts, the Owner and
Annuitant must be the same individual. If a joint Annuitant is named and the
Annuitant is alive, all distributions must be made to the Annuitant. Also, if
the joint Annuitant is not the Annuitant's spouse, the annuity options may be
limited, depending on the difference in their ages. Furthermore, the length of
any guarantee period may be limited in some circumstances to satisfy certain
minimum distribution requirements under the Code.
Under a Qualified Plan Contract, rules specify the form of distribution and
commencement dates. An excise tax is imposed for failure to comply with minimum
distribution requirements. This excise tax generally equals 50% of the amount by
which a minimum required distribution exceeds the actual distribution. In the
case of Individual Retirement Annuities, distributions of minimum
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<PAGE> 187
amounts must generally begin by April 1 of the calendar year following the
calendar year in which the owner attains age 70 1/2.
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Plan Contracts. For Individual Retirement Annuities, the penalty tax does not
apply to a payment:
- received after the Owner reaches age 59 1/2
- received after the Owner's death or because of the Owner's disability
- made as a series of substantially equal periodic payments (at least
annually) for the life (or life expectancy) of the Owner or for the joint
lives (or joint life expectancies) of the Owner and designated
beneficiary
In addition, the penalty tax does not apply to certain distributions taken after
December 31, 1997 used for qualified first time home purchases or for higher
education expenses. Special conditions must be met to qualify for these
exceptions. Owners wishing to take a distribution for these purposes should
consult their tax adviser. Other exceptions may apply.
Qualified Plan Contracts are amended to conform to plan requirements. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, we are not bound by terms and conditions of Qualified
Plans if they are inconsistent with the Contract.
1. QUALIFIED PLAN TYPES
We issue Contracts for the following types of Qualified Plans.
INDIVIDUAL RETIREMENT ANNUITIES. The Code permits eligible individuals to
contribute to an individual retirement annuity known as an "IRA." IRAs limit the
amounts contributed, the persons eligible and the time when distributions start.
Also, subject to direct rollover and mandatory withholding requirements,
distributions from other types of Qualified Plans may be "rolled over" on a tax-
deferred basis into an IRA. The Contract may not fund an "Education IRA."
IRAs generally may not provide life insurance coverage, but they may provide a
death benefit that equals the greater of the premiums paid and the contract
value. The Contract's death benefit may exceed Purchase Payments or Contract
Value. It is possible that the death benefit could be viewed as violating the
prohibition on investment in life insurance contracts and failing IRA
requirements.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). The Code allows employers to establish
simplified employee pension plans, using the employees' IRAs. Under these plans
the employer may make limited deductible contributions on behalf of the
employees to IRAs. Employers and employees intending to use the Contract in
connection with these plans should seek tax competent advice.
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ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth
IRAs differ from other IRAs in that:
- Roth IRA contributions are never deductible,
- "qualified distributions" from a Roth IRA are excludable from income,
- different eligibility and mandatory distribution requirements apply,
- a rollover to a Roth IRA must be a "qualified rollover contribution,"
under the Code.
For a rollover from a non-Roth IRA to a Roth IRA, amounts which would have been
includible in gross income but for the qualified rollover contribution are
includible in gross income, without application of the 10 percent penalty tax.
An IRA may be converted into a Roth IRA without taking a distribution. An
individual may convert by notifying the IRA issuer or trustee. The conversion of
an IRA to a Roth IRA is a special type of qualified rollover distribution.
Hence, the IRA participant must be eligible for a qualified rollover
distribution to convert an IRA to a Roth IRA. A conversion typically results in
the inclusion of some or all of the IRA value in gross income. Persons with
adjusted gross incomes in excess of $100,000 or who are married and file a
separate return are not eligible to make a qualified rollover contribution or a
transfer in a taxable year from a non-Roth IRA to a Roth IRA.
Any "qualified distribution" from a Roth IRA is excludible from gross income. A
"qualified distribution" is:
- a payment or distribution
-- made after the Owner attains age 59 1/2,
-- made after the Owner's death,
-- attributable to the Owner being disabled, or
-- a qualified first-time homebuyer distribution under the Code.
- a payment or distribution made in a taxable year that is five years or
more after
-- the first taxable year for which a contribution was made to the
Owner's Roth IRA, or
-- the first taxable year for which rollover was made to the Owner's
Roth IRA. A non-qualified distribution from a Roth IRA is generally
taxed like a distribution from an IRA. Distributions from a Roth IRA
need not commence at age 70 1/2.
E. FEDERAL INCOME TAX WITHHOLDING
We withhold and send to the U.S. Government a part of the taxable portion of
each distribution unless the payee notifies us before distribution of an
available election not to have any amounts withheld. In certain circumstances,
we may be required to withhold tax. The withholding rates for the taxable
portion of periodic annuity payments are the same as the withholding rates for
wage payments. In addition, the withholding rate for the taxable portion of non-
periodic payments (including withdrawals prior to the maturity date and
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<PAGE> 189
conversions of, or rollovers from, non-Roth IRAs to Roth IRAs) is 10%. The
withholding rate for eligible rollover distributions is 20%.
DISTRIBUTION OF CONTRACTS
The Contracts are sold by licensed insurance agents in those states where the
Contract may be lawfully sold. The agents are also registered representatives of
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc. Sales commissions may vary, but are not expected to
exceed 6.25% of Purchase Payments. In addition to commissions, we may pay
additional promotional incentives, in the form of cash or other compensation, to
selling broker-dealers. These incentives may be offered to certain licensed
broker-dealers that sell or are expected to sell certain minimum amounts during
specified time periods. The Contracts are distributed through the principal
underwriter for the Separate Account:
Investors Brokerage Services, Inc. ("IBS")
1 Kemper Drive
Long Grove, Illinois, 60049
IBS is our wholly-owned subsidiary. IBS enters into selling group agreements
with affiliated and unaffiliated broker-dealers. All of the investment options
are not available to all Owners. The investment options are available only under
Contracts that are sold or serviced by broker-dealers having a selling group
agreement with IBS authorizing the sale of Contracts with the investment options
specified in this Prospectus. Other distributors may sell and service contracts
with different investment options.
VOTING RIGHTS
Proxy materials in connection with any Fund shareholder meeting are delivered to
each Owner with Subaccount interests invested in the Fund as of the record date.
Proxy materials include a voting instruction form. We vote all Fund shares
proportionately in accordance with instructions received from Owners. We will
also vote any Fund shares attributed to amounts we have accumulated in the
Subaccounts in the same proportion that Owners vote. A Fund is not required to
hold annual shareholders' meetings. Funds hold special meetings as required or
deemed desirable for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement.
Owners have voting rights in a Portfolio based upon the Owner's proportionate
interest in the corresponding Subaccount as measured by units. Owners have
voting rights before surrender, the Annuity Date or the death of the Annuitant.
Thereafter, the payee entitled to receive Variable Annuity payments has voting
rights. During the Annuity Period, Annuitants' voting rights decrease as Annuity
Units decrease.
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REPORTS TO CONTRACT OWNERS AND INQUIRIES
After each Contract anniversary, we send Owners a statement showing amounts
credited to each Subaccount and to the Fixed Account Option. In addition, Owners
transferring amounts among the investment options or making additional payments
receive written confirmation of these transactions. We will also send a current
statement upon Owner request. Owners are also sent annual and semi-annual
reports for the Portfolios that correspond to the Subaccounts in which the Owner
invests and a list of the securities held by that Portfolio. In addition, we
calculate for an Owner the portion of a total amount that must be invested in a
selected Guarantee Period so that the portion grows to equal the original total
amount at the expiration of the Guarantee Period.
An Owner may direct inquiries to the selling agent or may call 1-800-621-5001 or
write to Kemper Investors Life Insurance Company, Customer Service, 1 Kemper
Drive, Long Grove, Illinois 60049.
DOLLAR COST AVERAGING
Under our Dollar Cost Averaging program, a predesignated portion of Subaccount
Value is automatically transferred monthly, quarterly, semiannually or annually
for a specified duration to other Subaccounts, Guarantee Periods and the Fixed
Account. The Dollar Cost Averaging program is available only during the
Accumulation Period. An Owner may also elect transfers from the Fixed Account on
a monthly or quarterly basis for a minimum duration of one year. An Owner may
enroll any time by completing our Dollar Cost Averaging form. Transfers are made
on the second Tuesday of the month. We must receive the enrollment form at least
five (5) business days before the transfer date.
An Owner participating in the Dollar Cost Averaging program may allocate all or
a portion of the initial Purchase Payment to the Scudder VLIF Money Market
Subaccount #2. This is the only Subaccount with no deduction for the 1.40%
charge for mortality and expense risks and administrative costs. The Owner must
transfer all Subaccount Value out of Scudder VLIF Money Market Subaccount #2
within one year from the initial Purchase Payment. If an Owner terminates Dollar
Cost Averaging or does not deplete all Subaccount Value in Scudder VLIF Money
Market Subaccount #2 within one year, we automatically transfer any remaining
Subaccount Value to Scudder VLIF Money Market Subaccount #1.
The minimum transfer amount is $100 per Subaccount, Guarantee Period or Fixed
Account. The total Contract Value in an account at the time Dollar Cost
Averaging is elected must be at least equal to the amount designated to be
transferred on each transfer date times the duration selected.
Dollar Cost Averaging ends if:
- the number of designated monthly transfers has been completed
- Contract Value in the transferring account is insufficient to complete
the next transfer; the remaining amount is transferred
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- we receive the Owner's written termination at least five (5) business
days before the next transfer date
- the Contract is surrendered or annuitized.
If the Fixed Account balance is at least $10,000, an Owner may elect automatic
calendar quarter transfers of interest accrued in the Fixed Account to one or
more of the Subaccounts or Guarantee Periods. An Owner may enroll in this
program any time by completing our Dollar Cost Averaging form. Transfers are
made within five business days of the end of the calendar quarter. We must
receive the enrollment form at least ten (10) days before the end of the
calendar quarter.
Dollar Cost Averaging is not available during the Annuity Period.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing Owners to pre-authorize
periodic withdrawals during the Accumulation Period. Owners instruct us to
withdraw selected amounts from the Fixed Account, or from any of the Subaccounts
or Guarantee Periods on a monthly, quarterly, semi-annual or annual basis. The
SWP is available to Owners who request a minimum $100 periodic payment. A market
value adjustment applies to any withdrawals under the SWP from a Guarantee
Period, unless effected within 30 days after the Guarantee Period ends. SWP
withdrawals from the Fixed Account are not available in the first Contract Year
and are limited to the amount not subject to Withdrawal Charges. If the amounts
distributed under the SWP from the Subaccounts or Guarantee Periods exceed the
free withdrawal amount, the Withdrawal Charge is applied on any amounts
exceeding the free withdrawal amount. WITHDRAWALS TAKEN UNDER THE SWP MAY BE
SUBJECT TO THE 10% TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME TAXES AND
WITHHOLDING. Owners interested in SWP may obtain an application and information
concerning this program and its restrictions from us or their agent. We give
thirty days' notice if we amend the SWP. The SWP may be terminated at any time
by the Owner or us.
EXPERTS
[TO BE UPDATED BY AMENDMENT]
The consolidated balance sheet of KILICO as of December 31, 1997 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the year ended December 31, 1997 have been included herein and in the
registration statement in reliance upon the report of PricewaterhouseCoopers
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. The
consolidated balance sheet of KILICO as of December 31, 1996 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the period from January 4, 1996 to December 31, 1996 and for the year ended
December 31, 1995 have been included herein and in the registration statement in
reliance upon the report of KPMG LLP,
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<PAGE> 192
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG LLP covering KILICO's financial statements referred to above contains an
explanatory paragraph that states as a result of the acquisition of its parent,
Kemper Corporation, the consolidated financial information for the period after
the acquisition is presented on a different cost basis than that for the period
before the acquisition and, therefore, is not comparable.
LEGAL MATTERS
Legal matters with respect to Our organization, Our authority to issue annuity
contracts and the validity of the Contract have been passed upon by Frank
Julian, our Associate General Counsel. Jorden Burt Boros Cicchetti Berenson &
Johnson, Washington, D.C., has advised us on certain legal matters concerning
federal securities laws applicable to the issue and sale of the Contracts.
SPECIAL CONSIDERATIONS
We reserve the right to amend the Contract to meet the requirements of federal
or state laws or regulations. We will notify the Owner in writing of these
amendments.
An Owner's rights under a Contract may be assigned as provided by law. An
assignment will not be binding upon us until we receive a written copy of the
assignment. The Owner is solely responsible for the validity or effect of any
assignment. The Owner, therefore, should consult a qualified tax adviser
regarding the tax consequences, as an assignment may be a taxable event.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934 and file reports and other information with the SEC. These reports and
other information can be inspected and copied at the SEC's public reference
facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500 West
Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies also
can be obtained from the SEC's Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
We have filed registration statements (the "Registration Statements") relating
to the Contracts with the SEC under the Securities Act of 1933. This Prospectus
has been filed as part of the Registration Statements and does not contain all
of the information set forth in the Registration Statements. These Registration
Statements contain further information about Us and the Contracts. The
Registration Statements may be inspected and copied, and copies can be obtained
at prescribed rates, as mentioned above.
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BUSINESS
[TO BE UPDATED BY AMENDMENT]
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. KILICO is
licensed in the District of Columbia and all states except New York. KILICO is a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company. Kemper Corporation is a wholly-owned subsidiary of Zurich Holding
Company of America, which is a wholly-owned subsidiary of Zurich Insurance
Company ("Zurich"). Zurich is a wholly-owned subsidiary of Zurich Financial
Services ("ZFS"). ZFS was formed in the September, 1998 merger of the Zurich
Group with the financial services business of B.A.T. Industries. ZFS is owned by
Zurich Allied A.G. and Allied Zurich p.l.c. fifty-seven percent and forty-three
percent, respectively.
CORPORATE CONTROL EVENTS
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 that change in
control, Zurich and Insurance Partners owned 80 percent and 20 percent,
respectively, of Kemper and therefore KILICO. On February 27, 1998, Zurich
acquired Insurance Partner's remaining 20 percent interest for cash. As a result
of this transaction, Kemper and KILICO became wholly-owned subsidiaries of
Zurich.
The acquisition of KILICO was accounted for using the purchase method of
accounting. The consolidated financial statements of KILICO prior to January 4,
1996, were prepared on a historical cost basis and have been labeled as
"preacquisition" throughout this Prospectus.
Under purchase accounting, KILICO's assets and liabilities have been marked to
their relative fair values as of the acquisition date. The difference between
the allocated cost of $745.6 million of acquiring KILICO and the net fair values
of KILICO's assets and liabilities as of the acquisition date resulted in $254.9
million of goodwill. KILICO originally began to amortize goodwill on a straight-
line basis over twenty-five years, however, in the fourth quarter of 1997,
KILICO changed its amortization period to twenty years. The change in
amortization periods was made to conform to Zurich's accounting practices and
policies and resulted in an increase in goodwill amortization of $5.1 million in
1997. KILICO has presented January 4, 1996 (the acquisition date) as the opening
purchase accounting balance sheet for comparative purposes, where appropriate,
throughout this Prospectus.
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.
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<PAGE> 194
(See note captioned "Summary of Significant Accounting Policies" in the notes to
the consolidated financial statements below.)
STRATEGIC INITIATIVES
Since the early 1990's, KILICO has intensified the management of its real
estate-related investments due to adverse market conditions. KILICO also
successfully implemented strategies over the last several years to reduce both
its joint venture operating losses and the level of its real estate-related
investments. These strategies included individual property sales, refinancings
and restructurings, as well as bulk sale transactions completed in December 1995
in anticipation of the 1996 change in control. As a result of these strategies,
KILICO reduced its holdings of real estate-related investments from 36.2 percent
of its total invested assets and cash at year-end 1991 to 4.9 percent at
year-end 1997.
The management, operations and strategic directions of KILICO were also
integrated by the end of 1993 with those of another Kemper subsidiary, Federal
Kemper Life Assurance Company ("FKLA"). The integration streamlined management,
controlled costs, improved profitability, increased operating efficiencies and
productivity, and helped to expand both companies' distribution capabilities.
Headquartered in Long Grove, Illinois, FKLA markets term and interest-sensitive
life insurance, as well as certain annuity products through brokerage general
agents and other independent distributors.
Beginning in 1995, KILICO also began to introduce and expand new and existing
product lines. In late 1995, KILICO began to sell term life insurance products
in order to balance its product mix and asset-liability structure. Over the last
three years, KILICO increased the competitiveness of its variable annuity
products by adding multiple variable subaccount investment options and
investment managers to existing variable annuity products. In 1996, KILICO
introduced a registered flexible individual variable life insurance product and
in 1997 KILICO introduced a non-registered individual and group variable
bank-owned life insurance contract ("BOLI") and a series of individual variable
life insurance contracts.
NARRATIVE DESCRIPTION OF BUSINESS
KILICO offers both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual term
life, universal life and individual and group variable life insurance products
through various distribution channels. KILICO offers investment-oriented
products, guaranteed returns or a combination of both, to help policyholders
meet multiple insurance and financial objectives. Financial institutions,
securities brokerage firms, insurance agents and financial planners are
important distribution channels for KILICO's products. KILICO's sales mainly
consist of deposits received on certain long duration annuity and variable life
insurance contracts as well as reinsurance premiums assumed from FKLA beginning
in 1996. (See note captioned "Reinsurance" in the notes to the consolidated
financial statements and see the table captioned "Sales" below.)
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<PAGE> 195
KILICO's fixed and variable annuities generally have surrender charges that are
a specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
Over the last several years, in part reflecting the current interest rate
environment, KILICO has increased its emphasis on marketing its existing and new
separate account products. Unlike the fixed-rate annuity business where KILICO
manages spread revenue, variable annuities pose minimal investment risk for
KILICO, as policyholders invest in one or more of several underlying investment
funds. KILICO, in turn, receives administrative fee revenue as well as cost of
insurance charges which compensate KILICO for providing life insurance coverage
to the contractholder potentially in excess of their cash surrender values.
As a result of this strategy, KILICO's separate account assets and related sales
of its variable annuity and life products have increased as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
------------------- ----------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Separate account assets................. $5,122.0 $2,127.2 $1,761.1
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Variable annuity sales................. $ 259.8 $254.6 $ 151.1
Variable life sales.................... 2,708.6 .2 --
-------- ------ --------
Total separate account sales......... $2,968.4 $254.8 $ 151.1
======== ====== ========
</TABLE>
Rating improvements in 1996 (see "Rankings and ratings" below) and the 1996
change in control also helped to increase KILICO's sales in 1997 and 1996,
compared with 1995.
In order to increase variable annuity sales, KILICO introduced Kemper PASSPORT
in 1992. Kemper PASSPORT is a variable and market value adjusted annuity
featuring a choice of investment portfolios, an increasing estate benefit,
tax-free transfers and guaranteed rates for a variety of terms. In 1994, KILICO
changed Kemper PASSPORT from a single premium annuity to one with a flexible
premium structure and also added a small capitalization equity subaccount as
another investment portfolio option. In 1995 and 1996, KILICO also added several
new subaccounts and new investment managers as investment portfolio choices for
certain purchasers of the Kemper Advantage III variable annuity product. During
late 1996, KILICO introduced POWER V, a registered flexible premium variable
life insurance product. During mid-1997, KILICO also introduced variable BOLI
which is primarily marketed to banks and other large corporate entities and a
series of non-registered variable individual universal life insurance contracts
which are marketed primarily to high net worth individuals. These products are
being distributed by Investors Brokerage Services, Inc., ("IBS") a wholly-owned
subsidiary of KILICO. Excluding these contracts
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<PAGE> 196
distributed by IBS which accounted for $2,705.8 million of KILICO's first year
sales, INVEST Financial Corporation, ("INVEST") an affiliated company until June
28, 1996, and certain other unrelated companies of INVEST's new parent First
American National Bank, and EVEREN Securities, Inc., an affiliated company until
September 13, 1995, accounted for approximately 23.0 percent and 5.0 percent,
respectively, in 1997 of KILICO's first-year sales, compared with 24 percent and
12 percent, respectively, in 1996.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted general account annuity sales for KILICO over the
last several years. KILICO's general account fixed annuity sales were as follows
(in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
General account fixed annuity sales...... $145.7 $140.6 $247.6
====== ====== ======
</TABLE>
Beginning in early 1995, KILICO began raising crediting rates on certain of its
existing and new general account products, reflecting both competitive
conditions and a rising interest rate environment. As a result of these actions,
sales of general account annuities increased. During late 1995, as interest
rates fell, KILICO began reducing crediting rates on certain of its existing and
new general account products reflecting both competitive conditions and the
falling interest rate environment. As a result of these events, as well as a
strong stock and bond market during 1996 and most of 1997, which influenced
potential buyers of fixed annuity products to purchase variable annuity
products, sales of general account annuities have increased only slightly in
1997, compared with 1996.
Beginning in 1995, KILICO began to sell term life insurance products in order to
balance its product mix and asset-liability structure. During 1997 and 1996,
KILICO also assumed $21.1 million and $7.3 million, respectively, of term life
insurance premiums from FKLA. Excluding the amounts assumed from FKLA, KILICO's
total term life sales, including new and renewal premiums, net of reinsurance
ceded, amounted to $1.1 million in 1997, compared with $565 thousand in 1996 and
$236 thousand in 1995.
FEDERAL INCOME TAX DEVELOPMENTS
In early 1998, the Clinton Administration's Fiscal Year 1998 Budget ("Budget")
was released and contained certain proposals to change the taxation of
non-qualified fixed and variable annuities and variable life insurance
contracts. It is currently unknown whether or not such proposals will be
accepted, amended or omitted in the final 1999 Budget approved by Congress. If
the current Budget proposals are accepted, certain of KILICO's non-qualified
fixed and variable annuities and certain of its variable life insurance
products, including BOLI and the nonregistered individual variable universal
life insurance contract introduced during 1997, may no longer be tax advantaged
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products and therefore no longer attractive to those customers who purchase them
because of their favorable tax attributes. Additionally, sales of such products
during 1998 may also be negatively impacted until the likelihood of the current
proposals being enacted into law has be determined.
YEAR 2000 COMPLIANCE
Many existing computer programs were originally designed without considering the
impact of the year 2000 and currently use only two digits to identify the year
in the date field. This issue affects nearly all companies and organizations and
could cause computer applications and systems to fail or create erroneous
results to occur for any transaction with a date of January 1, 2000, or later.
Many companies must undertake major projects to address the year 2000 issue and
each company's costs and uncertainties will depend on a number of factors,
including its software and hardware, and the nature of the industry. Companies
must also coordinate with other entities with which they electronically
interact, including suppliers, customers, creditors and other financial services
institutions.
If a company does not successfully address its year 2000 issues it could face
material adverse consequences in the form of lawsuits against the company, lost
business, erroneous results and substantial operating problems after January 1,
2000.
KILICO has taken substantial steps over the last several years to ensure that
its systems will be compliant for the year 2000. Such steps have included the
replacement of older systems with new systems which are already compliant. In
1996, KILICO replaced its investment accounting system and in 1997 KILICO
replaced its general ledger and accounts payable system. KILICO has also ensured
that new systems developed to support new product introductions in 1996 and 1997
are already year 2000 compliant. Data processing expenses related solely to
bringing KILICO's systems in compliance with the year 2000 amounted to $88
thousand in 1997 and KILICO anticipates that it will cost an additional $895
thousand to bring all remaining systems into compliance. KILICO has also
undertaken steps which require that all other entities with which KILICO
electronically interacts, including suppliers and other financial services
institutions, attest in writing to KILICO that their systems are year 2000
compliant.
NAIC RATIOS
The National Association of Insurance Commissioners (the "NAIC") annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System ("IRIS") ratios. There presently are twelve IRIS ratios. The
primary purpose of the ratios is to provide an "early warning" of any negative
developments. The NAIC reports the ratios to state regulators who may then
contact the companies if three or more ratios fall outside the NAIC's "usual
ranges".
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Based on statutory financial data as of December 31, 1997, KILICO had three
ratios outside the usual ranges, the change in reserving ratio, the change in
premium ratio and the change in product mix ratio. KILICO's change in reserving
ratio reflected the level of interest-sensitive life surrenders and withdrawals
during 1997, as well as the 1997 reinsurance agreement with FKLA. KILICO's
change in premium ratio and change in product mix ratio reflected the $2.7
billion increase in BOLI premiums received during 1997. Other than certain
states requesting quarterly financial reporting and/or explanations of the
underlying causes for certain ratios, no state regulators have taken any action
due to KILICO's IRIS ratios for 1997 or earlier years.
GUARANTY ASSOCIATION ASSESSMENTS
From time to time, mandatory assessments are levied on KILICO by life and health
guaranty associations of most states in which KILICO is licensed, to cover
losses to policyholders of insolvent or rehabilitated insurance companies. These
associations levy assessments (up to prescribed limits) on all member insurers
in a particular state, in order to pay claims on the basis of the proportionate
share of premiums written by member insurers in the lines of business in which
the insolvent or rehabilitated insurer engaged. These assessments may be
deferred or forgiven in certain states if they would threaten an insurer's
financial strength, and, in some states, these assessments can be partially
recovered through a reduction in future premium taxes.
In the early 1990s, there were a number of failures of life insurance companies.
KILICO's financial statements include provisions for all known assessments that
will be levied against KILICO by various state guaranty associations as well as
an estimate of amounts (net of estimated future premium tax recoveries) that
KILICO believes will be assessed in the future for failures which have occurred
to date and for which the life insurance industry has estimated the cost to
cover losses to policyholders. Assessments levied against KILICO and charged to
expense in 1997, 1996 and 1995 amounted to $1.2 million, $601 thousand and $5.8
million, respectively. Such amounts relate to accrued guaranty fund assessments
of $4.8 million, $5.8 million and $5.0 million at December 31, 1997, 1996 and
1995, respectively. Additional assessments charged to expense reflect accruals
for the life insurance industry's new or revised loss estimates for certain
insolvent insurance companies.
RISK-BASED CAPITAL
Since the early 1990s, reflecting a recessionary environment and the
insolvencies of a few large life insurance companies, both state and federal
legislators have increased scrutiny of the existing insurance regulatory
framework. While various initiatives, such as the codification of statutory
accounting principles, are being considered for future implementation by the
NAIC, it is not presently possible to predict the future impact of potential
regulatory changes on KILICO.
53
<PAGE> 199
Under asset adequacy and risk-based capital rules in Illinois, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to assure that
reserves and assets are adequate to cover liabilities under a variety of
economic scenarios. The focus of the capital rules is a risk-based formula that
applies prescribed factors to various risk elements in an insurer's business and
investments to develop a minimum capital requirement designed to be proportional
to the amount of risk assumed by the insurer. KILICO has capital levels
substantially exceeding any which would mandate action under the risk-based
capital rules and is in compliance with applicable asset adequacy rules.
RESERVES AND REINSURANCE
The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
General account annuities..................... $3,137 $3,507
Interest-sensitive life insurance and other... 709 743
Term life reserves............................ 10 7
Ceded future policy benefits.................. 383 427
------ ------
Total............................... $4,239 $4,684
====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions in which KILICO insured liabilities of approximately
$516 million in 1992 and $416 million in 1991 with Fidelity Life Association, A
Mutual Legal Reserve Company ("FLA"), an affiliated mutual insurance company.
FLA shares directors, management, operations and employees with FKLA pursuant to
an administrative and management services agreement. FLA produces policies not
produced by FKLA or KILICO as well as other policies similar to certain FKLA
policies. At December 31, 1997 and 1996, KILICO's reinsurance recoverable from
FLA related to these coinsurance transactions totaled approximately $382.6
million and $427.2 million, respectively. Utilizing FKLA's employees, KILICO is
the servicing company for this coinsured business and is reimbursed by FLA for
the related servicing expenses.
During December 1997, KILICO entered into a funds held reinsurance agreement
with another Zurich affiliated company, EPICENTRE Reinsurance (Bermuda) Limited
("EPICENTRE"). Under the terms of this agreement, KILICO ceded, on a yearly
renewable term basis, ninety percent of the net amount at risk (death benefit
payable to the insured less the insured's separate account cash surrender value)
related to variable BOLI, which is held in KILICO's separate accounts. During
1997, KILICO ceded to EPICENTRE approximately $24.3 million of separate account
fees (cost of insurance charges) paid to KILICO by these policyholders for the
life insurance coverage provided under the terms of each separate account
contract. KILICO has also withheld approximately $23.4 million of such funds due
to EPICENTRE under the
54
<PAGE> 200
terms of the reinsurance agreement as a component of benefits and funds payable
in the accompanying consolidated balance sheet in this Prospectus. KILICO
remains primarily liable to its policyholders for these amounts.
During 1996, KILICO assumed on a yearly renewable term basis approximately $14.4
billion (face amount) of term life insurance from FKLA. As a result of this
transaction, KILICO also recorded reserves in 1997 and 1996 of approximately
$7.9 million and $7.3 million, respectively. (See the note captioned
"Reinsurance" in the notes to the consolidated financial statements below.)
COMPETITION
KILICO is in a highly competitive business and competes with a large number of
other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with securities
brokerage and investment advisory firms as well as other institutions that
manage assets, produce financial products or market other types of investment
products.
KILICO's principal methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents. Certain of
KILICO's financial strength ratings and claims-paying/performance ratings,
however, were lower in 1995 than in earlier years, and were under review in
1995, due to uncertainty with respect to Kemper's and KILICO's ownership. These
ratings impacted sales efforts in certain markets; however, increases in
KILICO's financial strength ratings and claims-paying/performance ratings in
January 1996 favorably impacted variable annuity sales during 1997 and 1996 and
should continue to favorably impact future sales.
To address its competition, KILICO has adopted certain business strategies.
These include systematic reductions of investment risk and strengthening of its
capital position; continued focus on existing and new variable annuity and
variable life insurance products; distribution through diversified channels; and
ongoing efforts to continue as a low-cost provider of insurance products and
high-quality services to agents and policyholders through the use of technology.
EMPLOYEES
At December 31, 1997, KILICO utilized the services of approximately 620
employees of FKLA, which are also shared with FLA and Zurich Life Insurance
Company of America ("ZLICA"). On January 5, 1996, KILICO, FKLA, FLA and ZLICA
began to operate under the trade name Zurich Kemper Life. On July 1, 1996,
Kemper acquired 100 percent of the issued and outstanding common stock of ZLICA
from Zurich.
55
<PAGE> 201
REGULATION
KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions in which KILICO is licensed to
do business. These departments enforce laws and regulations designed to assure
that insurance companies maintain adequate capital and surplus, manage
investments according to prescribed character, standards and limitations and
comply with a variety of operational standards. The departments also make
periodic examinations of individual companies and review annual and other
reports on the financial condition of each company operating within their
respective jurisdictions. Regulations, which often vary from state to state,
cover most aspects of the life insurance business, including market practices,
forms of policies and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
In addition, certain of KILICO's variable life insurance and annuity products,
and the related separate accounts, are subject to regulation by the Securities
and Exchange Commission (the "SEC").
KILICO believes it is in compliance in all material respects with all applicable
regulations.
INVESTMENTS
A changing marketplace has affected the life insurance industry and to
accommodate customers' increased preference for safety over higher yields,
KILICO has systematically reduced its investment risk and strengthened its
capital position.
KILICO's cash flow is carefully monitored and its investment program is
regularly and systematically planned to provide funds to meet all obligations
and to optimize investment return. For securities, portfolio management is
handled by an affiliated company, Scudder Kemper Investments, Inc. ("SKI"),
formerly Zurich Kemper Investments, Inc. ("ZKI"), and its subsidiaries and
affiliates, with KILICO's real estate-related investments being handled by a
majority-owned Kemper real estate subsidiary. Investment policy is directed by
KILICO's board of directors. KILICO's investment strategies take into account
the nature of each annuity and life insurance product, the respective crediting
rates and the estimated future policy benefit maturities. See "INVESTMENTS"
below.
56
<PAGE> 202
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this report
and elsewhere (such as in other filings by KILICO with the Securities and
Exchange Commission, press releases, presentations by KILICO or its management
or oral statements) relative to markets for KILICO's products and trends in
KILICO's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend,"
and other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (i) general economic conditions and other factors, including
prevailing interest rate levels and stock market performance, which may affect
the ability of KILICO to sell its products, the market value of KILICO's
investments and the lapse rate and profitability of KILICO's contracts; (ii)
KILICO's ability to achieve anticipated levels of operational efficiencies
through certain cost-saving initiatives; (iii) customer response to new
products, distribution channels and marketing initiatives; (iv) mortality,
morbidity, and other factors which may affect the profitability of KILICO's
insurance products; (v) changes in the federal income tax laws and regulations
which may affect the relative tax advantages of some of KILICO's products; (vi)
increasing competition which could affect the sale of KILICO's products; (vii)
regulatory changes or actions, including those relating to regulation of
financial services affecting (among other things) bank sales and underwriting of
insurance products, regulations of the sale and underwriting and pricing of
insurance products; and (viii) the risk factors or uncertainties listed from
time to time in KILICO's other filings with the Securities and Exchange
Commission.
PROPERTIES
[TO BE UPDATED BY AMENDMENT]
KILICO shares 99,000 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois.
LEGAL PROCEEDINGS
We have been named as defendant in certain lawsuits incidental to Our insurance
business. Based upon the advice of legal counsel, Our management believes that
the resolution of these various lawsuits will not result in any material adverse
effect on Our consolidated financial position.
57
<PAGE> 203
[TO BE UPDATED BY AMENDMENT]
SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
six months ended June 30, 1998 and 1997 and for the five years ended December
31, 1997 and for the opening balance sheet as of the acquisition date, January
4, 1996. Such information should be read in conjunction with KILICO's
consolidated financial statements and notes thereto included in this Prospectus.
All amounts are shown in millions.
<TABLE>
<CAPTION>
PREACQUISITION
SIX MONTHS ENDED ----------------------------------
JUNE 30 DECEMBER 31
--------------------- DECEMBER 31 DECEMBER 31 JANUARY 4 ----------------------------------
1998 1997 1997 1996 1996 1995 1994 1993
---- ---- ----------- ----------- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE......... $ 208.0 $ 188.3 $ 425.5 $ 356.2 $ -- $ 68.1(1) $ 330.5 $ 337.4
========= ======== ========= ======== ======== ======== ======== ========
NET INCOME EXCLUDING
REALIZED INVESTMENT
RESULTS............. $ 13.7 $ 17.3 $ 31.9 $ 25.6 $ -- $ 74.2 $ 61.9 $ 33.7
========= ======== ========= ======== ======== ======== ======== ========
NET INCOME (LOSS)..... $ 25.1 $ 23.2 $ 38.7 $ 34.4 $ -- $ (133.0)(1) $ 26.4 $ 14.0
========= ======== ========= ======== ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account
assets.............. $ 5,941.1 $2,382.4 $ 5,122.0 $2,127.2 $1,761.1 $1,761.1 $1,508.0 $1,499.5
========= ======== ========= ======== ======== ======== ======== ========
Total assets.......... $11,159.5 $7,708.7 $10,589.7 $7,717.9 $7,682.7 $7,581.7 $7,537.1 $8,113.7
========= ======== ========= ======== ======== ======== ======== ========
Future policy
benefits............ $ 3,662.0 $4,083.4 $ 3,856.9 $4,256.5 $4,585.1 $4,573.2 $4,843.7 $5,040.0
========= ======== ========= ======== ======== ======== ======== ========
Stockholder's
equity.............. $ 899.7 $ 738.4 $ 865.6 $ 751.0 $ 745.6 $ 605.9 $ 434.0 $ 654.6
========= ======== ========= ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Total revenue and net income (loss) for 1995 were adversely impacted by real
estate-related investment losses. Such losses reflect a change in KILICO's
strategy with respect to its real estate-related investments in connection
with the January 4, 1996 acquisition of Kemper by the Zurich-led investor
group. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
58
<PAGE> 204
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
[TO BE UPDATED BY AMENDMENT]
As discussed in the note captioned "Summary of Significant Accounting Policies"
in the notes to the consolidated financial statements, Kemper, and therefore
KILICO, were acquired on January 4, 1996, by an investor group led by Zurich. In
connection with the acquisition, KILICO's assets and liabilities were marked to
their respective fair values as of the acquisition date in conformity with the
purchase accounting method required under generally accepted accounting
principles.
KILICO's financial statements as of January 4, 1996, and as of and for the year
ended December 31, 1996, have been adjusted to reflect the effects of such
purchase accounting adjustments. KILICO's financial statements for the year
ended December 31, 1995 has been prepared on an historical cost basis and do not
reflect such purchase accounting adjustments.
RESULTS OF OPERATIONS
KILICO recorded net income of $38.7 million in 1997, compared with net income of
$34.4 million in 1996 and with a net loss of $133.0 million in 1995. The
increase in net income in 1997, compared with 1996, was due to a significant
increase in operating earnings before the amortization of goodwill, offset by an
increase in goodwill amortization and a slight decline in net realized capital
gains. The increase in net income in 1996, compared with 1995, was primarily due
to a decrease in the level of real estate-related realized investment losses.
KILICO's strategy with respect to its real estate-related investments changed
dramatically as of year-end 1995 in connection with the Zurich-led investor
group's acquisition of Kemper. This change, as further discussed below, resulted
in significant reductions in real estate-related investments and significant
realized capital losses in the second half of 1995.
The following table reflects the components of net income (loss):
NET INCOME (LOSS)
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
Operating earnings before amortization
of goodwill......................... $ 47.2 $ 35.8 $ 74.2
Amortization of goodwill.............. (15.3) (10.2) --
Net realized investment gains
(losses)............................ 6.8 8.8 (207.2)
------ ------ -------
Net income (loss)........... $ 38.7 $ 34.4 $(133.0)
====== ====== =======
</TABLE>
The following table reflects the major components of realized investment results
included in net income (loss) above. (See "INVESTMENTS" below,
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<PAGE> 205
and the note captioned "Invested Assets and Related Income" in the notes to the
consolidated financial statements.)
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
Real estate-related gains (losses).... $ 12.8 $ 11.4 $(211.6)
Fixed maturity write-downs............ (2.8) (.9) (4.7)
Other gains (losses), net............. (3.2) (1.7) 9.1
------ ------ -------
Total....................... $ 6.8 $ 8.8 $(207.2)
====== ====== =======
</TABLE>
The higher level of real estate-related losses in 1995, compared with both 1997
and 1996, reflected realized capital losses predominately from real
estate-related bulk sale transactions in December 1995, as well as a higher
level of write-downs on real estate-related investments. These sales and
write-downs in 1995, reflect Zurich's and Insurance Partners' strategies,
adopted by KILICO, with respect to the disposition of real estate-related
investments. Other realized investment gains and losses for 1997, 1996 and 1995
relate primarily to the sale of fixed maturity investments. The fixed maturity
losses generated in 1997 and 1996 arose primarily from the sale of fixed
maturity investments, consisting of lower yielding U.S. Treasury bonds,
collateralized mortgage obligations and corporate bonds, related to ongoing
repositionings of KILICO's fixed maturity investment portfolio. The proceeds
from the repositionings, together with cash and short-term investments, were
reinvested into higher yielding corporate bonds and asset-backed securities in
1997 and 1996. Real estate-related gains in both 1997 and 1996, continue to
reflect KILICO's strategy to reduce its exposure to real estate-related
investments, as well as improving real estate market conditions in most areas of
the country. Fixed maturity write-downs in 1997 primarily reflect
other-than-temporary declines in value of certain U.S. dollar denominated fixed
maturity investments which have significant exposure to countries in Southeast
Asia. (See "INVESTMENTS" below.)
Operating earnings before the amortization of goodwill increased to $47.2
million in 1997, compared with $35.8 million in 1996. Operating earnings
increased in 1997 before the amortization of goodwill, compared with 1996,
primarily due to an increase in spread revenue (investment income earned less
interest credited), an increase in separate account fees and charges, an
increase in premium income and an increase in the deferral of insurance
acquisition costs, offset by an increase in claims incurred and other
policyholder benefits, taxes, licenses and fees, commissions, operating expenses
and an increase in the amortization of the value of business acquired.
Operating earnings before the amortization of goodwill decreased to $35.8
million in 1996, compared with $74.2 million in 1995, primarily due to purchase
accounting adjustments which reduced investment income and increased expenses.
60
<PAGE> 206
Investment income was lower in 1996, compared with 1995, primarily reflecting
purchase accounting adjustments related to the amortization of premiums on fixed
maturity investments. Under purchase accounting, the fair value of KILICO's
fixed maturity investments as of January 4, 1996 became KILICO's new cost basis
in 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 KILICO's fixed maturity investments
was approximately $133.9 million greater than original par. The amortization of
such premiums reduced investment income by approximately $14.1 million in 1997
and $22.7 million in 1996, compared with 1995.
Investment income and interest credited also declined in 1997, compared with
1996 and 1995, as a result of a decrease in both total invested assets and
liabilities for future policy benefits to policyholders. Such decreases were the
result of surrender and withdrawal activity over the last three years.
Investment income was also negatively impacted during 1996, compared with 1995,
by a higher level of cash and short-term investments held in the first quarter
of 1996. The increase in cash and short-term investments in the first quarter of
1996 was caused in part by the cash proceeds received from bulk sales of real
estate-related investments in late December 1995.
Investment income was positively impacted in 1997 and 1996 from the benefits of
capital contributions to KILICO and from the above-mentioned repositionings of
KILICO's investment portfolio.
The following table reflects KILICO's sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
PREACQUISITION
--------------
1997 1996 1995
-------- ------ --------------
<S> <C> <C> <C>
Annuities:
General account..................... $ 145.7 $140.6 $247.6
Separate account.................... 259.8 254.6 151.1
-------- ------ ------
Total annuities.................. 405.5 395.2 398.7
-------- ------ ------
Life Insurance:
Separate account bank-owned variable
universal life ("BOLI").......... 2,700.0 -- --
Separate account variable universal
life............................. 8.6 .2 --
Term life........................... 22.2 7.8 .2
Interest-sensitive life............. -- .6 .2
-------- ------ ------
Total life....................... 2,730.8 8.6 .4
-------- ------ ------
Total sales............ $3,136.3 $403.8 $399.1
======== ====== ======
</TABLE>
61
<PAGE> 207
Sales of annuity products consist of total deposits received. General account
annuity sales increased only slightly in 1997, compared with 1996, due to the
current low interest rate environment. The decrease in 1996 general account
(fixed annuity) sales, compared with 1995, is reflective of the declining
interest rate environments and the stock and bond markets during 1996 and 1995,
respectively, which made variable annuities more attractive to consumers in
1996, and fixed annuities more attractive to consumers during 1995.
The increase in separate account (variable sales) in 1997, compared with 1996
and 1995, was in part due to improvements in KILICO's financial strength and
performance ratings in January 1996, the addition of new separate account
investment fund options, the addition of new investment fund managers and a
strong overall underlying stock and bond market. Sales of variable annuities not
only increase administrative fees earned but they also pose minimal investment
risk for KILICO, as policyholders invest in one or more of several underlying
investment funds which invest in stocks and bonds. KILICO believes that the
increase in its financial strength and performance ratings in January 1996
together with KILICO's association with Zurich, will continue to assist in
KILICO's future sales efforts.
Beginning in late 1995, KILICO introduced a registered flexible individual
variable life insurance product and in 1997 KILICO introduced several non-
registered variable universal life insurance contracts, BOLI and a series of
individual universal life insurance contracts. Sales of these separate account
variable products, like variable annuities, pose minimal investment risk for
KILICO as policyholders also invest in one or more underlying investment funds
which invest in stocks and bonds. KILICO receives premium tax and DAC tax
expense loads from certain contract holders, as well as administrative fees and
cost of insurance charges which compensate KILICO for providing life insurance
coverage to the contractholders in excess of their cash surrender values. Face
amount of new variable universal life insurance business issued amounted to
$59.6 billion in 1997, compared with $4.0 million in 1996.
Beginning in 1995, KILICO began to sell low-cost term life insurance products
offering initial level premiums for 5, 10, 15 and 20 years in order to balance
its product mix and asset-liability structure. In 1997 and 1996, KILICO also
assumed $21.1 million and $7.3 million, respectively, of term life insurance
premiums from FKLA. (See the note captioned "Reinsurance" in the notes to the
consolidated financial statements.) Excluding the amounts assumed from FKLA,
KILICO's total term life sales, including new and renewal premiums, amounted to
$1.1 million in 1997, compared with $565 thousand in 1996 and $236 thousand in
1995. Face amount of new term business issued during 1997, 1996 and 1995
amounted to approximately $278 million, $187 million and $120 million,
respectively.
Included in separate account fees and charges are administrative fees received
from KILICO's separate account products of $31.0 million in 1997, compared with
$25.3 million and $21.9 million in 1996 and 1995, respectively. Administrative
fee revenue increased in each of the last three years due to growth in average
separate account assets.
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<PAGE> 208
Also included in separate account fees and charges in 1997 are cost of insurance
charges related to variable universal life insurance, primarily BOLI, of $27.6
million, of which $24.3 million of such fees were ceded to EPICENTRE. (See the
note captioned "Reinsurance" in the notes to the consolidated financial
statements.) Separate account fees and charges in 1997 also include premium tax
expense loads of $51.1 million related to BOLI.
Other income includes surrender charge revenue of $5.2 million in 1997, compared
with $5.4 million and $7.7 million in 1996 and 1995, respectively, as total
general account and separate account policyholder surrenders and withdrawals
decreased in 1997 and 1996, compared with 1995. The decrease in surrender charge
revenue in 1997, compared with 1996 and 1995 also reflects that 49 percent of
KILICO's fixed and variable annuity liabilities, excluding BOLI, at December 31,
1997 are subject to minimal (5 percent or less) or no surrender charges,
compared with 57 percent in 1996 and 56 percent in 1995. Also included in other
income in 1995 is a ceding commission experience adjustment which resulted in
income of $4.4 million related to certain reinsurance transactions entered into
by KILICO during 1992. (See the note captioned "Reinsurance" in the notes to the
consolidated financial statements.)
POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
(in millions)
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
General account........................ $703.1 $652.0 $755.9
Separate account....................... 236.2 196.7 205.6
------ ------ ------
Total............................. $939.3 $848.7 $961.5
====== ====== ======
</TABLE>
Reflecting the current interest rate environment and other competitive market
factors, KILICO adjusts its crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and withdrawal
activity. KILICO can also improve spread revenue over time by increasing
investment income. Beginning in late 1994, as a result of rising interest rates
and other competitive market factors, KILICO began to increase crediting rates
on certain interest-sensitive products which adversely impacted spread income.
The declines in interest rates during the last three quarters of 1995, however,
and the current interest rate environment during 1996 and 1997, have mitigated
at present, competitive pressures to increase existing renewal crediting rates
further.
General account surrenders, withdrawals and death benefits increased $51.1
million in 1997, compared with 1996, reflecting an increase of $18.2 million in
claims incurred as a result of the aforementioned term life insurance business
assumed from FKLA as well as an increase in overall surrenders and withdrawals
in 1997, compared with 1996. KILICO expects that the level of surrender and
withdrawal activity experienced in 1997 should remain at a similar level in 1998
given current projections for relatively stable interest rates.
Taxes licenses and fees increased in 1997 to $52.6 million of which $51.1
million of this increase was related to premium taxes on BOLI. Excluding the
taxes
63
<PAGE> 209
due on BOLI, of which KILICO received a corresponding expense load in separate
account fees and other charges, taxes licenses and fees amounted to $1.5
million, compared with $2.2 million in 1996 and $6.9 million in 1995. Taxes,
licenses and fees were lower in 1997 and 1996, compared with 1995, primarily
reflecting the level of guaranty fund assessments in each of those years.
Expenses for such assessments totaled $1.2 million, $601 thousand, and $5.8
million in 1997, 1996 and 1995, respectively. (See "Guaranty association
assessments" above.)
Commissions expense was higher in 1997, compared with both 1996 and 1995, due to
an increase in total sales, excluding BOLI.
Operating expenses declined in 1995, primarily as a result of a decrease in
headcount resulting from the uncertainty concerning KILICO's ownership.
Operating expenses increased in 1997 and 1996, compared with 1995, as a result
of restaffing after the completion of the merger, an increase in evidence costs
related to new term life sales and an increase in data processing expenses. Data
processing expenses increased to $10.8 million in 1997, compared with $4.1
million in 1996 and $3.7 million in 1995, primarily due to infrastructure
improvements related to new product development, a new general ledger and
accounts payable system, development of a data warehouse and costs related to
bringing KILICO's systems in compliance with the year 2000. Data processing
expenses related to bringing KILICO's systems in compliance with the year 2000
amounted to $88 thousand in 1997. KILICO currently anticipates that it will cost
an additional $895 thousand to bring all remaining systems in compliance. (See
"Year 2000 Compliance" above.)
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1997, compared with 1996 and 1995. The deferral of
insurance acquisition costs increased in 1997, compared with both 1996 and 1995
reflecting an increase in commissions expense and operating expenses related
directly to the increase in production of new business.
Operating earnings were negatively impacted by the amortization of insurance
acquisition costs and the amortization of the value of business acquired in 1997
and 1996, compared with the amortization of insurance acquisition costs in 1995.
Deferred insurance acquisition costs, and the related amortization thereof, for
policies sold prior to January 4, 1996 have been replaced under purchase
accounting by the value of business acquired. The value of business acquired
reflects the present value of the right to receive future cash flows from
insurance contracts existing at the date of acquisition. The amortization of the
value of business acquired is calculated assuming an interest rate equal to the
liability or contract rate on the value of the business acquired. (See note
captioned "Summary of Significant Accounting Policies" in the notes to the
consolidated financial statements.) Deferred insurance acquisition costs are
established on all new policies sold after January 4, 1996.
The amortization of the value of business acquired increased in 1997, compared
with 1996, as a result of an increase in net operating earnings related to the
business previously acquired. The amortization of the value of business acquired
in 1997 and 1996 was also adversely affected by net realized capital gains
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<PAGE> 210
in 1997 and 1996, while the net amortization of insurance acquisition costs in
1995, was positively affected by realized capital losses. Net realized capital
gains tend to accelerate the amortization of both the value of business acquired
and deferred insurance acquisition costs as they tend to decrease KILICO's
projected future estimated gross profits. Net realized capital losses tend to
defer such amortization into future periods as they tend to increase KILICO's
projected future estimated gross profits.
The difference between the cost of acquiring KILICO and the net fair value of
KILICO's assets and liabilities as of January 4, 1996 was recorded as goodwill.
During 1996, KILICO began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, KILICO changed its amortization period
to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, KILICO recorded an
increase in amortization expense of $5.1 million during 1997. The amortization
of goodwill increased expenses by $10.2 million in 1996, compared with 1995.
INVESTMENTS
KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors, its
evaluation of risk and return in various markets, consistency with KILICO's
business strategy and investment guidelines approved by the board of directors,
the interest rate environment, liability durations and changes in market and
business conditions.
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C> <C> <C>
Cash and short-term investments... $ 260 5.8% $ 74 1.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1.............. 3,004 67.1 3,231 71.5
NAIC(1) Class 2.............. 651 14.5 621 13.7
Below investment grade:
Performing................... 14 .3 13 .3
Nonperforming................ -- -- 1 --
Joint venture mortgage loans...... 73 1.6 111 2.4
Third-party mortgage loans........ 103 2.3 107 2.4
Other real estate-related
investments..................... 44 1.0 50 1.1
Policy loans...................... 282 6.3 288 6.4
Equity securities................. 25 .6 10 .2
Other............................. 21 .5 14 .4
------ ----- ------ -----
Total(2)................ $4,477 100.0% $4,520 100.0%
====== ===== ====== =====
</TABLE>
- ---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
the notes to the consolidated financial statements.
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<PAGE> 211
FIXED MATURITIES
KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's equity, net of any applicable income tax expense. The aggregate
unrealized appreciation (depreciation) on fixed maturities at December 31, 1997
and 1996 was $24.6 million and $(63.2) million, respectively, compared with no
unrealized appreciation or depreciation, at January 4, 1996 as a result of
purchase accounting adjustments. KILICO does not record a net deferred tax
benefit for the aggregate unrealized depreciation on investments. Fair values
are sensitive to movements in interest rates and other economic developments and
can be expected to fluctuate, at times significantly, from period to period.
At December 31, 1997, investment-grade fixed maturities and cash and short-term
investments accounted for 87.4 percent of KILICO's invested assets and cash,
compared with 86.8 percent at December 31, 1996. Approximately 54.0 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1997,
compared with 58.4 percent at December 31, 1996.
Approximately 35.1 percent of KILICO's investment-grade fixed maturities at
December 31, 1997 were mortgage-backed securities, down from 36.4 percent at
December 31, 1996, due to sales and paydowns during 1997. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. KILICO has not made any investments in interest-only
or other similarly volatile tranches of mortgage-backed securities. KILICO's
mortgage-backed investments are generally of AAA credit quality, and the markets
for these investments have been and are expected to remain liquid. KILICO plans
to continue to reduce its holding of such investments over time.
As a result of the previously discussed repositionings of KILICO's fixed
maturity portfolio, approximately 10.8 percent and 8.8 percent of KILICO's
investment-grade fixed maturities at December 31, 1997 and 1996, respectively,
consisted of corporate asset-backed securities. The majority of KILICO's
investments in asset-backed securities were backed by home equity loans (27.7%),
auto loans (22.3%), manufactured housing loans (17.2%), equipment loans (13.7%),
and commercial mortgage backed securities ("CMBs") (10.7%).
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 KILICO'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
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<PAGE> 212
which would result in reductions of investment income related to such
securities.
At December 31, 1997 and 1996 KILICO had unamortized premiums and discounts
related to mortgage-backed and asset-backed securities as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1997 1996
---- ----
<S> <C> <C>
Unamortized premiums.......................... $19.6 $24.7
===== =====
Unamortized discounts......................... $ 5.2 $ 5.7
===== =====
</TABLE>
KILICO believes that as a result of the purchase accounting adjustments and the
current interest rate environment, anticipated prepayment activity in 1998 is
expected to result in reductions to future investment income similar to or
greater than those reductions experienced by KILICO in 1997.
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.
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<PAGE> 213
The table below provides information about KILICO's mortgage-backed and
asset-backed securities that are sensitive to changes in interest rates. The
expected maturity dates have been calculated on a security by security basis
using prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current interest
rate and economic environment.
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, --------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1997 1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds....... $1,283.6 $219.1 $232.5 $145.1 $92.2 $64.5 $530.2 $1,283.6 $1,283.6
Average yield............. 6.58% 6.60% 6.61% 6.64% 6.64% 6.63% 6.67% 6.58% 6.58%
Asset-backed bonds.......... $ 353.0 $ 18.9 $ 16.9 $ 30.8 $35.5 $47.2 $203.7 $ 353.0 $ 353.0
Average yield............. 6.81% 6.85% 7.04% 7.05% 7.15% 7.13% 7.20% 6.81% 6.81%
CMBs........................ $ 42.2 $ 0.3 $ 0.4 $ 0.4 $ 0.4 $ 8.0 $ 32.7 $ 42.2 $ 42.2
Average yield............. 6.64% 6.64% 6.64% 6.64% 6.64% 6.63% 6.63% 6.64% 6.64%
-------- -------- --------
$1,678.8 $1,678.8 $1,678.8
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1996 1997 1998 1999 2000 2001 THEREAFTER TOTAL 1996
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds......... $1,402.0 $161.4 $239.0 $261.4 $166.1 $ 61.8 $512.3 $1,402.0 $1,402.0
Average yield............... 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83%
Asset-backed
bonds....................... $ 339.3 $ 31.4 $ 38.1 $ 36.6 $ 44.4 $ 51.0 $137.8 $ 339.3 $ 339.3
Average yield............... 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82%
-------- -------- --------
$1,741.3 $1,741.3 $1,741.3
======== ======== ========
</TABLE>
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<PAGE> 214
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1997, is 3.8 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately 1.0
year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.3 years.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1996, was 4.6 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately 1.7
years, while a 200 basis point decrease in interest rates would have decreased
the weighted average maturity by approximately 1.3 years.
As of December 31, 1997, KILICO had $54.7 million of U.S. dollar denominated
fixed maturity investments, after write-downs for other-than-temporary declines
in value, which have significant exposure to countries in Southeast Asia.
Approximately $5.6 million of such securities were from Korea, $21.9 million
were from Hong Kong, China, $20.4 million were from Malaysia and the remainder
of such bonds were from a United Kingdom bank with most of its loans issued to
countries in Southeast Asia. Write-downs on such securities, which were
considered to be other-than-temporary, as of December 31, 1997 amounted to $3.1
million. There can be no assurance that the current estimate for
other-than-temporary declines in value for such securities will prove accurate
over time due to changing economic conditions in Southeast Asia.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 9 issuers at December 31, 1997, totaled 0.3 percent
of cash and invested assets at both December 31, 1997 and December 31, 1996.
(See note captioned "Invested Assets and Related Income" in the notes to the
consolidated financial statements.) Below investment-grade securities are
generally unsecured and often subordinated to other creditors of the issuers.
These issuers may have relatively higher levels of indebtedness and be more
sensitive to adverse economic conditions than investment-grade issuers. KILICO
has significantly reduced its exposure to below investment-grade securities
since 1991. This strategy takes into account the more conservative nature of
today's consumer and the resulting demand for higher-quality investments in the
life insurance and annuity marketplace. KILICO expects to increase its holdings
in this category selectively during 1998.
REAL ESTATE-RELATED INVESTMENTS
The $220.0 million real estate-related portfolio held by KILICO, consisting of
joint venture and third-party mortgage loans and other real estate-related
investments, constituted 4.9 percent of cash and invested assets at December 31,
1997, compared with $267.7 million, or 5.9 percent, at December 31, 1996. The
decrease in real estate-related investments during 1997 was primarily due to
asset sales.
As reflected in the "Real estate portfolio" table below, KILICO has continued to
fund both existing projects and legal commitments. The future legal
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<PAGE> 215
commitments were $75.3 million at December 31, 1997. This amount represented a
net decrease of $122.1 million since December 31, 1996, primarily due to sales
in 1997. As of December 31, 1997, KILICO expects to fund approximately $21.2
million of these legal commitments, along with providing capital to existing
projects. The disparity between total legal commitments and the amount expected
to be funded relates principally to standby financing arrangements that provide
credit enhancements to certain tax-exempt bonds, which KILICO does not presently
expect to fund. The total legal commitments, along with estimated working
capital requirements, are considered in KILICO's evaluation of reserves and
write-downs. (See note captioned "Financial Instruments -- Off-Balance-Sheet
Risk" in the notes to the consolidated financial statements.)
Excluding the $4.0 million of real estate owned and $19.2 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $196.8 million
at December 31, 1997, after reserves and write-downs. Of this amount, $155.0
million are on accrual status with a weighted average interest rate of
approximately 8.82 percent. Of these accrual loans, 9.7 percent have terms
requiring current periodic payments of their full contractual interest, 53.4
percent require only partial payments or payments to the extent of cash flow of
the borrowers, and 36.9 percent defer all interest to maturity.
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The equity investments in real estate at December 31, 1997 consisted of KILICO's
other equity investments in joint ventures. These equity investments include
KILICO's share of periodic operating results. KILICO, as an equity owner or
affiliate thereof, has the ability to fund, and historically has elected to
fund, operating requirements of certain joint ventures.
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
MORTGAGE LOANS OTHER REAL ESTATE-RELATED INVESTMENTS
---------------- ---------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ --------- ------------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996....................... $111.0 $106.6 $ 30.9 $ 7.5 $11.7 $267.7 (1)
Additions (deductions):
Fundings..................... 11.8 -- -- -- -- 11.8
Interest added to
principal.................. 5.6 .7 -- -- -- 6.3
Sales/paydowns/distributions... (47.9) (13.8) (10.4) (4.1) (3.0) (79.2)
Operating gain............... -- -- -- -- .8 .8
Transfers.................... (9.1) 9.1 -- -- -- --
Realized investments gains... 7.6 .4 2.2 .7 8.8 19.7
Other transactions, net...... (6.3) -- (1.6) (.1) .9 (7.1)
------ ------ ------ ----- ----- ------
Balance at December 31,
1997....................... $ 72.7 $103.0 $ 21.1 $ 4.0 $19.2 $220.0 (3)
====== ====== ====== ===== ===== ======
</TABLE>
- ---------------
(1) Net of $11.8 million reserve and write-downs. Excludes $9.7 million of real
estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued by KILICO generally to
provide financing for Kemper's or KILICO's joint ventures for various
purposes.
(3) Net of $9.2 million reserve and write-downs. Excludes $9.5 million of real
estate-related accrued interest.
REAL ESTATE CONCENTRATIONS AND OUTLOOK
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships. (See notes
captioned "Unconsolidated Investees" and "Concentration of Credit Risk" in the
notes to the consolidated financial statements.)
As a result of KILICO's ongoing strategy to reduce its exposure to real
estate-related investments, as of December 31, 1997, KILICO had three remaining
properties which account for approximately 83.2 percent of KILICO's $220.0
million real estate-related portfolio.
The largest of these investments at December 31, 1997 amounted to $88.2 million
and consisted of second mortgages on nine hotel properties and two office
buildings in which Patrick M. Nesbitt or his affiliates, a third-party real
estate developer, have ownership interests. These hotels and office buildings
are geographically dispersed and the current market values of the underlying
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<PAGE> 217
properties substantially exceed the balances due on KILICO's mortgages. These
loans are on accrual status.
KILICO's loans to a master limited partnership (the "MLP") between subsidiaries
of Kemper and subsidiaries of Lumbermens, amounted to $60.5 million at December
31, 1997. The MLP's underlying investment primarily consists of a water
development project located in California's Sacramento River Valley. This
project is currently in the final stages of a permit process with various
federal and California state agencies which will determine the long-term
economic viability of the project. KILICO currently anticipates that the permit
process will be successfully completed in 1998. Loans to the MLP are on accrual
status.
The remaining significant real estate-related investment amounted to $34.4
million at December 31, 1997 and consisted of various zoned and unzoned
residential commercial lots located in Hawaii, as well as a sewer treatment
plant which is located in the same geographical area as the residential lots.
The sewer treatment plant is currently under a sales contract and is expected to
close in early 1998. Due to certain negative zoning restriction developments in
January 1997 and a continuing economic slump in Hawaii, KILICO has placed these
real estate-related investments on nonaccrual status as of December 31, 1996.
KILICO is currently pursuing the zoning of all remaining unzoned properties, as
well as pursuing steps to sell all remaining zoned properties. However, due to
the state of Hawaii's economy, which has lagged behind the economic expansion of
most of the rest of the United States, KILICO anticipates that it could be
several additional years until all of KILICO's investments in Hawaii are
completely disposed of.
KILICO evaluates its real estate-related investments (including accrued
interest) using an estimate of the investments observable market price, net of
estimated costs to sell. (See note captioned "Summary of Significant Accounting
Policies" in the notes to the consolidated financial statements.) Because
KILICO's real estate review process includes estimates, there can be no
assurance that current estimates will prove accurate over time due to changing
economic conditions and other factors. KILICO's real estate-related investments
are expected to continue to decline further through future sales. KILICO's net
income could be materially reduced in future periods if real estate market
conditions worsen in areas where KILICO's portfolio is located, if Kemper's and
KILICO's plans with respect to certain projects change or if necessary
construction or zoning permits are not obtained.
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<PAGE> 218
The following table is a summary of KILICO's troubled real estate-related
investments:
TROUBLED REAL ESTATE-RELATED INVESTMENTS
(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
Potential problem loans(1).................... $ -- $ 3.2
Past due loans(2)............................. -- --
Nonaccrual loans (primarily Hawaiian
properties)(3).............................. 47.4 43.5
Real estate owned............................. 4.0 7.5
----- -----
Total............................... $51.4 $54.2
===== =====
</TABLE>
- ---------------
(1) These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which KILICO anticipates may go into
nonaccrual, past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful. Loans on
nonaccrual status after reserves and write-downs amounted to $41.8 million
and $38.2 million at December 31, 1997 and December 31, 1996, respectively.
NET INVESTMENT INCOME
KILICO's pre-tax net investment income totaled $296.2 million in 1997, compared
with $299.7 million in 1996 and $348.4 million in 1995. Included in pre-tax net
investment income is KILICO's share of the operating losses from equity
investments in real estate consisting of other income less depreciation,
interest and other expenses. Such operating results exclude interest expense on
loans by KILICO which are on nonaccrual status. As previously discussed,
KILICO's net investment income in 1997 and 1996, compared with 1995, has been
negatively impacted by purchase accounting adjustments.
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KILICO's total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
FOREGONE INVESTMENT INCOME
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities....................... $ .5 $ .7 $ .4
Real estate-related investments........ 3.9 .5 20.5
---- ---- -----
Total........................... $4.4 $1.2 $20.9
==== ==== =====
Basis points........................... 10 3 43
==== ==== =====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of KILICO's share of interest expense on these loans excluded
from KILICO's share of joint venture operating results. Based on the level of
nonaccrual real estate-related investments at December 31, 1997, KILICO
estimates foregone investment income in 1998 will be similar to the 1997 level.
Any increase in nonperforming securities, and either worsening or stagnant real
estate conditions, would increase the expected adverse effect on KILICO's future
investment income and realized investment results.
REALIZED INVESTMENT RESULTS
Reflected in net income (loss) are after-tax realized investment gains of $6.8
million and $8.8 million in 1997 and 1996, respectively, compared with after-tax
realized investment losses of $207.2 million in 1995. (See note captioned
"Invested Assets and Related Income" in the notes to the consolidated financial
statements.)
Unrealized gains and losses on fixed maturity investments are not reflected in
KILICO's net income (loss). These changes in unrealized value are included
within a separate component of stockholder's equity, net of any applicable
income taxes. If and to the extent a fixed maturity investment suffers an other-
than-temporary decline in value, however, such security is written down to net
realizable value, and the write-down adversely impacts net income.
KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.
A valuation allowance has been established, and is evaluated as of each reported
period end, to reduce the deferred tax asset for investment losses to the amount
that, based upon available evidence, is in management's judgment
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<PAGE> 220
more likely than not to be realized. (See note captioned "Income Taxes" in the
notes to the consolidated financial statements.)
INTEREST RATES
In 1994, rapidly rising short-term interest rates resulted in a much flatter
yield curve as the Federal Reserve Board raised rates five times during the year
and once during first-quarter 1995. Interest rates subsequently declined through
the remainder of 1995. In 1996, however, interest rates again began to rise,
before declining again in 1997.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, KILICO can adjust its crediting rates on fixed
annuities and other interest-bearing liabilities. However, competitive
conditions and contractual commitments do not always permit the reduction in
crediting rates to fully or immediately reflect reductions in investment yield,
which can result in narrower spreads.
A rising interest rate environment can increase net investment income as well as
contribute to both realized and unrealized fixed maturity investment losses,
while a declining interest rate environment can decrease net investment income
as well as contribute to both realized and unrealized fixed maturity investment
gains. Also, lower renewal crediting rates on annuities, compared with
competitors' higher new money crediting rates, have influenced certain annuity
holders to seek alternative products. KILICO mitigates this risk somewhat by
charging surrender fees, which decrease over time, when annuity holders withdraw
funds prior to maturity on certain annuity products. Approximately 49 percent of
KILICO's fixed and variable annuity liabilities as of December 31, 1997,
however, were no longer subject to significant surrender fees.
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of KILICO's
liquidity are deposits for fixed annuities, premium income, investment income,
separate account fees, other operating revenue and cash provided from maturing
or sold investments. (See the Policyholder surrenders and withdrawals table and
related discussion and "INVESTMENTS" above.)
RATINGS
Ratings are an important factor in establishing the competitive position of life
insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios,
including those of KILICO. Any reductions in KILICO's claims-paying ability or
financial strength ratings could result in its products being less attractive to
consumers. Any reductions in KILICO's parent's ratings could also adversely
impact KILICO's financial flexibility.
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<PAGE> 221
Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating. (See
"Ranking and ratings" above.)
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $865.6 million at December 31, 1997, compared with
$751.0 million at December 31, 1996, and $745.6 million at January 4, 1996. The
1997 increase in stockholder's equity was primarily due to net income of $38.7
million, a $45.0 million capital contribution and an increase in stockholder's
equity related to the change in unrealized appreciation of $60.1 million related
to KILICO's fixed maturity investment portfolio due to falling interest rates
during 1997, offset by a dividend of $29.2 million to Kemper. The 1996 increase
in stockholder's equity was primarily due to net income of $34.4 million and an
$18.4 million capital contribution, offset by a $47.4 million decrease in
stockholder's equity related to the change in the unrealized loss position of
KILICO's fixed maturity investment portfolio due to rising interest rates during
1996.
EMERGING ISSUES
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses).
This statement requires that all items required to be reported be displayed with
the same prominence as other financial statements. This statement is effective
for fiscal years beginning after December 31, 1997. The impact of implementation
is not expected to be material to KILICO's reported net income before reporting
comprehensive income. Comprehensive income, however, by design, could be
materially different from reported net income, as changes in unrealized
appreciation and depreciation of investments for example will now be included as
a component of reported comprehensive income. Full implementation of SFAS No.
130 is expected in the first quarter of 1998.
In June 1997, the FASB also issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
how to report information about operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement is effective for fiscal years beginning
after December 31, 1997. Full implementation of SFAS No. 131 is expected in
December 1998 and the impact of implementation is not expected to be material to
KILICO.
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<PAGE> 222
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS. SFAS No. 132 revises standards for
disclosures related to pension and other postretirement benefit plans. This
statement is effective for fiscal years beginning after December 31, 1997. Full
implementation of SFAS No. 132 is expected in December 1998 and the impact of
implementation is not expected to be material to KILICO.
77
<PAGE> 223
DIRECTORS AND EXECUTIVE OFFICERS OF KILICO
[TO BE UPDATED BY AMENDMENT]
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR
YEAR OF ELECTION MORE
-------------------- ------------------------------------------------
<S> <C>
John B. Scott (53) Chief Executive Officer, President and Director
Chief Executive Officer since of Federal Kemper Life Assurance Company (FKLA)
February 1992. President since and Fidelity Life Association (FLA) since 1988.
November 1993. Director since 1992. Chief Executive Officer, President and Director
of Zurich Life Insurance Company of America
(ZLICA) and Zurich Direct, Inc. (ZD) since March
1996. Chairman of the Board and Director of
Investors Brokerage Services, Inc. (IBS) and
Investors Brokerage Services Insurance Agency,
Inc. (IBSIA) since 1993. Chairman of the Board
of FKLA and FLA from April 1988 to January 1996.
Chairman of the Board of KILICO from February
1992 to January 1996. Executive Vice President
and Director of Kemper Corporation (Kemper) from
January 1994 and March 1996, respectively.
Executive Vice President of Kemper Financial
Companies, Inc. from January 1994 to January
1996 and Director from 1992 to January 1996.
Eliane C. Frye (50) Executive Vice President of FKLA and FLA since
Executive Vice President since 1995. 1995. Executive Vice President of ZLICA and ZD
Director since May 1998. since March 1996. Director of FLA since December
1997. Director of FKLA and ZLICA since May 1998.
Director of ZD from March 1996 to March 1997.
Director of IBS and IBSIA since 1995. Senior
Vice President of KILICO, FKLA and FLA from 1993
to 1995. Vice President of FKLA and FLA from
1988 to 1993.
</TABLE>
78
<PAGE> 224
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR
YEAR OF ELECTION MORE
-------------------- ------------------------------------------------
<S> <C>
Frederick L. Blackmon (46) Senior Vice President and Chief Financial
Senior Vice President and Chief Officer of FKLA since December 1995. Senior Vice
Financial Officer since December President and Chief Financial Officer of FLA
1995. since January 1996. Senior Vice President and
Chief Financial Officer of ZLICA since March
1996. Senior Vice President and Chief Financial
Officer of ZD since March 1996. Director of FLA
since May 1998. Director of ZD from March 1996
to March 1997. Treasurer and Chief Financial
Officer of Kemper since January 1996. Chief
Financial Officer of Alexander Hamilton Life
Insurance Company from April 1989 to November
1995.
James C. Harkensee (39) Senior Vice President of FKLA and FLA since
Senior Vice President since January January 1996. Senior Vice President of ZLICA
1996. since 1995. Senior Vice President of ZD since
1995. Director of ZD from April 1993 to March
1997. Vice President of ZLICA from 1992 to 1995.
Chief Actuary of ZLICA from 1991 to 1994.
Assistant Vice President of ZLICA from 1990 to
1992. Vice President of ZD from 1994 to 1995.
James E. Hohmann (42) Senior Vice President and Chief Actuary of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and
Actuary since December 1995. Chief Actuary of FLA since January 1996. Senior
Vice President and Chief Actuary of ZLICA since
March 1996. Senior Vice President and Chief
Actuary of ZD since March 1996. Director of FLA
since June 1997. Director of FKLA and ZLICA
since May 1998. Director of ZD from March 1996
to March 1997. Managing Principal (Partner) of
Tillinghast-Towers Perrin from January 1991 to
December 1995. Consultant/Principal (Partner) of
Tillinghast-Towers Perrin from November 1986 to
January 1991.
</TABLE>
79
<PAGE> 225
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR
YEAR OF ELECTION MORE
-------------------- ------------------------------------------------
<S> <C>
Edward K. Loughridge (43) Senior Vice President and Corporate Development
Senior Vice President and Corporate Officer of FKLA and FLA since January 1996.
Development Officer since January Senior Vice President and Corporate Development
1996. Officer for ZLICA and ZD since March 1996.
Senior Vice President of Human Resources of
Zurich-American Insurance Group from February
1992 to March 1996.
Debra P. Rezabek (42) Senior Vice President of FKLA and FLA since
Senior Vice President since 1996. March 1996. Corporate Secretary of FKLA and FLA
General Counsel since 1992. Corporate since January 1996. Director of FLA since May
Secretary since January 1996. 1998. Vice President of KILICO, FKLA and FLA
since 1995. General Counsel and Director of
Government Affairs of FKLA and FLA since 1992
and of KILICO since 1993. Senior Vice President,
General Counsel and Corporate Secretary of ZLICA
since March 1996. Senior Vice President, General
Counsel and Corporate Secretary of ZD since
March 1996. Director of ZD from March 1996 to
March 1997. Secretary of IBS and IBSIA since
1993. Director of IBS and IBSIA from 1993 to
1996. Assistant General Counsel of FKLA and FLA
from 1988 to 1992. General Counsel and Assistant
Secretary of KILICO, FKLA and FLA from 1992 to
1996. Assistant Secretary of Kemper since
January 1996.
Kenneth M. Sapp (53) Senior Vice President of FKLA, FLA and ZLICA
Senior Vice President since January since January 1998. Director of IBS since May
1998. 1998. Director of IBSIA since September 1998.
Vice President--Aetna Life Brokerage of Aetna
Life & Annuity Company from February 1992 to
January 1998.
George Vlaisavljevich (55) Senior Vice President of FKLA, FLA and ZLICA
Senior Vice President since October since October 1996. Senior Vice President of ZD
1996. since March 1997. Director of IBS and IBSIA
since October 1996. Executive Vice President of
The Copeland Companies from April 1983 to
September 1996.
</TABLE>
80
<PAGE> 226
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR
YEAR OF ELECTION MORE
-------------------- ------------------------------------------------
<S> <C>
Loren J. Alter (59) Director of FKLA, FLA and Scudder Kemper
Director since January 1996. Investments, Inc. (SKI) since January 1996.
Director of ZLICA since May 1979. Executive Vice
President of Zurich Insurance Company since
1979. President, Chief Executive Officer and
Director of Kemper since January 1996.
William H. Bolinder (55) Chairman of the Board and Director of FKLA and
Chairman of the Board and Director FLA since January 1996. Chairman of the Board of
since January 1996. ZLICA and ZD since March 1995. Chairman of the
Board and Director of Kemper since January 1996.
Vice Chairman and Director of SKI since January
1996. Member of the Corporate Executive Board of
Zurich Insurance Group since October 1994.
Chairman of the Board of American Guarantee and
Liability Insurance Company, Zurich American
Insurance Company of Illinois, American Zurich
Insurance Company and Steadfast Insurance
Company since 1995. Chief Executive Officer of
American Guarantee and Liability Insurance
Company, Zurich American Insurance Company of
Illinois, American Zurich Insurance Company and
Steadfast Insurance Company from 1986 to June
1995. President of Zurich Holding Company of
America since 1986. Manager of Zurich Insurance
Company, U.S. Branch since 1986. Underwriter for
Zurich American Lloyds since 1986.
David A. Bowers (52) Director of FKLA and ZLICA since May 1997.
Director since May 1997. Director of FLA since June 1997. Executive Vice
President, Corporate Secretary and General
Counsel of Zurich-American Insurance Group since
August 1985. Vice President, General Council and
Secretary of Kemper since January 1996.
</TABLE>
81
<PAGE> 227
EXECUTIVE COMPENSATION
[TO BE UPDATED BY AMENDMENT]
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ --------------------------
OTHER LONG TERM
ANNUAL INCENTIVE PLAN OPTIONS/ ALL OTHER
NAME AND COMPENSATION PAYOUTS SARS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) ($)(3) ($)(2) (#)(4) ($)(5)(6)(7)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John B. Scott.............. 1997 $171,000 $ -- $ -- $-- $ -- $ 63,362
Chief Executive Officer(1) 1996 212,500 94,000 -- 212,500 -- 142,498
1995 172,800 129,600 20,035 -- 15,360 260,106
Eliane C. Frye............. 1997 98,040 47,515 -- 91,590 -- 29,909
Executive Vice President(1) 1996 105,000 41,750 -- 69,750 -- 58,520
1995 91,200 67,200 9,261 -- 10,560 41,546
Frederick L. Blackmon...... 1997 96,300 54,225 -- 112,500 -- 19,699
Senior Vice President and 1996 100,583 47,000 27,924 71,250 -- 11,226
Chief Financial
Officer(1)
George Vlaisavljevich...... 1997 252,500 146,000 39,922 243,000 -- 9,491
Senior Vice President(1)
Phillip D. Meserve......... 1997 231,818 150,500 172,526 280,500 -- --
Senior Vice President(1)
</TABLE>
- ---------------
(1) Also served in same positions for FKLA, ZLICA and FLA. An allocation of the
time devoted to duties as executive officer of KILICO has been made. All
compensation items reported in the Summary Compensation Table reflect this
allocation.
82
<PAGE> 228
(2) Annual bonuses are paid pursuant to annual incentive plans. The amounts of
the bonuses earned in 1997 for Mr. Scott were not available as of the date
of this filing.
(3) The amounts disclosed in this column include:
(a) Amounts paid as non-preferential dividend equivalents on shares of
restricted stock and phantom stock units.
(b) The cash value of shares of Kemper common stock when awarded under the
Kemper Anniversary Award Plan. Employees were awarded shares on an
increasing scale beginning with their 10th year of employment and every 5
years thereafter, with a pro rata award at retirement.
(c) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.
(d) Relocation expense reimbursements of $21,437 in 1996 for Mr. Blackmon
and $24,498 and $52,526, respectively, for Messrs. Vlaisavljevich and
Meserve in 1997.
(e) Sign-on payment of $120,000 for Mr. Meserve in 1997.
(4) Options were granted under Kemper stock option plans maintained for selected
officers and employees of Kemper and its subsidiaries.
(5) The amounts in this column include:
(a) The amounts of employer contributions allocated to the accounts of
the named persons under defined contribution plans or under supplemental
plans maintained to provide benefits in excess of applicable ERISA
limitations.
(b) Distributions from the Kemper and FKLA supplemental plans.
(6) Pursuant to the Conseco Merger Agreement, which was an agreement that was
subsequently terminated as the result of a failed merger attempt by Conseco,
the restricted stock awards for 1993 and 1994 were cancelled. To replace
these awards, on June 30, 1994, the Committee, under the Kemper Bonus
Restoration Plan and in its sole discretion, granted cash awards to the
named executive officers and other affected executives entitling each of
them to receive an amount in cash immediately prior to the effective time of
the then-planned Conseco merger equal to the product of the number of shares
of restricted stock previously granted to such individual under the 1993
Senior Executive Long-Term Incentive Plan multiplied by the consideration
payable in the merger. As a result of the termination of the Conseco Merger
Agreement, no cash awards were paid pursuant to the Kemper Bonus Restoration
Plan.
83
<PAGE> 229
In January 1995, the board of directors, upon the advice of the Committee,
approved the adoption of the Kemper 1995 Executive Incentive Plan under
which active employee holders of the previously cancelled shares of
restricted stock were granted phantom stock units by the Committee equal to
the number of shares cancelled plus an added amount representing 20 percent
of the aggregate cancelled shares. The 20 percent supplement was awarded in
recognition of the imposition of new vesting periods on the phantom awards
(to the extent the restricted stock held prior to cancellation would
otherwise have vested in June 1994 had stockholder approval of the affected
restricted stock plan been obtained as earlier anticipated).
By their terms, the phantom stock units associated with cancelled shares of
restricted stock originally awarded in 1993, as supplemented, would have
vested on December 31, 1995 and entitle the holders to a cash payment (net
of any required tax withholding) determined by the value of Kemper's common
stock based on an average trading range to December 31, 1995, and those
phantom stock units associated with the cancelled restricted stock
originally awarded in 1994 could similarly have vested and been paid on
December 31, 1996, subject to ongoing employment to the respective vesting
dates. Notwithstanding these vesting provisions, the phantom stock units
earlier vested and entitled payment upon the consummation of a "change of
control" of Kemper. Dividend equivalents were payable to holders of the
phantom stock units as compensation income when and as dividends were paid
on Kemper's outstanding common stock, and the Executive Incentive Plan
provided for standard anti-dilution adjustments.
Phantom stock units awarded to the named executive officers subject to
vesting on December 31, 1995 and December 31, 1996, were Mr. Scott 5,400 and
12,600 phantom units, respectively, and Ms. Frye 1,680 and 1,680 phantom
units, respectively. All phantom stock units vested and were paid
immediately prior to the effectiveness of the January 4, 1996 acquisition of
Kemper by Zurich and Insurance Partners. Mr. Scott and Ms. Frye received
allocated cash out payments of $430,272, and $80,317, respectively, in 1996.
(7) Pursuant to the terms of a Termination Protection Agreement with Kemper
dated March 17, 1994, Mr. Scott received payments in 1995 and 1996. These
payments were made by Kemper and no portion of the payments were allocated
to KILICO.
84
<PAGE> 230
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements; Independent Auditors' Report, Financial
Statements of the Separate Account. Please read the Statement of Additional
Information in conjunction with this Prospectus.
FINANCIAL STATEMENTS
[TO BE UPDATED BY AMENDMENT]
Our included financial statements should be considered primarily as bearing on
our ability to meet our obligations under the Contracts. The Contracts are not
entitled to participate in earnings, dividends or surplus of KILICO. In addition
to audited financial statements for the year ended December 31, 1997, KILICO has
provided unaudited financial statements for the period ended June 30, 1998.
CHANGE OF ACCOUNTANTS
[TO BE UPDATED BY AMENDMENT]
On September 12, 1997, Kemper Investors Life Insurance Company ("KILICO")
appointed the accounting firm of PricewaterhouseCoopers LLP (on July 1, 1998,
Coopers & Lybrand L.L.P. merged with Price Waterhouse LLP to form
PricewaterhouseCoopers LLP) as independent accountants for the year ended
December 31, 1997 to replace KPMG LLP effective with such appointment. KILICO's
Board of Directors approved the selection of PricewaterhouseCoopers LLP as the
new independent accountants. Management had not consulted with
PricewaterhouseCoopers LLP on any accounting, auditing or reporting matter,
prior to that time.
During the two most recent fiscal years ended December 31, 1996, there have been
no disagreements with KPMG LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure or any
reportable events. KPMG LLP's report on the financial statements for the past
two years contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
There were no disagreements with PricewaterhouseCoopers LLP on accounting or
financial disclosures for the year ended December 31, 1997.
85
<PAGE> 231
[TO BE UPDATED BY AMENDMENT]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder's
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated balance sheet of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the year then ended. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as listed in
the accompanying index. These consolidated financial statements and the
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audit. The
financial statements of Kemper Investors Life Insurance Company and subsidiaries
for the period from January 4, 1996 to December 31, 1996 (post-acquisition
basis) and for the year ended December 31, 1995 (pre-acquisition basis), were
audited by other auditors, whose unqualified report, dated March 21, 1997,
included an explanatory paragraph that described the acquisition of Kemper
Investors Life Insurance Company as discussed in Note 1 to the financial
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kemper
Investors Life Insurance Company and subsidiaries as of December 31, 1997, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
/s/ PricewaterhouseCoopers LLP
Coopers & Lybrand L.L.P.
Chicago, Illinois
March 18, 1998
86
<PAGE> 232
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated balance sheet of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the period from January 4, 1996 to December 31, 1996 (post-acquisition), and for
the year ended December 31, 1995 (pre-acquisition). In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedules as of December 31, 1996 and 1995 as listed in the
accompanying index. These consolidated financial statements and the financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedules based on our 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 the results of their operations and their cash flows for the post-
acquisition period, in conformity with generally accepted accounting principles.
Also, in our opinion, the aforementioned pre-acquisition consolidated financial
statements present fairly, in all material respects, the results of their
operations and their cash flows for the pre-acquisition period, in conformity
with generally accepted accounting principles. Further, in our opinion, the
aforementioned financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
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 Corporation, the parent 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 period
after the acquisition is presented on a different cost basis than that for the
period before the acquisition and, therefore, is not comparable.
KPMG LLP
Chicago, Illinois
March 21, 1997
87
<PAGE> 233
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1997, $3,644,075;
December 31, 1996, $3,929,650)................... $ 3,668,643 $3,866,431
Short-term investments............................. 236,057 71,696
Joint venture mortgage loans....................... 72,663 110,971
Third-party mortgage loans......................... 102,974 106,585
Other real estate-related investments.............. 44,409 50,157
Policy loans....................................... 282,439 288,302
Equity securities.................................. 24,839 9,910
Other invested assets.............................. 20,820 13,597
----------- ----------
Total investments......................... 4,452,844 4,517,649
Cash............................................... 23,868 2,776
Accrued investment income.......................... 117,789 115,199
Goodwill........................................... 229,393 244,688
Value of business acquired......................... 138,482 189,639
Deferred insurance acquisition costs............... 59,459 26,811
Deferred income taxes.............................. 39,993 --
Reinsurance recoverable............................ 382,609 427,165
Receivable on sales of securities.................. 20,076 32,569
Other assets and receivables....................... 3,187 34,117
Assets held in separate accounts................... 5,121,950 2,127,247
----------- ----------
Total assets.............................. $10,589,650 $7,717,860
=========== ==========
LIABILITIES
Future policy benefits............................. $ 3,856,871 $4,256,521
Ceded future policy benefits....................... 382,609 427,165
Benefits and funds payable......................... 150,524 36,142
Other accounts payable and liabilities............. 212,133 59,462
Deferred income taxes.............................. -- 60,362
Liabilities related to separate accounts........... 5,121,950 2,127,247
----------- ----------
Total liabilities......................... 9,724,087 6,966,899
----------- ----------
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......................... 806,538 761,538
Unrealized gain (loss) on investments.............. 12,637 (47,498)
Retained earnings.................................. 43,888 34,421
----------- ----------
Total stockholder's equity................ 865,563 750,961
----------- ----------
Total liabilities and stockholder's
equity.................................. $10,589,650 $7,717,860
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
88
<PAGE> 234
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUE
Net investment income........... $296,195 $299,688 $ 348,448
Realized investment gains
(losses)...................... 10,546 13,602 (318,700)
Premium income.................. 22,239 7,822 236
Separate account fees and
charges....................... 85,413 25,309 21,909
Other income.................... 11,087 9,786 16,192
-------- -------- ---------
Total revenue......... 425,480 356,207 68,085
-------- -------- ---------
BENEFITS AND EXPENSES
Interest credited to
policyholders................. 199,782 223,094 237,984
Claims incurred and other
policyholder benefits......... 28,372 14,255 7,631
Taxes, licenses and fees........ 52,608 2,173 6,912
Commissions..................... 32,602 25,962 24,881
Operating expenses.............. 36,837 24,678 20,837
Deferral of insurance
acquisition costs............. (38,177) (27,820) (36,870)
Amortization of insurance
acquisition costs............. 3,204 2,316 14,423
Amortization of value of
business acquired............. 24,948 21,530 --
Amortization of goodwill........ 15,295 10,195 --
-------- -------- ---------
Total benefits and
expenses............ 355,471 296,383 275,798
-------- -------- ---------
Income (loss) before income tax
expense (benefit)............. 70,009 59,824 (207,713)
Income tax expense (benefit).... 31,292 25,403 (74,664)
-------- -------- ---------
Net income (loss)..... $ 38,717 $ 34,421 $(133,049)
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
89
<PAGE> 235
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
----------- ----------- --------- -----------
<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....... 761,538 743,104 491,994 491,994
Capital contributions from
parent.................... 45,000 18,434 -- --
Adjustment to reflect
purchase accounting
method.................... -- -- 251,110 --
-------- -------- -------- ---------
End of period...... 806,538 761,538 743,104 491,994
-------- -------- -------- ---------
UNREALIZED GAIN (LOSS) ON
INVESTMENTS, beginning of
period.................... (47,498) -- 68,502 (236,443)
Unrealized gain (loss) on
revaluation of
investments, net.......... 60,135 (47,498) -- 304,945
Adjustment to reflect
purchase accounting
method.................... -- -- (68,502) --
-------- -------- -------- ---------
End of period...... 12,637 (47,498) -- 68,502
-------- -------- -------- ---------
RETAINED EARNINGS, beginning
of period................. 34,421 -- 42,880 175,929
Net income (loss)........... 38,717 34,421 -- (133,049)
Dividends to parent......... (29,250) -- -- --
Adjustment to reflect
purchase accounting
method.................... -- -- (42,880) --
-------- -------- -------- ---------
End of period...... 43,888 34,421 -- 42,880
-------- -------- -------- ---------
Total stockholder's
equity........... $865,563 $750,961 $745,604 $ 605,876
======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
90
<PAGE> 236
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................... $ 38,717 $ 34,421 $(133,049)
Reconcilement of net income (loss) to net
cash provided:
Realized investment losses (gains)....... (10,546) (13,602) 318,700
Interest credited and other charges...... 198,206 230,298 237,984
Deferred insurance acquisition costs..... (34,973) (25,504) (22,447)
Amortization of value of business
acquired............................... 24,948 21,530 --
Amortization of goodwill................. 15,295 10,195 --
Amortization of discount and premium on
investments............................ 17,866 25,743 4,586
Deferred income taxes.................... (99,370) (897) 38,423
Net change in current federal income
taxes.................................. 97,386 108,806 (86,990)
Benefits and premium taxes due related to
separate account bank-owned life
insurance.............................. 180,546 -- --
Other, net............................... 17,168 (22,283) (29,905)
--------- ----------- ---------
Net cash provided from operating
activities......................... 445,243 368,707 327,302
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity........ 229,208 264,383 320,143
Fixed maturities sold prior to
maturity............................... 633,872 891,995 297,637
Mortgage loans, policy loans and other
invested assets........................ 131,866 168,727 450,573
Cost of investments purchased or loans
originated:
Fixed maturities......................... (606,028) (1,369,091) (549,867)
Mortgage loans, policy loans and other
invested assets........................ (76,350) (119,044) (131,966)
Short-term investments, net................ (164,361) 300,819 (168,351)
Net change in receivable and payable for
securities transactions.................. 29,746 (31,667) (1,397)
Net reductions in other assets............. 244 115 1,996
--------- ----------- ---------
Net cash provided by investing
activities......................... 178,197 106,237 218,768
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits................................. 145,687 141,159 247,778
Withdrawals.............................. (745,510) (700,084) (755,917)
Capital contributions from parent.......... 45,000 18,434 --
Dividends to parent........................ (29,250) -- --
Other...................................... (18,275) 42,512 (35,309)
--------- ----------- ---------
Net cash used in financing
activities......................... (602,348) (497,979) (543,448)
--------- ----------- ---------
Net increase (decrease) in
cash........................... 21,092 (23,035) 2,622
CASH, beginning of period.................... 2,776 25,811 23,189
--------- ----------- ---------
CASH, end of period.......................... $ 23,868 $ 2,776 $ 25,811
========= =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
91
<PAGE> 237
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 that change in control, Zurich and Insurance Partners owned 80
percent and 20 percent, respectively, of Kemper and therefore the Company. On
February 27, 1998, Zurich acquired Insurance Partner's remaining 20 percent
interest for cash. As a result of this transaction, Kemper and the Company
became wholly-owned subsidiaries of Zurich.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements in order for them to conform to the 1997
presentation.
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 years ended December 31, 1996 and 1997, 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 where appropriate 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 values as of the acquisition date. The difference between
the cost of acquiring the Company and the net fair values of the Company's
assets and liabilities as of the acquisition date has been recorded as
92
<PAGE> 238
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
goodwill. 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 began to amortize goodwill during 1996 on a straight-line basis over
twenty-five years. In December of 1997, the Company changed its amortization
period to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, the Company
recorded an increase in goodwill amortization expense of $5.1 million during
1997.
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, 1997, 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 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
93
<PAGE> 239
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2002 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ---------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1996 (actual).......... $190,222 $(31,427) $ 9,897 $168,692
1997 (actual).......... 168,692 (34,906) 9,958 143,744
1998................... 143,744 (25,633) 8,933 127,044
1999................... 127,044 (23,701) 7,873 111,216
2000................... 111,216 (21,668) 6,876 96,424
2001................... 96,424 (19,122) 5,973 83,275
2002................... 83,275 (17,835) 5,134 70,574
</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, 1997 and
1996, this adjustment increased (decreased) the value of business acquired by
$(5.3) million and $20.9 million, respectively, and stockholder's equity by
approximately $(3.4) 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.
94
<PAGE> 240
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs. 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, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life insurance products are being
amortized over the estimated contract life in relation to the present value of
estimated gross profits. Deferred insurance acquisition costs related to such
interest-sensitive products also reflect the estimated impact of unrealized
gains or losses on fixed maturities held as available for sale in the investment
portfolio, through a credit or charge to 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 3.0 percent to 7.3 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 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
95
<PAGE> 241
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and equity securities 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 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; 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.
96
<PAGE> 242
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.
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 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
97
<PAGE> 243
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) CASH FLOW INFORMATION (CONTINUED)
for the period from January 1, 1996 to January 4, 1996 and for the years ended
December 31, 1995 amounted to $108.8 million and $25.2 million, respectively.
The Company paid federal income taxes of $29.0 million and $28.1 million
directly to the United States Treasury Department during 1997 and 1996,
respectively.
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale. The carrying
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, 1997
U.S. treasury securities and obligations
of U.S. government agencies and
authorities........................... $ 6,258 $ 6,298 $ 4 $ (44)
Obligations of states and political
subdivisions, special revenue and
nonguaranteed......................... 29,330 29,308 160 (138)
Debt securities issued by foreign
governments........................... 92,563 92,722 188 (347)
Corporate securities.................... 1,861,655 1,846,588 24,733 (9,666)
Mortgage and asset-backed securities.... 1,678,837 1,669,159 10,035 (357)
---------- ---------- ------- --------
Total fixed maturities............ $3,668,643 $3,644,075 $35,120 $(10,552)
========== ========== ======= ========
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)
========== ========== ======= ========
</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
98
<PAGE> 244
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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 $220.0 million real estate portfolio at December 31, 1997 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1997 and 1996, total impaired real estate-related
loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross....... $39.3 $39.8
Impaired loans with reserves--gross.......... 2.2 7.6
----- -----
Total gross impaired loans............ 41.5 47.4
Reserves related to impaired loans........... (2.1) (4.4)
----- -----
Net impaired loans.................... $39.4 $43.0
===== =====
</TABLE>
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. At December 31, 1997 and 1996, the Company's deficit
in equity investments considered in determining reserves and write-downs
amounted to $0 and $5.9 million, respectively. The Company had an average
balance of $45.2 million and $30.8 million in impaired loans for 1997 and 1996,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance.
At December 31, 1997 and December 31, 1996, loans on nonaccrual status, before
reserves and write-downs, amounted to $47.4 million and $43.5 million,
respectively. The Company's nonaccrual loans are generally included in impaired
loans.
99
<PAGE> 245
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
At December 31, 1997, securities carried at approximately $6.3 million were on
deposit with governmental agencies as required by law.
Proceeds from sales of investments in fixed maturities prior to maturity were
$633.9 million, $892.0 million and $297.6 million during 1997, 1996 and 1995,
respectively. Gross gains of $3.1 million, $9.9 million and $21.2 million and
gross losses of $13.7 million, $16.2 million and $11.9 million were realized on
sales and write-downs of fixed maturities in 1997, 1996 and 1995, respectively.
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1997, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST VALUE
(in thousands) -------- ----------
<S> <C> <C>
One year or less............................ $ 47,724 $ 47,797
Over one year through five.................. 649,279 648,291
Over five years through ten................. 988,849 984,495
Over ten years.............................. 303,954 294,333
Securities not due at a single maturity
date, primarily mortgage and asset-backed
securities(1)............................. 1,678,837 1,669,159
---------- ----------
Total fixed maturities............... $3,668,643 $3,644,075
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 3.8 years.
100
<PAGE> 246
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Interest and dividends on
fixed maturities............ $250,170 $250,683 $269,934
Dividends on equity
securities.................. 2,123 646 681
Income from short-term
investments................. 4,128 9,130 13,159
Income from mortgage loans.... 16,283 20,257 40,494
Income from policy loans...... 20,549 20,700 19,658
Income from other real estate-
related investments......... 6,631 4,917 15,565
Income from other loans and
investments................. 2,045 2,480 1,555
-------- -------- --------
Total investment
income.............. 301,929 308,813 361,046
Investment expense............ (5,734) (9,125) (12,598)
-------- -------- --------
Net investment
income.............. $296,195 $299,688 $348,448
======== ======== ========
</TABLE>
Realized gains (losses) for the years ended December 31, 1997, 1996 and 1995,
were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-----------------------------------------------
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Real estate-related........... $ 19,758 $17,462 $(325,611)
Fixed maturities.............. (10,656) (6,344) 9,336
Equity securities............. 914 -- (346)
Other......................... 530 2,484 (2,079)
-------- ------- ---------
Realized investment gains
(losses) before income
tax expense (benefit).... 10,546 13,602 (318,700)
Income tax expense
(benefit)................... 3,691 4,761 (111,545)
-------- ------- ---------
Net realized investment
gains (losses)........... $ 6,855 $ 8,841 $(207,155)
======== ======= =========
</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)
101
<PAGE> 247
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
by class of investment for the years ended December 31, 1997, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
---------------------------------------------------------
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
(in thousands) ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Fixed maturities......... $ 87,787 $(63,219) $ $351,964
Equity and other
securities............. (103) 1,256 -- 180
Adjustment to deferred
insurance acquisition
costs.................. (2,325) 1,307 -- (14,277)
Adjustment to value of
business acquired...... (26,209) 20,947 -- --
-------- -------- -- --------
Unrealized gain (loss)
before income tax
expense............. 59,150 (39,709) -- 337,867
Income tax expense
(benefit).............. (985) 7,789 -- 32,922
-------- -------- -- --------
Net unrealized
gain (loss) on
investments.... $ 60,135 $(47,498) $-- $304,945
======== ======== == ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1997 and 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, 1997 and December 31, 1996, the Company's net equity
investment in unconsolidated investees amounted to $19.3 million and $11.7
million, respectively. The Company's share of net income related to such
unconsolidated investees amounted to $835 thousand and $223 thousand in 1997 and
1996, respectively, and a net loss of $453 thousand in 1995.
102
<PAGE> 248
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
Approximately 35.1 percent of the Company's investment-grade fixed maturities at
December 31, 1997 were mortgage-backed securities, down from 36.4 percent at
December 31, 1996, due to sales and paydowns during 1997. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
Approximately 10.8 percent and 8.8 percent of the Company's investment-grade
fixed maturities at December 31, 1997 and 1996, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (27.7%), auto loans
(22.3%), manufactured housing loans (17.2%), equipment loans (13.7%), and
commercial mortgage backed securities (10.7%).
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, 1997
<TABLE>
<S> <C>
California........................................... 38.2%
Hawaii............................................... 14.2
Colorado............................................. 9.8
Oregon............................................... 9.2
Washington........................................... 9.1
Florida.............................................. 6.4
Texas................................................ 5.1
Michigan............................................. 3.7
Ohio................................................. 3.3
Illinois............................................. 1.0
-----
Total...................................... 100.0%
=====
</TABLE>
103
<PAGE> 249
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
Hotel................................................ 41.3%
Land................................................. 28.2
Residential.......................................... 13.1
Retail............................................... 3.3
Office............................................... 3.1
Industrial........................................... .9
Other................................................ 10.1
-----
Total...................................... 100.0%
=====
</TABLE>
Undeveloped land represented approximately 28.2 percent of the Company's real
estate portfolio at December 31, 1997. 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 mortgage loans are on properties
or projects where the Company, Kemper, or their affiliates have taken ownership
positions in joint ventures with a small number of partners. (See note captioned
"Unconsolidated Investees".)
At December 31, 1997, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $88.2 million, or
40.1 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1997,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.
At December 31, 1997, loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens Mutual
104
<PAGE> 250
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
Casualty Company ("Lumbermens"), a former affiliate, constituted approximately
$60.5 million, or 27.5 percent, of the Company's real estate portfolio. Kemper's
interest is 75 percent at December 31, 1997. At December 31, 1997, MLP-related
commitments accounted for approximately $7.4 million of the Company's
off-balance-sheet legal commitments, which the Company expects to fund.
At December 31, 1997, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold or written-down to zero. However, the Company
continues to have Prime Group-related commitments, which accounted for $25.7
million of the Company's off-balance-sheet legal commitments at December 31,
1997. The Company does not expect to fund any of these commitments.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Current..................... $130,662 $26,300 $(113,087)
Deferred.................... (99,370) (897) 38,423
-------- ------- ---------
Total............. $ 31,292 $25,403 $ (74,664)
======== ======= =========
</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 each filed 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.
105
<PAGE> 251
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The actual income tax expense (benefit) for 1997, 1996 and 1995 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 1997, 1996, and 1995 to income (loss) before
income tax expense (benefit).
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Computed expected tax expense
(benefit).................. $24,503 $20,938 $(72,700)
Difference between "expected"
and actual tax expense
(benefit):
State taxes................ 1,801 913 (1,370)
Amortization of goodwill... 5,353 3,568 --
Foreign tax credit......... (278) -- (183)
Other, net................. (87) (16) (411)
------- ------- --------
Total actual tax
expense
(benefit)........ $31,292 $25,403 $(74,664)
======= ======= ========
</TABLE>
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company only records deferred tax
assets if future realization of the tax benefit is more likely than not, with a
valuation allowance recorded for the portion that is not likely to be realized.
The valuation allowance is subject to future adjustments based upon, among other
items, the Company's estimates of future operating earnings and capital gains.
The Company has established a valuation allowance to reduce the deferred federal
tax asset related to real estate and other investments to the amount that, based
upon available evidence, is, in management's judgment, more likely than not to
be realized. Any reversals of the valuation allowance are contingent upon the
recognition of future capital gains in the Company's federal income tax return
or a change in circumstances which causes the recognition of the benefits to
become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred federal tax asset or liability from
unrealized gains or losses on investments.
106
<PAGE> 252
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 asset or liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 JANUARY 4
1997 1996 1996
(in thousands) ----------- ----------- ---------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition
costs...................... $ 75,522 $ 4,520 $ --
Unrealized losses on
investments................ -- 16,624 --
Life policy reserves.......... 43,337 46,452 46,654
Unearned revenue.............. 37,243 -- --
Real estate-related........... 13,400 20,642 27,736
Other investment-related...... 3,298 5,409 1,773
Other......................... 4,371 3,639 9,750
-------- -------- --------
Total deferred federal tax
assets................... 177,171 97,286 85,913
Valuation allowance........... (15,201) (31,825) (15,201)
-------- -------- --------
Total deferred federal tax
assets after valuation
allowance................ 161,970 65,461 70,712
-------- -------- --------
Deferred federal tax
liabilities:
Value of business acquired.... 48,469 66,373 66,578
Deferred insurance acquisition
costs...................... 20,811 9,384 --
Depreciation and
amortization............... 20,201 15,473 15,490
Other investment-related...... 18,774 28,855 37,919
Unrealized gains on
investments................ 9,002 -- --
Other......................... 4,720 5,738 4,197
-------- -------- --------
Total deferred federal tax
liabilities.............. 121,977 125,823 124,184
-------- -------- --------
Net deferred federal tax assets
(liabilities)................. $ 39,993 $(60,362) $(53,472)
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the tax on
deferred insurance acquisition costs ("DAC Tax") associated with $2.7 billion of
new 1997 sales from a non-registered individual and group variable bank-owned
life insurance contract ("BOLI"). As a result of proposed tax law changes, as
more fully discussed below, the level of DAC Tax experienced in 1997 is not
anticipated to occur in future periods and it is expected that the Company will
return to its normalized earnings patterns in 1998. Management believes that it
is more likely, than not, that the results of future operations will generate
sufficient taxable income over the ten year amortization period of the unearned
revenue and DAC Tax to realize such deferred tax assets.
107
<PAGE> 253
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
In early 1998, the Clinton Administration's Fiscal Year 1998 Budget ("Budget")
was released and contained certain proposals to change the taxation of
non-qualified fixed and variable annuities and variable life insurance
contracts, including BOLI. It is currently unknown whether or not such proposals
will be accepted, amended or omitted in the final 1999 Budget approved by
Congress. If the current Budget proposals are accepted, certain of the Company's
non-qualified fixed and variable annuities and certain of its variable life
insurance products, including BOLI and the non-registered individual variable
universal life insurance contract introduced during 1997, may no longer be tax
advantaged products and therefore no longer attractive to those customers who
purchase them because of their favorable tax attributes. Additionally, sales of
such products during 1998 may also be negatively impacted until the likelihood
of the current proposals being enacted into law has been determined.
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 $45.0 million and $18.4
million during 1997 and 1996, respectively. The Company paid cash dividends of
$29.3 million to Kemper during 1997.
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, 1997 and December 31, 1996, joint venture
mortgage loans totaled $72.7 million and $111.0 million, respectively, and
during 1997, 1996 and 1995, the Company earned interest income on these joint
venture loans of $7.5 million, $9.5 million and $19.6 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper
Investments, Inc., an affiliated company, and the information systems of Kemper
Service Company ("KSvC"), an SKI subsidiary, based on the Company's share of
administrative, legal, marketing, investment management, information systems and
operation and support services. During 1997, 1996 and 1995, expenses allocated
to the Company from SKI and KSvC amounted to $114 thousand, $1.7 million and
$4.4 million, respectively. The
108
<PAGE> 254
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
Company also paid to SKI investment management fees of $3.5 million, $3.6
million and $3.4 million during 1997, 1996 and 1995, respectively. In addition,
expenses allocated to the Company from FKLA during 1997, 1996 and 1995 amounted
to $30.0 million, $10.5 million and $14.3 million, respectively.
During 1995, the Company sold certain mortgages and real estate-related
investments, net of reserves, amounting to approximately $3.5 million 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 an affiliated non-life
realty subsidiary for cash. The Company also paid to Kemper real estate
subsidiaries $2.2 million, $1.8 million and $1.8 million in 1997, 1996 and 1995,
respectively, related to the management of the Company's real estate portfolio.
(8) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
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 Fidelity Life Association, a Mutual Legal Reserve
Company ("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,
1997 and 1996, the reinsurance recoverable related to the fixed-rate annuity
liabilities ceded to FLA amounted to $382.6 million and $427.2 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
109
<PAGE> 255
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
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. Premiums assumed during 1997 under the
terms of the treaty amounted to $21.1 million and the face amount which remained
outstanding at December 31, 1997 amounted to $12.6 billion.
The Company's retention limit on term life insurance prior to 1997 was $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. Effective January 1, 1997, the Company ceded 90 percent of all new
term life insurance premiums to outside reinsurers. Term life reserves ceded to
outside reinsurers on the Company's direct business amounted to approximately
$139 thousand and $102 thousand as of December 31, 1997 and 1996, respectively.
During December 1997, the Company entered into a funds held reinsurance
agreement with a Zurich affiliated company, EPICENTRE Reinsurance (Bermuda)
Limited ("EPICENTRE"). Under the terms of this agreement, the Company ceded, on
a yearly renewable term basis, ninety percent of the net amount at risk (death
benefit payable to the insured less the insured's separate account cash
surrender value) related to a new product developed in 1997, a non-registered
variable bank-owned life insurance contract ("BOLI"), which is held in the
Company's separate accounts. During 1997, the Company issued $59.3 billion (face
amount) of new BOLI business and ceded $51.1 billion (face amount) to EPICENTRE
under the terms of the treaty. During 1997, the Company also ceded $24.3 million
of separate account fees (cost of insurance charges) to EPICENTRE. The Company
has also withheld approximately $23.4 million of such funds due to EPICENTRE
under the terms of the reinsurance agreement as a component of benefits and
funds payable in the accompanying consolidated balance sheet as of December 31,
1997.
(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
110
<PAGE> 256
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
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 $1.9 million and $1.7 million at December 31, 1997 and 1996,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.25 percent and 7.75 percent for 1997 and 1996, respectively.
The assumed health care trend rate used was based on projected experience for
1997 and 1998, 8 percent in 1999, gradually declining to 5.0 percent by the year
2002 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, 1997 and 1996 by $242 thousand and $191 thousand, respectively.
The Company also provides certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company 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
111
<PAGE> 257
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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
1997 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, 1997.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1997, the Company had future legal loan commitments and stand-by
financing agreements totaling $75.3 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 $21.2 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 estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
112
<PAGE> 258
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. (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 were determined by using
market quotations, or independent pricing services that use prices provided by
market makers or estimates of fair values obtained from yield data relating to
instruments or securities with similar characteristics, or fair value as
determined in good faith by the Company's portfolio manager, SKI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty of estimating the fair value of real estate due to the lack
of a liquid quotable market.
113
<PAGE> 259
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 1997 and 1996 to be 5.25 percent and 4.75 percent,
respectively, while the assumed average market crediting rate was 6.0 percent
and 5.8 percent in 1997 and 1996, respectively.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) -------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial instruments
recorded as assets:
Fixed maturities........ $3,668,643 $3,668,643 $3,866,431 $3,866,431
Cash and short-term
investments........... 259,925 259,925 74,472 74,472
Mortgage loans and other
real estate-related
assets................ 220,046 220,046 267,713 267,713
Policy loans............ 282,439 282,439 288,302 288,302
Equity securities....... 24,839 24,839 9,910 9,910
Other invested assets... 20,820 24,404 13,597 13,597
Financial instruments
recorded as liabilities:
Life policy benefits,
excluding term life
reserves.............. 3,846,023 4,050,852 4,249,264 4,101,588
</TABLE>
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which can
be paid by the Company without prior approval in 1998 is $58.4 million.
114
<PAGE> 260
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS (CONTINUED)
The Company paid cash dividends of $29.3 million to Kemper during 1997. The
Company paid no cash dividends in 1996 or 1995.
The Company's net income (loss) and capital and surplus as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Net income (loss).................. $ 58,372 $ 37,287 $(64,707)
======== ======== ========
Statutory capital and surplus...... $476,924 $411,837 $383,374
======== ======== ========
</TABLE>
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997 OPERATING SUMMARY
Net investment income...... $74,249 $74,050 $72,950 $ 74,946
Realized investment gains
(losses)................. 889 8,161 (3,032) 4,528
Premium income............. 5,008 4,121 3,938 9,172
Separate account fees and
other income............. 8,909 12,961 12,215 62,415(1)
------- ------- ------- --------
Total revenue....... 89,055 99,293 86,071 151,061
------- ------- ------- --------
Interest credited and
benefits to
policyholders............ 57,859 56,643 57,965 55,687
Commissions, taxes,
licenses and fees........ 8,023 9,475 8,389 59,323(1)
Operating expenses......... 7,175 8,780 10,014 10,868
Net deferral of insurance
acquisition costs........ (7,216) (6,877) (7,471) (13,409)
Amortization of value of
business acquired........ 4,821 6,991 6,743 6,393
Amortization of goodwill... 2,547 2,552 2,549 7,647(2)
------- ------- ------- --------
Total benefits and
expenses.......... 73,209 77,564 78,189 126,509
------- ------- ------- --------
Income before income tax
expense.................. 15,846 21,729 7,882 24,552
Income tax expense......... 5,678 8,723 3,778 13,113
------- ------- ------- --------
Net income.......... $10,168 $13,006 $ 4,104 $ 11,439
======= ======= ======= ========
</TABLE>
115
<PAGE> 261
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996 OPERATING SUMMARY
Net investment income...... $72,302 $74,647 $76,070 $ 76,669
Realized investment gains
(losses)................. (1,248) (2,439) 13,518 3,771
Premium income............. 130 109 150 7,433(3)
Separate account fees and
other income............. 8,028 9,419 8,478 9,170
------- ------- ------- --------
Total revenue....... 79,212 81,736 98,216 97,043
------- ------- ------- --------
Interest credited and
benefits to
policyholders............ 58,296 57,335 57,512 64,206
Commissions, taxes,
licenses and fees........ 6,868 6,486 6,819 7,962
Operating expenses......... 5,440 4,920 6,974 7,344
Net deferral of insurance
acquisition costs........ (5,032) (7,302) (5,434) (7,736)
Amortization of value of
business acquired........ 4,234 2,787 11,582 2,927
Amortization of goodwill... 2,547 2,552 2,549 2,547
------- ------- ------- --------
Total benefits and
expenses.......... 72,353 66,778 80,002 77,250
------- ------- ------- --------
Income before income tax
expense.................. 6,859 14,958 18,214 19,793
Income tax expense......... 3,513 6,402 7,391 8,097
------- ------- ------- --------
Net income.......... $ 3,346 $ 8,556 $10,823 $ 11,696
======= ======= ======= ========
</TABLE>
- ---------------
Notes:
(1) Reflects premium tax expense loads received and premium taxes incurred of
$49.1 million related to new BOLI sales of $2.6 billion in the fourth
quarter of 1997.
(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
years.
(3) Reflects the assumption of term life insurance business from FKLA.
116
<PAGE> 262
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at market
(cost: June 30, 1998, $3,550,377; December 31,
1997, $3,644,075).............................. $ 3,591,991 $ 3,668,643
Short-term investments........................... 41,806 236,057
Joint venture mortgage loans..................... 67,868 72,663
Third-party mortgage loans....................... 104,206 102,974
Other real estate-related investments............ 41,891 44,409
Policy loans..................................... 277,034 282,439
Equity securities................................ 75,341 24,839
Other invested assets............................ 21,264 20,820
----------- -----------
Total investments......................... 4,221,401 4,452,844
Cash............................................... 20,785 23,868
Accrued investment income.......................... 121,452 117,789
Goodwill........................................... 223,023 229,393
Value of business acquired......................... 124,780 138,482
Deferred insurance acquisition costs............... 78,420 59,459
Deferred income taxes.............................. 48,819 39,993
Reinsurance recoverable............................ 361,172 382,609
Other assets and receivables....................... 18,562 23,263
Assets held in separate accounts................... 5,941,104 5,121,950
----------- -----------
Total assets.............................. $11,159,518 $10,589,650
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits............................. $ 3,662,012 $ 3,856,871
Ceded future policy benefits....................... 361,172 382,609
Benefits and funds payable......................... 245,884 150,524
Other accounts payable and liabilities............. 49,694 212,133
Liabilities related to separate accounts........... 5,941,104 5,121,950
----------- -----------
Total liabilities......................... 10,259,866 9,724,087
----------- -----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY:
Capital stock--$10 par value, authorized 300,000
shares; outstanding 250,000 shares............... 2,500 2,500
Additional paid-in capital......................... 806,538 806,538
Accumulated other comprehensive income............. 21,609 12,637
Retained earnings.................................. 69,005 43,888
----------- -----------
Total stockholder's equity................ 899,652 865,563
----------- -----------
Total liabilities and stockholder's
equity.................................. $11,159,518 $10,589,650
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
117
<PAGE> 263
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Net investment income.......... $139,018 $148,299 $ 68,467 $74,050
Realized investment gains...... 17,527 9,050 15,673 8,161
Premium income................. 11,144 9,129 5,941 4,121
Separate account fees and
charges...................... 34,380 16,827 16,388 9,510
Other income................... 5,960 5,043 3,534 3,451
-------- -------- -------- -------
Total revenue........ 208,029 188,348 110,003 99,293
-------- -------- -------- -------
BENEFITS AND EXPENSES
Interest credited to
policyholders................ 90,169 101,886 44,479 50,365
Claims and other policyholder
benefits..................... 25,700 12,616 13,460 6,278
Taxes, licenses and fees....... 9,758 3,064 3,082 2,488
Commissions.................... 18,049 14,434 10,840 6,987
Operating expenses............. 22,253 15,955 12,157 8,780
Deferral of insurance
acquisition costs............ (21,600) (15,790) (12,710) (7,688)
Amortization of insurance
acquisition costs............ 1,644 1,697 727 811
Amortization of value of
business acquired............ 11,548 11,812 7,121 6,991
Amortization of goodwill....... 6,370 5,099 3,186 2,552
-------- -------- -------- -------
Total benefits and
expenses........... 163,891 150,773 82,342 77,564
-------- -------- -------- -------
Income before income tax
expense...................... 44,138 37,575 27,661 21,729
Income tax expense (benefit)
Current...................... 32,679 16,028 19,011 10,577
Deferred..................... (13,658) (1,627) (7,237) (1,854)
-------- -------- -------- -------
Total income tax
expense............ 19,021 14,401 11,774 8,723
-------- -------- -------- -------
Net income..................... $ 25,117 $ 23,174 $ 15,887 $13,006
======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
118
<PAGE> 264
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
SIX MONTHS ENDED ENDED
JUNE 30 JUNE 30
------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income.......................... $25,117 $ 23,174 $15,887 $13,006
Other comprehensive income (loss),
before tax:
Unrealized holding gains (losses)
on investments arising during
period:
Unrealized holding gains (losses)
on investments.................. 10,522 (6,178) 10,246 64,826
Adjustment to value of business
acquired........................ (5,487) (14 602) (5,181) 2,914
Adjustment to deferred insurance
acquisition costs............... (1,855) (1,057) (1,367) 41
------- -------- ------- -------
Total unrealized holding
gains (losses) on
investments arising
during period............ 3,180 (21,837) 3,698 67,781
------- -------- ------- -------
Less reclassification adjustments
for gains (losses) included in net
income on the preceding page:
Adjustment for gains included in
realized investment gains....... (2,421) (978) (1,742) (1,003)
Adjustment for amortization of
premium on fixed maturities
included in net investment
income.......................... 8,851 8,997 4,175 4,232
Adjustment for gains included in
amortization of value of
business acquired............... 3,333 2,454 2,978 2,223
Adjustment for gains included in
amortization of insurance
acquisition costs............... 860 412 769 381
------- -------- ------- -------
Total reclassification
adjustments for gains
included in net income... 10,623 10,885 6,180 5,833
------- -------- ------- -------
Other comprehensive income (loss),
before related income tax expense
(benefit)......................... 13,803 (10,952) 9,878 73,614
Related income tax expense
(benefit)......................... 4,831 (4,477) 3,457 1,945
------- -------- ------- -------
Other comprehensive income (loss),
net of tax........................ 8,972 (6,475) 6,421 71,669
------- -------- ------- -------
Comprehensive income................ $34,089 $ 16,699 $22,308 $84,675
======= ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
119
<PAGE> 265
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
------- -----------
<S> <C> <C>
CAPITAL STOCK, beginning and end of period.......... $ 2,500 $ 2,500
-------- --------
ADDITIONAL PAID-IN CAPITAL, beginning of period..... 806,538 761,538
Capital contributions from Parent................... -- 45,000
-------- --------
End of period.............................. 806,538 806,538
-------- --------
Accumulated other comprehensive income, beginning of
period............................................ 12,637 (47,498)
Other comprehensive income, net of tax.............. 8,972 60,135
-------- --------
End of period.............................. 21,609 12,637
-------- --------
RETAINED EARNINGS, beginning of period.............. 43,888 34,421
Net income.......................................... 25,117 38,717
Dividend to parent.................................. -- (29,250)
-------- --------
End of period.............................. 69,005 43,888
-------- --------
Total stockholder's equity................. $899,652 $865,563
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
120
<PAGE> 266
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 25,117 $ 23,174
Reconcilement of net income to net cash provided:
Realized investment gains............................... (17,527) (9,050)
Interest credited and other charges..................... 88,303 101,886
Amortization of value of business acquired.............. 11,548 11,812
Amortization of goodwill................................ 6,370 5,099
Deferred insurance acquisition costs.................... (19,956) (14,093)
Amortization of discount and premium on investments..... 8,851 8,997
Deferred income taxes................................... (13,658) (1,627)
Net change in current Federal income taxes.............. (97,823) 3,840
Benefits and premium taxes due related to separate
account bank-owned life insurance..................... 40,163 --
Other, net.............................................. (21,795) 11,495
--------- ---------
Net cash flow provided by operating activities...... 9,593 141,533
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity....................... 258,237 104,154
Fixed maturities sold prior to maturity................. 505,188 209,569
Equity securities....................................... 460 --
Mortgage loans, policy loans and other invested
assets................................................ 54,780 117,093
Cost of investments purchased or loans originated:
Fixed maturities........................................ (675,192) (229,921)
Equity securities....................................... (48,585) --
Mortgage loans, policy loans and other invested
assets................................................ (26,951) (76,014)
Short-term investments, net............................... 194,251 62,729
Net change in receivable and payable for securities
transactions............................................ (677) 13,677
Net change in other assets................................ -- 114
--------- ---------
Net cash provided by investing activities........... 261,511 201,401
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits................................................ 72,626 67,412
Withdrawals............................................. (356,177) (343,675)
Dividends to parent....................................... -- (29,250)
Other..................................................... 9,364 (37,834)
--------- ---------
Net cash used in financing activities............... (274,187) (343,347)
--------- ---------
Net decrease in cash............................ (3,083) (413)
CASH at the beginning of period............................. 23,868 2,776
--------- ---------
CASH at the end of the period............................... $ 20,785 $ 2,363
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
121
<PAGE> 267
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Kemper Investors Life Insurance Company ("KILICO") is incorporated under the
insurance laws of the State of Illinois. KILICO is licensed in the District of
Columbia and all states, except New York. KILICO is a wholly-owned subsidiary of
Kemper Corporation ("Kemper"), a nonoperating holding company.
On January 4, 1996, an investor group comprised of Zurich Insurance Company
("Zurich"), and Insurance Partners, L.P. ("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 owned 80 percent and 20 percent,
respectively, of Kemper and therefore KILICO. On February 27, 1998, Zurich
acquired Insurance Partner's remaining 20 percent interest for cash. As a result
of this transaction, Kemper and KILICO became wholly-owned subsidiaries of
Zurich.
The acquisition of Kemper on January 4, 1996 was accounted for using the
purchase method of accounting. Under the purchase method of accounting, KILICO's
assets and liabilities have been marked to their relative fair values as of the
acquisition date. The difference between the cost of acquiring KILICO and the
net fair values of KILICO's assets and liabilities as of the acquisition date
has been recorded as goodwill. KILICO began to amortize goodwill during 1996 on
a straight-line basis over twenty-five years. In December of 1997, KILICO
changed its amortization period to twenty years in order to conform to Zurich's
accounting practices and policies.
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 KILICO's
life insurance business in force and represents the portion of the cost to
acquire KILICO that is allocated to the value of the right to receive future
cash flows from insurance contracts existing at the date of acquisition. Such
value is the present value of the actuarially determined projected cash flows
for the acquired policies.
The value of the business acquired is amortized over the estimated contract life
of the business acquired in relation to the present value of estimated gross
profits using current assumptions based on an interest rate equal to the
liability or contract rate on the value of business acquired. The estimated
amortization
122
<PAGE> 268
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
and accretion of interest for the value of business acquired for each of the
years through December 31, 2003 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ---------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1998................... $143,744 $(31,301) $8,877 $121,320
1999................... 121,320 (23,621) 7,889 105,588
2000................... 105,588 (21,587) 6,899 90,900
2001................... 90,900 (19,100) 5,995 77,795
2002................... 77,795 (17,820) 5,157 65,132
2003................... 65,132 (15,897) 4,364 53,599
</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 KILICO's net income but rather are recorded as a credit or charge to
accumulated other comprehensive income, net of income tax. As of June 30, 1998,
the accumulated affects of this adjustment increased the value of business
acquired and accumulated other comprehensive income by approximately $7.4
million and $4.8 million, respectively.
2. In the opinion of management, all necessary adjustments consisting of normal
recurring accruals have been made for a fair statement of the results of KILICO
for the periods included in these financial statements. These financial
statements should be read in conjunction with the financial statements and
related notes in the 1997 Annual Report on Form 10-K/A No. 1.
3. In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS" No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses). This statement requires that all items required to be reported be
displayed with the same prominence as other financial statements. KILICO adopted
SFAS No. 130 on January 1, 1998 and accordingly restated 1997 results for
comparative purposes. The impact of implementation did not affect KILICO's
reported net income before reporting other comprehensive income. Other
comprehensive income, however, by design, could be materially different from
reported net income, as changes in unrealized appreciation and depreciation of
investments for example are now included as a component of reported
comprehensive income.
123
<PAGE> 269
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. During December 1997, KILICO entered into a funds held reinsurance agreement
with a Zurich affiliated company, EPICENTRE Reinsurance (Bermuda) Limited
("EPICENTRE"). Under the terms of this agreement, KILICO ceded, on a yearly
renewable term basis, ninety percent of the net amount at risk (death benefit
payable to the insured less the insured's separate account cash surrender value)
related to a non-registered variable bank-owned life insurance contract
("BOLI"), which is held in KILICO's separate accounts. During the first quarter
of 1998, KILICO ceded to EPICENTRE approximately $77.3 million of separate
account fees (cost of insurance charges) paid to KILICO by these policyholders
for the life insurance coverage provided under the terms of each separate
account contract. KILICO has also withheld approximately $95.3 million of such
funds due to EPICENTRE under the terms of the reinsurance agreement as a
component of benefits and funds payable in the accompanying consolidated balance
sheet as of June 30, 1998. KILICO remains primarily liable to its policyholders
for these amounts.
124
<PAGE> 270
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
KILICO recorded net income of $25.1 million in the first six months of 1998,
compared with net income of $23.2 million in the first six months of 1997. The
increase in net income in the first six months of 1998, compared with the first
six months of 1997, was primarily related to an increase in realized capital
gains, partially offset by a decrease in operating earnings before amortization
of goodwill and an increase in goodwill amortization.
The following table reflects the components of net income:
NET INCOME
(in millions)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------
1998 1997
----- -----
<S> <C> <C>
Operating earnings before amortization of
goodwill.......................................... $20.1 $22.4
Amortization of goodwill............................ (6.4) (5.1)
Net realized capital gains.......................... 11.4 5.9
----- -----
Net income................................ $25.1 $23.2
===== =====
</TABLE>
The following table reflects the major components of net realized capital gains
included in net income. (See "INVESTMENTS" below.)
NET REALIZED CAPITAL GAINS (LOSSES)
(in millions)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
---------------- ------------------
1998 1997 1998 1997
----- ----- ----- ----
<S> <C> <C> <C> <C>
Real estate-related gains........... $10.5 $ 9.3 $ 9.9 $7.7
Fixed maturity write-downs.......... -- (1.0) -- --
Other gains, net.................... 7.0 .8 5.7 .5
----- ----- ----- ----
Realized investment gains........... 17.5 9.1 15.6 8.2
Income tax expense.................. 6.1 3.2 5.4 2.9
----- ----- ----- ----
Net realized capital
gains................... $11.4 $ 5.9 $10.2 $5.3
===== ===== ===== ====
</TABLE>
Operating earnings before amortization of goodwill decreased to $20.1 million in
the first six months of 1998, compared with $22.4 million in the first six
months of 1997. This decrease was primarily attributable to increases in claims
and nondeferrable operating expenses, partially offset by increases in fees and
other income and spread revenue (investment income earned, less interest
credited incurred).
Spread revenue improved during 1998, due to a net decrease in interest credited.
Interest credited declined during 1998 due to crediting rate reductions and a
decrease in the liability for future policy benefits. Investment income
125
<PAGE> 271
declined due to a decrease in invested assets. Invested assets and the liability
for future policy benefits both declined due to surrenders and withdrawals
during 1997 and 1998. Investment income in 1998, compared with 1997, was
positively impacted by a $45.0 million capital contribution received by KILICO
in December 1997.
SALES
(in millions)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
---------------- ------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Annuities:
General account.............. $ 71.9 $ 67.2 $ 35.4 $ 33.3
Separate account............. 128.3 133.1 67.7 61.7
------ ------ ------ ------
Total annuities........... 200.2 200.3 103.1 95.0
------ ------ ------ ------
Life insurance:
Separate account bank-owned
life insurance............ 422.7 80.0 264.0 80.0
Separate account variable
universal life
insurance................. 6.8 .6 5.6 .6
Term life.................... 11.1 9.0 6.1 4.0
Interest-sensitive life...... .1 .2 -- (.2)
------ ------ ------ ------
Total life................ 440.7 89.8 275.7 84.4
------ ------ ------ ------
Total sales.......... $640.9 $290.1 $378.8 $179.4
====== ====== ====== ======
</TABLE>
Sales of annuity products consist of total deposits received. Sales of variable
annuities increase administrative fees earned, and they pose minimal investment
risk for KILICO, as policyholders invest in one or more of several underlying
investment funds which invest in stocks and bonds.
General account fixed annuity sales increased $4.7 million in the first six
months of 1998, compared with the first six months of 1997, while separate
account variable annuity sales decreased $4.8 million in the first six months of
1998, compared with the first six months of 1997. Separate account annuity sales
declined during the first six months of 1998, compared with 1997, as a result of
a transition in KILICO's sales initiatives in certain markets, as well as from
certain tax proposals, which had negatively impacted KILICO's sales in certain
markets during the first part of 1998.
During late 1996, KILICO introduced a registered flexible individual variable
life insurance product and in mid 1997 KILICO began to introduce several non-
registered variable universal life insurance contracts, a variable individual
and group bank-owned life insurance contract ("BOLI") and a series of variable
individual universal life insurance contracts. Sales of these separate account
variable products, like variable annuities, pose minimal investment risk for
KILICO as policyholders invest in subaccounts that, in turn, invest in one or
more underlying investment funds which invest in stocks and bonds. KILICO
receives premium tax and DAC tax expense loads from certain contract
126
<PAGE> 272
holders, as well as administrative fees and cost of insurance charges which
compensate KILICO for providing life insurance coverage to the contractholders
in excess of their cash surrender values. Face amount of variable universal life
insurance business in force, before reinsurance, amounted to $61.0 billion at
June 30, 1998, compared with $59.6 billion at December 31, 1997 and $2.0 billion
at June 30, 1997.
KILICO also sells low-cost term life insurance products offering initial level
premiums for 5, 10, 15, 20, and 30 years in order to balance its product mix and
asset-liability structure. In December 1996, KILICO assumed $14.4 billion (face
amount) of term life insurance premiums from Federal Kemper Life Assurance
Company ("FKLA"), a wholly-owned subsidiary of Kemper. Through the first six
months of 1998 and 1997, KILICO assumed premiums of $10.7 million and $8.7
million, respectively, and $10.7 million and $8.0 million of claims,
respectively, under the terms of the reinsurance agreement with FKLA.
Excluding the amounts assumed from FKLA, KILICO's total term life sales,
including new and renewal premiums, amounted to $449 thousand in the first six
months of 1998, compared with $280 thousand in the first six months of 1997.
Separate account fees and charges consist of the following as of June 30, 1998
and 1997:
<TABLE>
<CAPTION>
(in millions) SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
---------------- ------------------
1998 1997 1998 1997
----- ----- ----- ----
<S> <C> <C> <C> <C>
Separate account fees on non-BOLI
variable life and annuities...... $18.9 $14.4 $ 9.4 $7.1
BOLI cost of insurance charges and
fees............................. 9.4(1) .4 5.1 .4
BOLI premium tax expense loads..... 6.1(2) 2.0 1.9 2.0
----- ----- ----- ----
Total.................... $34.4 $16.8 $16.4 $9.5
===== ===== ===== ====
</TABLE>
- ---------------
(1) KILICO ceded $77.3 million of such charges to EPICENTRE during 1998.
(2) There is a corresponding offset in taxes, licenses and fees.
Separate account fees on non-BOLI variable life and annuities increased during
the first half of 1998, compared with 1997, due to an increase in the market
value of separate account assets and due to new sales during 1997 and 1998.
127
<PAGE> 273
Policyholder surrenders, withdrawals and death benefits were as follows:
<TABLE>
<CAPTION>
(in millions) SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
General account................. $352.2 $326.0 $173.7 $179.8
Separate account................ 127.4 110.1 66.6 48.9
------ ------ ------ ------
Total................. $479.6 $436.1 $240.3 $228.7
====== ====== ====== ======
</TABLE>
Reflecting the current interest rate environment and other competitive market
factors, KILICO adjusts its crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and withdrawal
activity. KILICO can also improve spread revenue over time by increasing
investment income.
General account surrenders, withdrawals and death benefits increased $26.2
million in the first six months of 1998, compared with the first six months of
1997, reflecting an increase in claims as well as an increase in overall
surrenders and withdrawals. KILICO expects that the level of surrender and
withdrawal activity experienced in the first six months of 1998 should remain at
a similar level through out 1998 given current projections for relatively stable
interest rates.
Claims and other policyholder benefits increased $13.1 million in the first six
months of 1998, compared with 1997, primarily due to BOLI-related claims and
benefits.
Taxes, licenses and fees increased during the first six months of 1998, compared
with 1997, primarily reflecting premium taxes on BOLI. KILICO received a
corresponding expense load related to these premium taxes in separate account
fees and other charges during the first six months of 1998.
Commissions and the deferral of insurance acquisition costs increased reflecting
the overall increase in new business during 1998, compared with 1997.
Operating expenses increased $6.3 million in the first six months of 1998,
compared with first six months of 1997, due to increases in head count in the
sales and underwriting departments, an increase in data processing expenses
related to ongoing projects, new product development and year 2000 compliance
costs.
The difference between the cost of acquiring KILICO and the net fair value of
KILICO's assets and liabilities as of January 4, 1996 was recorded as goodwill.
As previously mentioned, KILICO changed its amortization period in December of
1997, from 25 years to 20 years, in order to conform to Zurich's accounting
practices and policies. As a result of the change in amortization periods,
KILICO recorded an increase in amortization expense of $1.3 million in the first
six months of 1998, compared with 1997.
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<PAGE> 274
INVESTMENTS
KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors, its
evaluation of risk and return in various markets, consistency with KILICO's
business strategy and investment guidelines approved by the board of directors,
the interest rate environment, liability durations and changes in market and
business conditions.
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
------- -----------
<S> <C> <C> <C> <C>
Cash and short-term
investments.................. $ 63 1.5% $ 260 5.8%
Fixed maturities:
Investment grade:
NAIC(1) Class 1........... 2,853 67.3 3,004 67.1
NAIC(1) Class 2........... 683 16.1 651 14.5
Below investment grade:
Performing................ 56 1.3 14 .3
Nonperforming............. -- -- -- --
Joint venture mortgage loans... 68 1.6 73 1.6
Third-party mortgage loans..... 104 2.5 103 2.3
Other real estate-related
investments.................. 42 1.0 44 1.0
Policy loans................... 277 6.5 282 6.3
Equity securities.............. 75 1.8 25 .6
Other.......................... 21 .4 21 .5
------ ----- ------ -----
Total................ $4,242 100.0% $4,477 100.0%
====== ===== ====== =====
</TABLE>
- ---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
FIXED MATURITIES
KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value, with the aggregate unrealized
appreciation or depreciation being recorded as a component of accumulated other
comprehensive income, net of any applicable income tax expense. The aggregate
unrealized appreciation on fixed maturities at June 30, 1998 was $41.6 million,
compared with $24.6 million at December 31, 1997. Fair values are sensitive to
movements in interest rates and other economic developments and can be expected
to fluctuate, at times significantly, from period to period.
129
<PAGE> 275
At June 30, 1998, investment-grade fixed maturities and cash and short-term
investments accounted for 84.9 percent of KILICO's invested assets and cash,
compared with 87.4 percent at December 31, 1997.
Approximately 31.6 percent of KILICO's investment-grade fixed maturities at June
30, 1998 were mortgage-backed securities, down from 35.1 percent at December 31,
1997, due to sales and paydowns during 1998. These investments consist primarily
of marketable mortgage pass-through securities issued by the Government National
Mortgage Association, the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation and other investment-grade securities
collateralized by mortgage pass-through securities issued by these entities.
KILICO has not made any investments in interest-only or other similarly volatile
tranches of mortgage-backed securities. KILICO's mortgage-backed investments are
generally of AAA credit quality, and the markets for these investments have been
and are expected to remain liquid. KILICO plans to continue to reduce its
holding of such investments over time.
Approximately 10.2 percent of KILICO's investment-grade fixed maturities at June
30, 1998 consisted of corporate asset-backed securities, compared with 10.8
percent at December 31, 1997. The majority of KILICO's investments in
asset-backed securities were backed by manufactured housing loans, auto loans
and home equity loans.
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 KILICO'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 June
30, 1998, KILICO had unamortized premiums and discounts of $17.2 million and
$4.8 million, respectively, related to mortgage-backed and asset-backed
securities. Reductions to investment income related to the amortization of
premiums and discounts amounted to $8.9 million during the first half of 1998,
compared with $9.0 million in the first half of 1997. KILICO believes that as a
result of the purchase accounting adjustments and the current interest rate
environment, anticipated prepayment activity is expected to result in further
reductions to future investment income for the remainder of 1998.
REAL ESTATE-RELATED INVESTMENTS
The $214.0 million real estate portfolio held by KILICO, consisting of joint
venture and third-party mortgage loans and other real estate-related
investments, constituted 5.1 percent of cash and invested assets at June 30,
1998, compared with $220.0 million, or 4.9 percent, at December 31, 1997.
As reflected in the "Real estate portfolio" table on the following page, KILICO
has continued to fund both existing projects and legal commitments. The future
legal commitments declined to $64.7 million at June 30, 1998, compared with
$75.3 million at December 31, 1997, primarily due to sales. As of June 30, 1998,
KILICO expects to fund approximately $6.3 million of these legal
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<PAGE> 276
commitments, along with providing capital to existing projects. The disparity
between total legal commitments and the amount expected to be funded relates
principally to standby financing arrangements that provide credit enhancements
to certain tax-exempt bonds, which KILICO does not presently expect to fund. The
total legal commitments, along with estimated working capital requirements, are
considered in KILICO's evaluation of reserves and write-downs.
Excluding the $1.7 million of real estate owned and $15.3 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $197.0 million
at June 30, 1998, after reserves and writedowns. Of this amount, $164.4 million
are on accrual status with a weighted average interest rate of approximately 8.9
percent. Of these accrual loans, 8.1 percent have terms requiring current
periodic payments of their full contractual interest, 53.8 percent require only
partial payments or payments to the extent of cash flow of the borrowers, and
38.1 percent defer all interest to maturity.
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
OTHER REAL ESTATE-RELATED
MORTGAGE LOANS INVESTMENTS
---------------- ------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ -------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1997........... $ 72.7 $103.0 $21.1 $ 4.0 $19.2 $220.0(1)
Additions
(deductions):
Fundings............. 1.1 -- -- .2 -- 1.3
Interest added to
principal.......... 3.1 1.4 -- -- -- 4.5
Sales/paydowns/
distributions...... (11.0) (.2) -- (2.9) (3.1) (17.2)
Operating loss....... -- -- -- -- (.2) (.2)
Realized investments
gains (losses)..... 4.3 2.6 3.9 .3 (.6) 10.5
Other transactions,
net................ (2.3) (2.6) (.1) .1 -- (4.9)
------ ------ ----- ----- ----- ------
Balance at June 30,
1998............... $ 67.9 $104.2 $24.9 $ 1.7 $15.3 $214.0(3)
====== ====== ===== ===== ===== ======
</TABLE>
- ---------------
(1) Net of $9.2 million reserve and writedowns. Excludes $9.5 million of real
estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued by KILICO generally
131
<PAGE> 277
to provide financing for Kemper's or KILICO's joint ventures for various
purposes.
(3) Net of $8.8 million reserve and writedowns. Excludes $9.1 million of real
estate-related accrued interest.
REAL ESTATE CONCENTRATIONS
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships.
GEOGRAPHIC DISTRIBUTION AS OF
JUNE 30, 1998
<TABLE>
<S> <C>
California............... 40.3%
Hawaii................... 11.4
Colorado................. 10.2
Oregon................... 9.6
Washington............... 9.5
Florida.................. 5.4
Texas.................... 5.3
Michigan................. 3.8
Ohio..................... 3.5
Other states............. 1.0
-----
Total.................... 100.0%
=====
</TABLE>
DISTRIBUTION BY PROPERTY TYPE AS OF JUNE 30, 1998
<TABLE>
<S> <C>
Hotel.................... 43.1%
Land..................... 29.8
Residential.............. 12.7
Retail................... 3.4
Office................... 1.9
Industrial............... 1.0
Other.................... 8.1
-----
100.0%
=====
</TABLE>
Undeveloped land represented approximately 29.8 percent of KILICO's real estate
portfolio at June 30, 1998. To maximize the value of certain land and other
projects, additional development has been proceeding or has been planned. Such
development of existing projects would continue to require funding, either from
KILICO 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 KILICO. The values of development
projects are dependent on a number of factors, including Kemper's and KILICO's
plans with respect thereto, obtaining necessary construction and zoning permits
and market demand for the permitted use of the property. There can be no
assurance that such permits will be obtained as planned or at all, nor that such
expenditures will occur as scheduled, nor that Kemper's and KILICO's plans with
respect to such projects may not change substantially.
Approximately half of KILICO's real estate loans are on properties or projects
where KILICO, Kemper, or their affiliates have taken ownership positions in
joint ventures with a small number of partners.
At June 30, 1998, loans to and investments in joint ventures in which Patrick M.
Nesbitt or his affiliates ("Nesbitt"), a third-party real estate developer, have
ownership interests constituted approximately $89.6 million, or 41.9 percent, of
KILICO's real estate portfolio. The Nesbitt ventures consist of nine hotel
132
<PAGE> 278
properties and two office buildings. At June 30, 1998, KILICO did not have any
Nesbitt-related off-balance sheet legal funding commitments outstanding.
At June 30, 1998, loans to and investment in a master limited partnership (the
"MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual
Casualty Company, a former affiliate, constituted approximately $64.7 million,
or 30.2 percent, of KILICO's real estate portfolio. Kemper's interest is 75
percent as of June 30, 1998. At June 30, 1998, MLP-related commitments accounted
for approximately $6.3 million of KILICO's off-balance sheet legal commitments,
which KILICO expects to fund.
At June 30, 1998, KILICO no longer had any outstanding loans or investments in
projects with the Prime Group, Inc. or its affiliates, as all such investments
have been sold or written down to zero. However, KILICO continues to have Prime
Group-related commitments, which accounted for $25.7 million of the
off-balance-sheet legal commitments at June 30, 1998. KILICO does not expect to
fund any of these commitments.
The remaining significant real estate-related investment amounted to $28.1
million at June 30, 1998 and consisted of various zoned and unzoned residential
and commercial lots located in Hawaii. Due to certain negative zoning
restriction developments in January 1997 and a continuing economic slump in
Hawaii, KILICO has placed these real estate-related investments on nonaccural
status. KILICO is currently pursuing the zoning of all remaining unzoned
properties, as well as pursuing steps to sell all remaining zoned properties.
However, due to the state of the Hawaiian economy, which has lagged behind the
economic expansion of most of the rest of the United States, KILICO anticipates
that it could be several additional years until all of KILICO's investments in
Hawaii are completely disposed of.
REAL ESTATE OUTLOOK
The following table is a summary of KILICO's troubled real estate-related
investments:
TROUBLED REAL ESTATE-RELATED INVESTMENTS
(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
<TABLE>
<CAPTION>
(in millions) JUNE 30 December 31
1998 1997
------- -----------
<S> <C> <C>
Potential problem loans(1)....................... $ -- $ --
Past due loans(2)................................ -- --
Nonaccrual loans(3)(primarily Hawaiian
properties).................................... 38.2 47.4
Real estate owned................................ 1.7 4.0
----- -----
Total.................................. $39.9 $51.4
===== =====
</TABLE>
- ---------------
(1) These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which KILICO anticipates may go into
nonaccrual, past due or restructured status.
133
<PAGE> 279
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful. Loans on
nonaccrual status after reserves and write-downs amounted to $32.6 million
and $41.8 million at June 30, 1998 and December 31, 1997, respectively.
KILICO evaluates its real estate-related investments (including accrued
interest) using an estimate of each investment's observable market price, net of
estimated costs to sell. Because KILICO's real estate review process includes
estimates, there can be no assurance that current estimates will prove accurate
over time due to changing economic conditions and other factors. KILICO's real
estate-related investments are expected to continue to decline further through
future sales. KILICO's net income could be materially reduced in future periods
if real estate market conditions worsen in areas where KILICO's portfolio is
located or if Kemper's and KILICO's plans with respect to certain projects
change or if necessary construction or zoning permits are not obtained.
REALIZED INVESTMENT RESULTS
Reflected in net income are after-tax net realized investment gains of $11.4
million for the first half of 1998, compared with $5.9 million for the first
half of 1997.
Unrealized gains and losses on fixed maturity investments are not reflected in
KILICO's net income. These changes in unrealized value are included within
accumulated other comprehensive income, net of any applicable income taxes, in
accordance with SFAS No. 130, as previously discussed. If and to the extent a
fixed maturity investment suffers an other-than-temporary decline in value,
however, such security is written down to net realizable value, and the write-
down adversely impacts net income.
KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.
A valuation allowance has been established, and is evaluated as of each reported
period end, to reduce the deferred tax asset for investment losses to the amount
that, based upon available evidence, is in management's judgment more likely
than not to be realized.
134
<PAGE> 280
STATEMENT OF ADDITIONAL INFORMATION
------------------------, 1998
[TO BE UPDATED BY AMENDMENT]
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
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 . 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-18
Experts..................................................... B-18
Financial Statements........................................ B-18
</TABLE>
<PAGE> 281
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Fund by
each of the Subaccounts. All expenses incurred in the operations of the Separate
Account, except the charge for mortality and expense risk and administrative
expenses, and records maintenance charge (as described in the Prospectus) are
borne by KILICO.
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the year ended December 31, 1997. The firm performed
the annual audit of the financial statements of the Separate Account and KILICO
for the year ended December 31, 1997.
The independent auditors for the Separate Account prior to 1997 were KPMG 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 and one-quarter percent (6 1/4%)
of Purchase Payments.
PERFORMANCE INFORMATION OF SUBACCOUNTS
As described in the Prospectus, a Subaccount's historical performance may be
shown in the form of standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, the Kemper Investment Grade Bond Subaccount and the Kemper
Government Securities Subaccount; and "yield" and "effective yield" information
may be provided in the case of the Kemper Money Market Subaccount. These various
measures of performance are described below.
A Subaccount's standardized average annual total return quotation is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a
Subaccount for a specific period is found by first taking a hypothetical $1,000
investment in each of the Subaccount's units on the first day of the period at
the maximum offering price, which is the Accumulation Unit value per unit
("initial investment") and computing the ending redeemable value ("redeemable
value") of that investment at the end of the period. The redeemable value
reflects the effect of the applicable Withdrawal Charge that may be imposed at
the end of the period as well as all other recurring charges and fees applicable
under the Contract to all Contract Owner accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. Standardized average annual total return figures
are annualized and, therefore, represent the average annual percentage change in
the value of a Subaccount over the applicable period.
No standard formula has been prescribed for calculating nonstandardized total
return performance. Nonstandardized total return performance for a specific
period is calculated by first taking an investment (assumed to be $40,000 below)
in each Subaccount's units on the first day of the period at the maximum
offering price, which is the Accumulation Unit value per unit ("initial
investment") and computing the ending value ("ending value") of that investment
at the end of the period. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Premium taxes are not
included in the term charges. The nonstandardized total return percentage is
then determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. An assumed investment of $40,000 was chosen because that
approximates the size of a typical account. The account size used affects the
performance figure because the Records Maintenance Charge is a fixed per account
charge. Both annualized and nonannualized
B-1
<PAGE> 282
(cumulative) nonstandardized total return figures may be provided. Annualized
nonstandardized total return figures represent the average annual percentage
charge in the value of a Subaccount over the applicable period while
nonannualized (cumulative) figures represent the actual percentage change over
the applicable period.
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover periods of one, three, five and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in a
Subaccount (life of Subaccount). Nonstandardized total return may cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper Money Market Subaccount, Kemper Total Return Subaccount and
Kemper High Yield Subaccount, and for periods from December 9, 1983 (inception)
for the Kemper Growth Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount, the Kemper Investment Grade Bond
Subaccount and the Kemper Government Securities Subaccount is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The yields for the Kemper High Yield Subaccount, the Kemper
Investment Grade Bond Subaccount and the Kemper Government Securities
Subaccount, based upon the one month period ended December 31, 1997, were 6.12%,
3.44% and 4.06%, 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 Kemper Money Market Subaccount's yield is computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit value during
the period is divided by the Accumulation Unit value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Separate Account's portfolio are not included in the
calculation. The Kemper Money Market Subaccount's yield for the seven-day period
ended December 31, 1997 was 3.90% and average portfolio maturity was 27 days.
The Kemper Money Market Subaccount's effective yield is determined by taking the
base period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period return
+1) (365) / (7) - 1. The Kemper Money Market Subaccount's effective yield for
the seven day period ended December 31, 1997 was 3.98%.
B-2
<PAGE> 283
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 seven years after purchase may be subject
to a Withdrawal Charge that ranges from 7% the first year to 0% after seven
years. Yield, effective yield and total return do not reflect the effect of the
Withdrawal Charge or premium taxes that may be imposed upon the redemption of
units. Standardized average annual total return reflects the effect of the
applicable Withdrawal Charge (but not premium tax) that may be imposed at the
end of the period in question.
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes, including the
Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, the
Consumer Price Index, the CDA Certificate of Deposit Index, the Salomon Brothers
High Grade Corporate Bond Index, the Lehman Brothers Government/Corporate Bond
Index, the Merrill Lynch Government/Corporate Master Index, the Lehman Brothers
Long Government/Corporate Bond Index, the Lehman Brothers Government/Corporate
1-3 Year Bond Index, the Standard & Poor's Midcap 400 Index, the NASDAQ
Composite Index, the Russell 2000 Index and the Morgan Stanley Capital
International Europe, Australia, Far East Index. In addition, the Subaccounts
may provide performance analysis rankings of Lipper Analytical Services, Inc.,
the VARDS Report, MORNINGSTAR, INC., Ibbotson Associates or Micropal. Please
note the differences and similarities between the investments which a Subaccount
may purchase and the investments measured by the indexes which are described
below. In particular, it should be noted that certificates of deposit may offer
fixed or variable yields and principal is guaranteed and may be insured. The
units of the Subaccounts are not insured. Also, the value of the Subaccounts
will fluctuate. From time to time, the Separate Account may quote information
from publications such as MORNINGSTAR, INC., THE WALL STREET JOURNAL, MONEY
MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA TODAY,
INSTITUTIONAL INVESTOR, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE, BROKER
WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
The following tables include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1997, and compares these quotations to various indexes.
B-3
<PAGE> 284
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT...................... 28.61%
Life of Subaccount (from 05/01/96).................... $59,838 49.52% 27.26% 23.14%
Life of Portfolio (from 05/01/96)..................... 59,838 49.52% 27.26% 23.14%
One Year.............................................. 51,446 28.54% 28.54% 20.89%
KEMPER VALUE+GROWTH SUBACCOUNT.......................... 23.76%
Life of Subaccount (from 05/01/96).................... 56,224 40.49% 22.60% 18.39%
Life of Portfolio (from 05/01/96)..................... 56,224 40.49% 22.60% 18.39%
One Year.............................................. 49,504 23.68% 23.68% 16.05%
KEMPER HORIZON 20+ SUBACCOUNT........................... 18.83%
Life of Subaccount (from 05/01/96).................... 54,346 35.79% 20.13% 15.87%
Life of Portfolio (from 05/01/96)..................... 54,346 35.79% 20.13% 15.87%
One Year.............................................. 47,532 18.75% 18.75% 11.13%
JANUS GROWTH SUBACCOUNT................................. 19.89%
Life of Subaccount (from 09/15/95).................... 57,865 44.66% 17.40% 14.73%
Life of Portfolio (from 09/13/93)..................... 75,123 87.73% 15.78% N/A
Three Year............................................ 71,914 79.71% 21.58% N/A
One Year.............................................. 47,957 19.82% 19.82% 12.19%
</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> 285
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------------------------------------------------------------
STANDARD & CONSUMER
DOW JONES DOW JONES POOR'S STANDARD & PRICE CONSUMER
INDUSTRIAL(5) INDUSTRIAL(5) 500(6) POOR'S 500(6) INDEX(7) PRICE INDEX(7)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
------------- ------------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE
SUBACCOUNT
Life of Portfolio (from
05/01/96).................... 41.85 23.31 48.25 26.62 3.72 2.21
One Year....................... 22.64 22.64 31.01 31.01 1.70 1.70
KEMPER VALUE+GROWTH SUBACCOUNT
Life of Portfolio (from
05/01/96).................... 41.85 23.31 48.25 26.62 3.72 2.21
One Year....................... 22.64 22.64 31.01 31.01 1.70 1.70
KEMPER HORIZON 20+ SUBACCOUNT
Life of Portfolio (from
05/01/96).................... 41.85 23.31 48.25 26.62 3.72 2.21
One Year....................... 22.64 22.64 31.01 31.01 1.70 1.70
JANUS GROWTH SUBACCOUNT
Life of Portfolio (from
09/13/93).................... 117.61 19.83 110.62 18.85 11.66 2.60
Three Years.................... 106.24 27.29 113.30 28.32 7.72 2.51
One Year....................... 22.64 22.64 31.01 31.01 1.70 1.70
</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> 286
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
------------------------------- --------------
YEAR TO DATE (%) ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
RETURN(3) VALUE(4) RETURN RETURN RETURN
---------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET SUBACCOUNT(20)......... 3.81%
Life of Subaccount (from 04/06/82)....... $91,778 126.87% 5.34% 5.07%
Life of Portfolio (from 04/06/82)........ 91,778 126.87% 5.34% 5.07%
Ten Years................................ 60,635 51.51% 4.24% 3.97%
Five Years............................... 46,660 16.58% 3.11% 2.09%
Three Years.............................. 44,822 11.98% 3.84% 1.98%
One Year................................. 41,524 3.73% 3.73% -3.11%
KEMPER MONEY MARKET SUBACCOUNT #2(20)...... 5.21%
Life of Subaccount (from 04/06/82)....... 100,417 150.97% 6.02% 5.75%
Life of Portfolio (from 04/06/82)........ 100,417 150.97% 6.02% 5.75%
Ten Years................................ 66,548 66.29% 5.22% 4.94%
Five Years............................... 49,527 23.74% 4.35% 3.32%
Three Years.............................. 46,522 16.23% 5.14% 3.26%
One Year................................. 42,083 5.13% 5.13% -1.80%
KEMPER HIGH YIELD SUBACCOUNT(19)........... 10.08%
Life of Subaccount (from 04/06/82)....... 241,465 503.59% 12.11% 11.82%
Life of Portfolio (from 04/06/82)........ 241,465 503.59% 12.11% 11.82%
Ten Years................................ 106,143 165.28% 10.25% 9.96%
Five Years............................... 65,537 63.77% 10.37% 9.27%
Three Years.............................. 57,336 43.26% 12.73% 10.71%
One Year................................. 44,032 10.01% 10.01% 2.75%
KEMPER GOVERNMENT SECURITIES SUBACCOUNT.... 7.46%
Life of Subaccount (from 11/03/89)....... 67,043 67.61% 6.54% 6.26%
Life of Portfolio (from 09/03/87)........ 76,290 90.65% 6.44% N/A
Ten Years................................ 76,075 90.11% 6.64% N/A
Five Years............................... 51,435 28.51% 5.15% 4.10%
Three Years.............................. 51,126 27.74% 8.50% 6.56%
One Year................................. 43,984 7.38% 7.38% .29%
KEMPER INVESTMENT GRADE BOND SUBACCOUNT.... 7.54%
Life of Subaccount (from 05/01/96)....... 44,143 10.28% 6.04% 2.26%
Life of Portfolio (from 05/01/96)........ 44,143 10.28% 6.04% 2.26%
One Year................................. 43,014 7.46% 7.46% .37%
</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> 287
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------------------------------------------------------------
SALOMON BROS SALOMON BROS LEHMAN BROS.
CONSUMER CONSUMER CDA CERT CDA CERT HIGH GRADE HIGH GRADE GOVT/CORP
PRICE PRICE OF DEPOSIT OF DEPOSIT CORP BOND CORP BOND BOND
INDEX(7) INDEX(7) INDEX(8) INDEX(8) INDEX(9) INDEX(9) INDEX(10)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE %
RETURN RETURN RETURN RETURN RETURN RETURN RETURN
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET
SUBACCOUNT(20)
Life of Portfolio
(from 04/06/82)..... N/A N/A N/A N/A N/A N/A N/A
Ten Years............. 39.93 3.42 80.38 6.08 180.09 10.85 N/A
Five Years............ 13.69 2.60 27.98 5.06 55.46 9.23 N/A
Three Years........... 7.72 2.51 18.39 5.79 45.69 13.36 N/A
One Year.............. 1.70 1.70 5.77 5.77 12.96 12.96 N/A
KEMPER MONEY MARKET
SUBACCOUNT #2(20)
Life of Portfolio
(from 04/06/82)..... N/A N/A N/A N/A N/A N/A N/A
Ten Years............. 39.93 3.42 80.38 6.08 180.09 10.85 N/A
Five Years............ 13.69 2.60 27.98 5.06 55.46 9.23 N/A
Three Years........... 7.72 2.51 18.39 5.79 45.69 13.36 N/A
One Year.............. 1.70 1.70 5.77 5.77 12.96 12.96 N/A
KEMPER HIGH YIELD
SUBACCOUNT(19)
Life of Portfolio
(from 04/06/82)..... N/A N/A N/A N/A N/A N/A N/A
Ten Years............. 39.93 3.42 N/A N/A N/A N/A 139.88
Five Years............ 13.69 2.60 N/A N/A N/A N/A 44.29
Three Years........... 7.72 2.51 N/A N/A N/A N/A 34.68
One Year.............. 1.70 1.70 N/A N/A N/A N/A 9.76
KEMPER GOVERNMENT
SECURITIES SUBACCOUNT
Life of Portfolio
(from 09/03/87)..... N/A N/A N/A N/A 191.45 10.91 N/A
Ten Years............. 39.93 3.42 180.09 10.85 139.88
Five Years............ 13.69 2.60 N/A N/A 55.46 9.23 44.29
Three Years........... 7.72 2.51 N/A N/A 45.69 13.36 34.68
One Year.............. 1.70 1.70 N/A N/A 12.96 12.96 9.76
KEMPER INVESTMENT GRADE
BOND SUBACCOUNT
Life of Portfolio
(from 05/01/96)..... 3.72 2.21 N/A N/A 22.33 12.85 16.45
One Year.............. 1.70 1.70 N/A N/A 12.96 12.96 9.76
<CAPTION>
COMPARED TO
------------
LEHMAN BROS.
GOVT/CORP
BOND
INDEX(10)
ANNUALIZED %
RETURN
------------
<S> <C>
KEMPER MONEY MARKET
SUBACCOUNT(20)
Life of Portfolio
(from 04/06/82)..... N/A
Ten Years............. N/A
Five Years............ N/A
Three Years........... N/A
One Year.............. N/A
KEMPER MONEY MARKET
SUBACCOUNT #2(20)
Life of Portfolio
(from 04/06/82)..... N/A
Ten Years............. N/A
Five Years............ N/A
Three Years........... N/A
One Year.............. N/A
KEMPER HIGH YIELD
SUBACCOUNT(19)
Life of Portfolio
(from 04/06/82)..... N/A
Ten Years............. 9.14
Five Years............ 7.61
Three Years........... 10.43
One Year.............. 9.76
KEMPER GOVERNMENT
SECURITIES SUBACCOUNT
Life of Portfolio
(from 09/03/87)..... N/A
Ten Years............. 9.14
Five Years............ 7.61
Three Years........... 10.43
One Year.............. 9.76
KEMPER INVESTMENT GRADE
BOND SUBACCOUNT
Life of Portfolio
(from 05/01/96)..... 9.57
One Year.............. 9.76
</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> 288
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
--------------------------------------------------------------------------------------
LEHMAN BROS LEHMAN BROS LEHMAN BROS
MERRILL LYNCH MERRILL LYNCH LONG LONG GOVT/CORP
GOVT/CORP GOVT/CORP GOVT/CORP GOVT/CORP 1-3 YEAR
MASTER INDEX(11) MASTER INDEX(11) BOND INDEX(12) BOND INDEX(12) BOND INDEX(13)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE %
RETURN RETURN RETURN RETURN RETURN
---------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET SUBACCOUNT(20)
Life of Portfolio (from
04/06/82)...................... N/A N/A N/A N/A N/A
Ten Years........................ N/A N/A N/A N/A N/A
Five Years....................... N/A N/A N/A N/A N/A
Three Years...................... N/A N/A N/A N/A N/A
One Year......................... N/A N/A N/A N/A N/A
KEMPER MONEY MARKET SUBACCOUNT
#2(20)
Life of Portfolio (from
04/06/82)...................... N/A N/A N/A N/A N/A
Ten Years........................ N/A N/A N/A N/A N/A
Five Years....................... N/A N/A N/A N/A N/A
Three Years...................... N/A N/A N/A N/A N/A
One Year......................... N/A N/A N/A N/A N/A
KEMPER HIGH YIELD SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)...................... N/A N/A N/A N/A N/A
Ten Years........................ 140.51 9.17 N/A N/A N/A
Five Years....................... 44.49 7.64 N/A N/A N/A
Three Years...................... 36.50 10.39 N/A N/A N/A
One Year......................... 9.78 9.78 N/A N/A N/A
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
Life of Portfolio (from
09/03/87)...................... N/A N/A N/A N/A N/A
Ten Years........................ 140.51 9.17 139.88 9.14
Five Years....................... 44.49 7.64 44.29 7.61 N/A
Three Years...................... 36.50 10.39 34.68 10.43 N/A
One Year......................... 9.78 9.78 9.76 9.76 N/A
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
Life of Portfolio (from
05/01/96)...................... N/A N/A N/A N/A N/A
One Year......................... 9.78 9.78 N/A N/A N/A
<CAPTION>
COMPARED TO
--------------
LEHMAN BROS
GOVT/CORP
1-3 YEAR
BOND INDEX(13)
ANNUALIZED %
RETURN
--------------
<S> <C>
KEMPER MONEY MARKET SUBACCOUNT(20)
Life of Portfolio (from
04/06/82)...................... N/A
Ten Years........................ N/A
Five Years....................... N/A
Three Years...................... N/A
One Year......................... N/A
KEMPER MONEY MARKET SUBACCOUNT
#2(20)
Life of Portfolio (from
04/06/82)...................... N/A
Ten Years........................ N/A
Five Years....................... N/A
Three Years...................... N/A
One Year......................... N/A
KEMPER HIGH YIELD SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)...................... N/A
Ten Years........................ N/A
Five Years....................... N/A
Three Years...................... N/A
One Year......................... N/A
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
Life of Portfolio (from
09/03/87)...................... N/A
Ten Years........................
Five Years....................... N/A
Three Years...................... N/A
One Year......................... N/A
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
Life of Portfolio (from
05/01/96)...................... N/A
One Year......................... N/A
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-8
<PAGE> 289
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
------------------------ (STANDARDIZED)
CUMULATIVE ANNUALIZED --------------
YEAR TO DATE(%) (%) (%) ANNUALIZED
RETURN(3) ENDING VALUE(4) RETURN RETURN (%) RETURN
--------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER GROWTH SUBACCOUNT.................. 19.69%
Life of Subaccount (from 12/09/83)...... $243,929 509.75% 13.72% 13.42%
Life of Portfolio (from 12/09/83)....... 243,929 509.75% 13.72% 13.42%
Ten Years............................... 161,985 304.89% 15.01% 14.71%
Five Years.............................. 80,764 101.83% 15.08% 13.94%
Three Years............................. 76,176 90.37% 23.94% 22.00%
One Year................................ 47,874 19.61% 19.61% 11.99%
KEMPER BLUE CHIP SUBACCOUNT............... N/A
Life of Subaccount (from 05/01/97)...... 44,209 10.45% N/A N/A
Life of Portfolio (from 05/01/97)....... 44,209 10.45% N/A N/A
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT.... 33.88%
Life of Subaccount (from 05/01/98)...... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85)....... 210,213 425.46% 14.23% N/A
Ten Years............................... 164,262 310.58% 15.17% N/A
Five Years.............................. 85,484 113.63% 16.39% N/A
Three Years............................. 80,491 101.15% 26.23% N/A
One Year................................ 53,554 33.81% 33.81% N/A
WARBURG POST-VENTURE CAPITAL SUBACCOUNT... 11.77%
Life of Subaccount (from 05/01/98)...... N/A N/A N/A N/A
Life of Portfolio (from 09/30/96)....... 43,483 8.63% 6.84% N/A
One Year................................ 44,709 11.70% 11.70% N/A
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------------------------------------------------
STANDARD & STANDARD &
STANDARD & STANDARD & CONSUMER POOR'S POOR'S
POOR'S 500 POOR'S 500 CONSUMER PRICE INDEX MIDCAP MIDCAP
(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>
KEMPER GROWTH SUBACCOUNT
Life of Portfolio (from
12/09/83).............. 487.82 13.42 60.14 3.41 N/A N/A
Ten Years................ 292.76 14.66 39.93 3.42 492.25 19.47
Five Years............... 122.72 17.37 13.69 2.60 107.64 15.74
Three Years.............. 111.30 28.32 7.72 2.51 96.75 25.32
One Year................. 31.01 31.01 1.70 1.70 30.44 30.44
KEMPER BLUE CHIP
SUBACCOUNT
Life of Portfolio (from
05/01/97).............. 22.55 22.55 0.69 0.69 30.85 30.85
SCUDDER VLIF CAPITAL
GROWTH SUBACCOUNT........
Life of Portfolio (from
07/16/85).............. N/A N/A N/A N/A N/A N/A
Ten Years................ 292.76 14.66 39.93 3.42 492.25 19.47
Five Years............... 122.72 17.37 13.69 2.60 107.64 15.74
Three Years.............. 111.30 28.32 7.72 2.51 96.75 25.32
One Year................. 31.01 31.01 1.70 1.70 30.44 30.44
WARBURG POST-VENTURE
CAPITAL SUBACCOUNT.......
Life of Portfolio (from
09/30/96).............. N/A N/A N/A N/A N/A N/A
One Year................. 31.01 31.01 1.70 1.70 30.44 30.44
<CAPTION>
COMPARED TO
---------------------------
NASDAQ NASDAQ
COMPOS (15) COMPOS (15)
CUMULATIVE % ANNUALIZED %
RETURN RETURN
------------ ------------
<S> <C> <C>
KEMPER GROWTH SUBACCOUNT
Life of Portfolio (from
12/09/83).............. 459.82 13.03
Ten Years................ 375.19 16.86
Five Years............... 131.97 18.33
Three Years.............. 108.83 27.83
One Year................. 21.64 21.64
KEMPER BLUE CHIP
SUBACCOUNT
Life of Portfolio (from
05/01/97).............. N/A N/A
SCUDDER VLIF CAPITAL
GROWTH SUBACCOUNT........
Life of Portfolio (from
07/16/85).............. N/A N/A
Ten Years................ 375.19 16.86
Five Years............... 131.97 18.33
Three Years.............. 108.83 27.83
One Year................. 21.64 21.64
WARBURG POST-VENTURE
CAPITAL SUBACCOUNT.......
Life of Portfolio (from
09/30/96).............. N/A N/A
One Year................. 21.64 21.64
</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> 290
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER SMALL CAP GROWTH SUBACCOUNT...................... 32.39%
Life of Subaccount (from 05/02/94).................... $88,491 121.15% 24.15% 22.57%
Life of Portfolio (from 05/02/94)..................... 88,491 121.15% 24.15% 22.57%
Three Years........................................... 85,886 114.64% 28.99% 27.14%
One Year.............................................. 52,954 32.31% 32.31% 24.64%
KEMPER SMALL CAP VALUE SUBACCOUNT....................... 20.08%
Life of Subaccount (from 05/01/96).................... 48,477 21.12% 12.17% 8.17%
Life of Portfolio (from 05/01/96)..................... 48,477 21.12% 12.17% 8.17%
One Year.............................................. 48,031 20.00% 20.00% 12.38%
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------------------------
CONSUMER PRICE CONSUMER PRICE RUSSELL 2000 RUSSELL 2000 NASDAQ NASDAQ
INDEX(7) INDEX(7) INDEX(16) INDEX(16) COMPOS(15) COMPOS(15)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
-------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER SMALL CAP GROWTH SUBACCOUNT
Life of Portfolio (from
05/02/94)....................... 9.91 2.61 72.03 15.96 112.01 22.77
Three Years....................... 7.72 2.51 74.56 20.42 108.83 27.83
One Year.......................... 1.70 1.70 20.52 20.52 21.64 21.64
KEMPER SMALL CAP VALUE SUBACCOUNT
Life of Portfolio (from
05/01/96)....................... 3.72 2.21 24.76 14.98 30.90 17.51
One Year.......................... 1.70 1.70 20.52 20.52 21.64 21.64
</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> 291
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
------------------------------- --------------
YEAR TO DATE(%) CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED
RETURN(3) ENDING VALUE(4) RETURN RETURN (%) RETURN
--------------- --------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER INTERNATIONAL SUBACCOUNT(18)... 7.96%
Life of Subaccount (from
01/06/92)......................... $67,606 68.94% 9.15% 8.34%
Life of Portfolio (from 01/06/92)... 67,606 68.94% 9.15% 8.34%
Five Years.......................... 68,891 72.15% 11.48% 10.36%
Three Years......................... 55,264 38.08% 11.36% 9.36%
One Year............................ 43,184 7.88% 7.88% .83%
KEMPER GLOBAL INCOME SUBACCOUNT....... N/A
Life of Subaccount
(from 05/01/97)................... 40,769 1.85% N/A N/A
Life of Portfolio (from 05/01/97)... 40,769 1.85% N/A N/A
SCUDDER VLIF GLOBAL DISCOVERY
SUBACCOUNT.......................... 10.83%
Life of Subaccount
(from 05/01/98)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/98)... 46,339 15.77% 9.17% N/A
One Year............................ 44,333 10.76% 10.76% N/A
SCUDDER VLIF INTERNATIONAL
SUBACCOUNT.......................... 7.56%
Life of Subaccount (from
05/01/96)......................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/87)... 93,997 134.92% 8.33% N/A
Ten Years........................... 106,185 165.39% 10.25% N/A
Five Years.......................... 70,925 77.24% 12.13% N/A
Three Years......................... 53,364 33.34% 10.06% N/A
One Year............................ 43,024 7.49% 7.49% N/A
</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>
KEMPER INTERNATIONAL SUBACCOUNT(18)
Life of Portfolio (from 01/06/92)...................... 132.57 15.15 17.06 2.67
Five Years............................................. 122.72 17.37 13.69 2.60
Three Years............................................ 111.30 28.32 7.72 2.51
One Year............................................... 31.01 31.01 1.70 1.70
KEMPER GLOBAL INCOME SUBACCOUNT
Life of Portfolio (from 05/01/97)...................... 22.55 22.55 0.69 0.69
SCUDDER VLIF GLOBAL DISCOVERY SUBACCOUNT
Life of Portfolio (from 05/01/96)...................... 48.25 26.62 3.72 2.21
One Year............................................... 31.01 31.01 1.70 1.70
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Life of Portfolio (from 05/01/87)...................... N/A N/A N/A N/A
Ten Years.............................................. 292.76 14.66 39.93 3.42
Five Years............................................. 122.72 17.37 13.69 2.60
Three Years............................................ 111.30 28.32 7.72 2.51
One Year............................................... 31.01 31.01 1.70 1.70
</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> 292
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------
MORGAN STANLEY MORGAN STANLEY
MORGAN STANLEY MORGAN STANLEY INTER'L WORLD INTER'L WORLD
EAFE INDEX (17) EAFE INDEX (17) INDEX (21) INDEX (21)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
KEMPER INTERNATIONAL SUBACCOUNT(18)
Life of Portfolio (from 01/06/92)......... 53.34 7.40 72.34 9.52
Five Years................................ 73.96 11.71 88.40 13.51
Three Years............................... 21.09 6.59 51.41 14.84
One Year.................................. 2.06 2.06 14.17 14.17
KEMPER GLOBAL INCOME SUBACCOUNT
Life of Portfolio (from 05/01/97)......... 2.42 1.44 20.83 12.01
SCUDDER VLIF GLOBAL DISCOVERY SUBACCOUNT
Life of Portfolio (from 05/01/96)......... N/A N/A N/A N/A
One Year.................................. 2.06 2.06 14.17 14.17
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Life of Portfolio (from 05/01/87)......... N/A N/A N/A N/A
Ten Years................................. 88.77 6.56 N/A N/A
Five Years................................ 73.96 11.71 88.40 13.51
Three Years............................... 21.04 6.59 51.41 14.84
One Year.................................. 2.06 2.06 14.17 14.17
</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> 293
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
---------------------------------- --------------
YEAR TO DATE ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
(%) RETURN(3) VALUE(4) RETURN RETURN RETURN
------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER TOTAL RETURN SUBACCOUNT(19)......... 18.32%
Life of Subaccount (from 04/06/82)....... $247,567 518.84% 12.29% 12.00%
Life of Portfolio (from 04/06/82)........ 247,567 518.84% 12.29% 12.00%
Ten Years................................ 128,367 220.84% 12.36% 12.07%
Five Years............................... 66,944 67.29% 10.84% 9.74%
Three Years.............................. 68,093 70.16% 19.39% 17.33%
One Year................................. 47,329 18.25% 18.25% 10.63%
KEMPER HORIZON 10+ SUBACCOUNT.............. 15.17%
Life of Subaccount (from 05/01/96)....... 50,846 27.04% 15.42% 11.31%
Life of Portfolio (from 05/01/96)........ 50,846 27.04% 15.42% 11.31%
One Year................................. 46,070 15.10% 15.10% 7.51%
KEMPER HORIZON 5 SUBACCOUNT................ 11.16%
Life of Subaccount (from 05/01/96)....... 48,284 20.63% 11.90% 7.91%
Life of Portfolio (from 05/01/96)........ 48,284 20.63% 11.90% 7.91%
One Year................................. 44,462 11.08% 11.08% 3.75%
SCUDDER VLIF GROWTH & INCOME SUBACCOUNT.... 28.67%
Life of Subaccount (from 05/01/98)....... N/A N/A N/A N/A
Life of Portfolio (from 05/02/94)........ 83,736 109.27% 22.30% N/A
Three Years.............................. 80,557 101.32% 26.27% N/A
One Year................................. 51,469 28.60% 28.60% N/A
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------------------------------------------------------------
CONSUMER CONSUMER LEHMAN BROS LEHMAN BROS
STANDARD & STANDARD & PRICE PRICE GOVT/CORP 1-3 GOVT/CORP 1-3
POOR'S 500(6) POOR'S 500(6) INDEX(7) INDEX(7) YEAR BOND(13) YEAR BOND(13)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
------------- ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER TOTAL RETURN
SUBACCOUNT(19)
Life of Portfolio (from
04/06/82).................. N/A N/A N/A N/A N/A N/A
Ten Years.................... 292.76 14.66 39.93 3.42 103.34 7.35
Five Years................... 122.76 17.37 13.69 2.60 32.09 5.72
Three Years.................. 111.30 28.32 7.72 2.51 24.45 7.56
One Year..................... 31.01 31.01 1.70 1.70 6.66 6.66
KEMPER HORIZON 10+ SUBACCOUNT
Life of Portfolio (from
05/01/96).................. 48.25 26.62 3.72 2.21 11.59 6.80
One Year..................... 31.01 31.01 1.70 1.70 6.66 6.66
KEMPER HORIZON 5 SUBACCOUNT
Life of Portfolio (from
05/01/96).................. 48.25 26.62 3.72 2.21 11.59 6.80
One Year..................... 31.01 31.01 1.70 1.70 6.66 6.66
SCUDDER VLIF GROWTH & INCOME
SUBACCOUNT
Life of Portfolio (from
05/02/94).................. N/A N/A N/A N/A N/A N/A
Three Years.................. 111.30 28.32 7.72 2.51 24.45 7.56
One Year..................... 31.01 31.01 1.70 1.70 6.66 6.66
</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> 294
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------
MERRILL LYNCH MERRILL LYNCH LEHMAN BROS LEHMAN BROS
GOVT/CORP GOVT/CORP GOVT/CORP GOVT/CORP
MASTER INDEX (11) MASTER INDEX (11) BOND INDEX (10) BOND INDEX (10)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
KEMPER TOTAL RETURN SUBACCOUNT(19)
Life of Portfolio (from 04/06/82)...... N/A N/A N/A N/A
Ten Years.............................. 140.51 9.17 139.88 9.14
Five Years............................. 44.49 7.64 44.24 7.61
Three Years............................ 36.50 10.39 34.68 10.43
One Year............................... 9.78 9.78 9.76 9.76
KEMPER HORIZON 10+ SUBACCOUNT
Life of Portfolio (from 05/01/96)...... 18.07 10.48 16.45 9.57
One Year............................... 9.78 9.78 9.76 9.76
KEMPER HORIZON 5 SUBACCOUNT
Life of Portfolio (from 05/01/96)...... 18.07 16.48 16.45 9.57
One Year............................... 9.78 9.78 9.76 9.76
SCUDDER VLIF GROWTH & INCOME SUBACCOUNT
Life of Portfolio (from 05/02/94)...... N/A N/A N/A N/A
Three Years............................ 36.50 10.39 34.68 10.43
One Year............................... 9.78 9.78 9.76 9.76
</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> 295
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Non standardized Total Return figures quoted are based on a
hypothetical $40,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract except for the
Withdrawal Charge and any charge for applicable premium taxes which may be
imposed in certain states.
(2) The Standardized Average Annual Total Return figures quoted are based on a
hypothetical $1,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract including the
applicable Withdrawal Charge that may be imposed at the end of the quoted
period. Premium taxes are not reflected.
(3) The Year to Date percentage return figures quoted are based on the change
in unit values.
(4) The Ending Values quoted are based on a $10,000 initial investment and
assumes the deduction of all recurring charges and fees applicable under
the Contract except for the Withdrawal Charge and any charge for applicable
premium taxes which may be imposed in certain states.
(5) The 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 Kemper Money Market Subaccount is neither insured nor
guaranteed by the U.S. government. There can be no assurance that the
Kemper Money Market Portfolio will be able to maintain a stable net asset
value of $1.00 per share.
(21) The Morgan Stanley International World Index is an arithmetic, market
value-weighted average of the performance of over 1,470 securities listed
on the stock exchanges of Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New
Zealand, Norway, Singapore/Malaysia, South Africa Gold, Spain, Switzerland,
United Kingdom, and the United States. The index is calculated on a total
return basis, which includes reinvestment of gross dividends before
deduction of withholding taxes. The index covers about 60% of the issues
listed on the exchanges of the countries included.
B-15
<PAGE> 296
The following tables illustrate an assumed $40,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from the inception date of each Fund to December 31, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER MONEY MARKET SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 ............................... $43,058
1983 ............................... 46,405
1984 ............................... 50,670
1985 ............................... 54,094
1986 ............................... 56,926
1987 ............................... 59,885
1988 ............................... 63,514
1989 ............................... 68,402
1990 ............................... 72,994
1991 ............................... 76,270
1992 ............................... 77,820
1993 ............................... 78,968
1994 ............................... 81,012
1995 ............................... 84,434
1996 ............................... 87,447
1997 ............................... 90,778
</TABLE>
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1987 ............................... $40,113
1988 ............................... 40,801
1989 ............................... 46,074
1990 ............................... 49,929
1991 ............................... 56,785
1992 ............................... 59,330
1993 ............................... 62,326
1994 ............................... 59,688
1995 ............................... 70,150
1996 ............................... 70,995
1997 ............................... 76,290
</TABLE>
<TABLE>
<CAPTION>
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $41,050
1997 ............................... 44,143
</TABLE>
<TABLE>
<CAPTION>
KEMPER GLOBAL INCOME SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1997 ............................... $40,769
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 5 SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $43,438
1997 ............................... 48,284
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 .............................. $ 49,485
1983 .............................. 56,063
1984 .............................. 62,318
1985 .............................. 74,895
1986 .............................. 87,061
1987 .............................. 90,996
1988 .............................. 104,077
1989 .............................. 101,381
1990 .............................. 84,537
1991 .............................. 126,794
1992 .............................. 147,376
1993 .............................. 174,554
1994 .............................. 168,457
1995 .............................. 195,187
1996 .............................. 219,553
1997 .............................. 241,465
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 10+ SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $44,147
1997 ............................... 50,846
</TABLE>
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 .............................. $ 49,393
1983 .............................. 57,379
1984 .............................. 53,853
1985 .............................. 68,340
1986 .............................. 77,673
1987 .............................. 77,143
1988 .............................. 85,302
1989 .............................. 104,435
1990 .............................. 108,255
1991 .............................. 147,444
1992 .............................. 147,925
1993 .............................. 163,685
1994 .............................. 145,429
1995 .............................. 182,252
1996 .............................. 209,232
1997 .............................. 247,567
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 20+ SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $45,734
1997 ............................... 54,346
</TABLE>
<TABLE>
<CAPTION>
KEMPER VALUE+GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $45,430
1997 ............................... 56,224
</TABLE>
B-16
<PAGE> 297
<TABLE>
<CAPTION>
KEMPER BLUE CHIP SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1997 ............................... $44,209
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1992 ............................... $39,254
1993 ............................... 51,478
1994 ............................... 48,933
1995 ............................... 54,820
1996 ............................... 62,622
1997 ............................... 67,606
</TABLE>
<TABLE>
<CAPTION>
KEMPER CONTRARIAN VALUE SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $46,525
1997 ............................... 59,838
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $40,371
1997 ............................... 48,477
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1994 ............................... $41,213
1995 ............................... 52,892
1996 ............................... 66,844
1997 ............................... 88,491
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1983 .............................. $ 41,162
1984 .............................. 45,032
1985 .............................. 55,642
1986 .............................. 60,009
1987 .............................. 60,235
1988 .............................. 59,688
1989 .............................. 75,584
1990 .............................. 75,035
1991 .............................. 118,212
1992 .............................. 120,811
1993 .............................. 136,674
1994 .............................. 128,086
1995 .............................. 170,516
1996 .............................. 203,807
1997 .............................. 243,929
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF GLOBAL
DISCOVERY SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $41,810
1997 ............................... 46,339
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF GROWTH AND INCOME
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1994 ............................... $41,578
1995 ............................... 54,351
1996 ............................... 65,077
1997 ............................... 83,736
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1987 ............................... $35,409
1988 ............................... 40,769
1989 ............................... 55,419
1990 ............................... 50,462
1991 ............................... 55,468
1992 ............................... 53,012
1993 ............................... 72,052
1994 ............................... 70,457
1995 ............................... 77,786
1996 ............................... 87,390
1997 ............................... 943,997
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF CAPITAL GROWTH
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1985 .............................. $ 43,878
1986 .............................. 52,927
1987 .............................. 51,190
1988 .............................. 61,634
1989 .............................. 74,624
1990 .............................. 68,087
1991 .............................. 93,734
1992 .............................. 98,364
1993 .............................. 117,263
1994 .............................. 103,424
1995 .............................. 133,489
1996 .............................. 157,011
1997 .............................. 210,213
</TABLE>
<TABLE>
<CAPTION>
JANUS GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1993 ............................... $41,230
1994 ............................... 41,700
1995 ............................... 53,835
1996 ............................... 62,659
1997 ............................... 75,123
</TABLE>
<TABLE>
<CAPTION>
WARBURG PINCUS POST-VENTURE CAPITAL
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $38,903
1997 ............................... 43,483
</TABLE>
B-17
<PAGE> 298
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED
ANNUITY CONVENTIONAL
AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- CONTRIBUTIONS
TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------
<S> <C> <C> <C>
10 Years.......................................... $107,946 $ 86,448 $ 81,693
20 Years.......................................... 233,048 165,137 133,476
30 Years.......................................... 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts. Income on
Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10% tax
penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following annuity charges and
expenses: 1.25% mortality and expense risk; .10% administration charges; 7%
maximum deferred withdrawal charge; and $30 annual records maintenance charge.
The tax-deferred accumulation would be reduced if these charges were reflected.
No implication is intended by the use of these assumptions that the return shown
is guaranteed in any way or that the return shown represents an average or
expected rate of return over the period of the Contracts. [IMPORTANT--THIS IS
NOT AN ILLUSTRATION OF YIELD OR RETURN].
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
EXPERTS
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1997 and the related statements of
operations for the year then ended and the statements of changes in contract
owners' equity for the year then ended has been included herein in reliance upon
the report of PricewaterhouseCoopers LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The statement of changes in contract owners' equity of the Separate Account for
the year ended December 31, 1996 has been included herein in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
FINANCIAL STATEMENTS
This Statement of Additional Information contains financial statements for the
Separate Account which reflect assets attributable to other variable annuity
contracts offered by KILICO through the Separate Account. As of the date of this
Statement of Additional Information, no assets attributable to the Contracts are
reflected as the Contracts were not offered prior to such date. In addition, the
financial statements for the Separate Account reflect Subaccounts that are not
available under the Contracts.
B-18
<PAGE> 299
[THIS PAGE INTENTIONALLY LEFT BLANK]
B-19
<PAGE> 300
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS OF
KEMPER INVESTORS LIFE INSURANCE COMPANY AND
CONTRACT OWNERS OF KILICO VARIABLE ANNUITY SEPARATE ACCOUNT:
We have audited the accompanying statements of assets and liabilities and
contract owners' equity of the Kemper Money Market Subaccount, Kemper Money
Market Subaccount #2, Kemper Total Return Subaccount, Kemper High Yield
Subaccount, Kemper Growth Subaccount, Kemper Government Securities Subaccount,
Kemper International Subaccount, Kemper Small Cap Growth Subaccount, Kemper
Investment Grade Bond Subaccount, Kemper Contrarian Value Subaccount, Kemper
Small Cap Value Subaccount, Kemper Value+Growth Subaccount, Kemper Horizon 20+
Subaccount, Kemper Horizon 10+ Subaccount, Kemper Horizon 5 Subaccount, Kemper
Global Income Subaccount and Kemper Blue Chip Subaccount (investment options
within the Investors Fund Series), and the Growth Subaccount (investment option
within Janus Aspen Series), of KILICO Variable Annuity Separate Account as of
December 31, 1997 and the related statements of operations and the statements of
changes in contract owners' equity for the year then ended, except for Kemper
Global Income Subaccount and Kemper Blue Chip Subaccount as to which the period
is May 1, 1997 (commencement of operations) to December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The statement of changes in contract owners' equity for the year
ended December 31, 1996 was audited by other auditors, whose report, dated March
26, 1997, expressed an unqualified opinion on that statement.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments owned at December 31, 1997 by correspondence with
the transfer agent. An audit also includes assessing the accounting principles
used and significant estimates made by management as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the December 31, 1997 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, 1997 and
the results of their operations and changes in their contract owners' equity for
the year then ended, except for Kemper Global Income Subaccount and Kemper Blue
Chip Subaccount as to which the period is May 1, 1997 (commencement of
operations) to December 31, 1997, in conformity with generally accepted
accounting principles.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 20, 1998
B-20
<PAGE> 301
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying statement of changes in contract owners' equity
of the Kemper Money Market Subaccount, Kemper Money Market Subaccount #2, Kemper
Total Return Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount,
Kemper Government Securities Subaccount, Kemper International Subaccount, Kemper
Small Cap Growth Subaccount, Kemper Investment Grade Bond Subaccount, Kemper
Contrarian Value Subaccount, Kemper Small Cap Value Subaccount, Kemper
Value+Growth Subaccount, Kemper Horizon 20+ Subaccount, Kemper Horizon 10+
Subaccount, and Kemper Horizon 5 Subaccount (investment options within the
Investors Fund Series), and the Growth Subaccount (investment option within
Janus Aspen Series) of KILICO Variable Annuity Separate Account (the Account)
for the year ended December 31, 1996. This financial statement is the
responsibility of the Account's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the changes in the contract owners' equity of the
subaccounts of KILICO Variable Annuity Separate Account for the year ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
March 26, 1997
B-21
<PAGE> 302
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... $73,754 6,379 743,633 306,171 527,701 72,906
Dividends and other
receivables................ 200 17 142 40 69 5
------- ----- ------- ------- ------- ------
Total assets.......... 73,954 6,396 743,775 306,211 527,770 72,911
------- ----- ------- ------- ------- ------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 82 -- 796 327 564 78
Other payables............. 118 2 195 63 106 12
------- ----- ------- ------- ------- ------
Total liabilities..... 200 2 991 390 670 90
------- ----- ------- ------- ------- ------
Contract owners' equity...... $73,754 6,394 742,784 305,821 527,100 72,821
======= ===== ======= ======= ======= ======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. $ 3,881 5,218 203,480 96,788 187,968 39,559
Accumulated net investment
income (loss).............. 69,873 1,176 301,262 181,924 202,725 30,968
Accumulated net realized gain
on sales of investments.... -- -- 88,300 6,525 61,033 1,024
Unrealized appreciation of
investments................ -- -- 149,742 20,584 75,374 1,270
------- ----- ------- ------- ------- ------
Contract owners' equity...... $73,754 6,394 742,784 305,821 527,100 72,821
======= ===== ======= ======= ======= ======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... 160,865 112,970
Dividends and other
receivables................ 28 25
------- -------
Total assets.......... 160,893 112,995
------- -------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 172 115
Other payables............. 125 17
------- -------
Total liabilities..... 297 132
------- -------
Contract owners' equity...... 160,596 112,863
======= =======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. 107,157 72,054
Accumulated net investment
income (loss).............. 7,987 7,311
Accumulated net realized gain
on sales of investments.... 18,107 11,120
Unrealized appreciation of
investments................ 27,345 22,378
------- -------
Contract owners' equity...... 160,596 112,863
======= =======
</TABLE>
See accompanying notes to financial statements.
B-22
<PAGE> 303
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 GLOBAL INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5,463 78,165 33,296 27,952 6,474 9,169 4,902 326 2,080
1 20 14 21 5 4 3 -- 3
----- ------ ------ ------ ----- ----- ----- --- -----
5,464 78,185 33,310 27,973 6,479 9,173 4,905 326 2,083
----- ------ ------ ------ ----- ----- ----- --- -----
5 68 35 29 7 10 5 -- 2
1 35 25 23 4 3 2 -- 3
----- ------ ------ ------ ----- ----- ----- --- -----
6 103 60 52 11 13 7 -- 5
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
5,144 64,882 28,513 23,759 5,342 7,793 4,402 307 2,017
(37) (395) (220) (224) (86) (83) (47) (7) (20)
73 2,762 1,143 618 177 138 98 21 27
278 10,833 3,814 3,768 1,035 1,312 445 5 54
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
29,665
13
------
29,678
------
31
--
------
31
------
29,647
======
23,713
668
916
4,350
------
29,647
======
</TABLE>
B-23
<PAGE> 304
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL KEMPER KEMPER 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.................... $3,938 374 107,616 23,900 112,090 6,229
Expenses:
Mortality and expense risk and
administrative charges......... 999 1 9,756 3,824 6,893 1,011
------ --- ------- ------ ------- -----
Net investment income (loss)....... 2,939 373 97,860 20,076 105,197 5,218
------ --- ------- ------ ------- -----
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments................. -- -- 21,466 5,634 13,791 (133)
Change in unrealized appreciation
(depreciation) of
investments.................... -- -- 1,837 2,376 (29,191) 284
------ --- ------- ------ ------- -----
Net realized and unrealized gain
(loss) on investments............ -- -- 23,303 8,010 (15,400) 151
------ --- ------- ------ ------- -----
Net increase in contract owners'
equity resulting from
operations....................... $2,939 373 121,163 28,086 89,797 5,369
====== === ======= ====== ======= =====
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Dividends and capital gains
distributions.................... 9,141 8,510
Expenses:
Mortality and expense risk and
administrative charges......... 2,301 1,226
------ ------
Net investment income (loss)....... 6,840 7,284
------ ------
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments................. 9,738 8,226
Change in unrealized appreciation
(depreciation) of
investments.................... (2,788) 8,507
------ ------
Net realized and unrealized gain
(loss) on investments............ 6,950 16,733
------ ------
Net increase in contract owners'
equity resulting from
operations....................... 13,790 24,017
====== ======
</TABLE>
- ---------------
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
1997.
See accompanying notes to financial statements.
B-24
<PAGE> 305
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
- --------------------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER GLOBAL KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ---------- ------------ ----------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
303 181 121 40 60 29 -- --
28
621 357 282 98 113 62 7 20
54
--- ------ ----- ----- --- ----- --- -- ---
(26) (318) (176) (161) (58) (53) (33) (7) (20)
--- ------ ----- ----- --- ----- --- -- ---
2,750 1,194 619 161 129 97 21 27
71
9,122 3,077 3,038 777 945 320 5 54
248
--- ------ ----- ----- --- ----- --- -- ---
319 11,872 4,271 3,657 938 1,074 417 26 81
--- ------ ----- ----- --- ----- --- -- ---
11,554 4,095 3,496 880 1,021 384 19 61
293
=== ====== ===== ===== === ===== === == ===
<CAPTION>
JANUS ASPEN SERIES
- --- ------------------
GROWTH
SUBACCOUNT
------------------
<S> <C>
741
312
-----
429
-----
842
3,150
-----
3,992
-----
4,421
=====
</TABLE>
B-25
<PAGE> 306
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income
(loss)..................... $ 2,939 373 97,860 20,076 105,197 5,218
Net realized gain (loss) on
sales of investments....... -- -- 21,466 5,634 13,791 (133)
Change in unrealized
appreciation (depreciation)
of investments............. -- -- 1,837 2,376 (29,191) 284
-------- ------- ------- ------- ------- -------
Net increase in contract
owners' equity resulting
from operations.......... 2,939 373 121,163 28,086 89,797 5,369
-------- ------- ------- ------- ------- -------
Account unit transactions:
Proceeds from units sold..... 21,938 7,884 36,774 26,456 32,804 6,125
Net transfers (to) from
affiliated divisions and
subaccounts................ 7,054 (10,145) (30,823) (473) (35,916) (6,847)
Payments for units
redeemed................... (17,525) (213) (75,741) (34,745) (43,779) (11,513)
-------- ------- ------- ------- ------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions............. 11,467 (2,474) (69,790) (8,762) (46,891) (12,235)
-------- ------- ------- ------- ------- -------
Total increase (decrease) in
contract owners' equity...... 14,406 (2,101) 51,373 19,324 42,906 (6,866)
Beginning of period............ 59,348 8,495 691,411 286,497 484,194 79,687
-------- ------- ------- ------- ------- -------
End of period.................. $ 73,754 6,394 742,784 305,821 527,100 72,821
======== ======= ======= ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income
(loss)..................... 6,840 7,284
Net realized gain (loss) on
sales of investments....... 9,738 8,226
Change in unrealized
appreciation (depreciation)
of investments............. (2,788) 8,507
------- -------
Net increase in contract
owners' equity resulting
from operations.......... 13,790 24,017
------- -------
Account unit transactions:
Proceeds from units sold..... 14,396 14,943
Net transfers (to) from
affiliated divisions and
subaccounts................ (14,865) 11,461
Payments for units
redeemed................... (15,633) (6,408)
------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions............. (16,102) 19,996
------- -------
Total increase (decrease) in
contract owners' equity...... (2,312) 44,013
Beginning of period............ 162,908 68,850
------- -------
End of period.................. 160,596 112,863
======= =======
</TABLE>
- ---------------
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
1997.
See accompanying notes to financial statements.
B-26
<PAGE> 307
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 GLOBAL INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(26) (318) (176) (161) (58) (53) (33) (7) (20)
71 2,750 1,194 619 161 129 97 21 27
248 9,122 3,077 3,038 777 945 320 5 54
----- ------ ------ ------ ----- ----- ----- --- -----
293 11,554 4,095 3,496 880 1,021 384 19 61
----- ------ ------ ------ ----- ----- ----- --- -----
1,403 16,729 8,235 8,265 1,223 1,730 1,182 44 1,073
2,113 31,875 9,674 7,531 1,114 1,220 1,152 263 1,027
(224) (2,935) (1,625) (1,266) (179) (395) (200) -- (83)
----- ------ ------ ------ ----- ----- ----- --- -----
3,292 45,669 16,284 14,530 2,158 2,555 2,134 307 2,017
----- ------ ------ ------ ----- ----- ----- --- -----
3,585 57,223 20,379 18,026 3,038 3,576 2,518 326 2,078
1,873 20,859 12,871 9,895 3,430 5,584 2,380 -- --
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
429
842
3,150
------
4,421
------
5,841
2,785
(1,058)
------
7,568
------
11,989
17,658
------
29,647
======
</TABLE>
B-27
<PAGE> 308
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
------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)....... $ 2,493 243 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 affiliated
divisions 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
======== ====== ======= ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income (loss)....... 942 478
Net realized gain (loss) on sales
of investments................... 5,409 2,710
Change in unrealized appreciation
(depreciation) of investments.... 14,729 8,276
------- ------
Net increase in contract owners'
equity resulting from
operations..................... 21,080 11,464
------- ------
Account unit transactions:
Proceeds from units sold........... 20,272 13,879
Net transfers (to) from affiliated
divisions and subaccounts........ 819 11,423
Payments for units redeemed........ (13,606) (3,253)
------- ------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... 7,485 22,049
------- ------
Total increase (decrease) in contract
owners' equity..................... 28,565 33,513
Beginning of period.................. 134,343 35,337
------- ------
End of period........................ 162,908 68,850
======= ======
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-28
<PAGE> 309
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
- -----------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(11) (77) (44) (63) (28) (30) (14)
2 12 (51) (1) 16 9 1
30 1,711 737 730 258 367 125
----- ------ ------ ----- ----- ----- -----
21 1,646 642 666 246 346 112
----- ------ ------ ----- ----- ----- -----
1,262 9,908 6,111 6,223 2,580 4,108 1,453
632 9,522 6,244 3,214 620 1,206 887
(42) (217) (126) (208) (16) (76) (72)
----- ------ ------ ----- ----- ----- -----
1,852 19,213 12,229 9,229 3,184 5,238 2,268
----- ------ ------ ----- ----- ----- -----
1,873 20,859 12,871 9,895 3,430 5,584 2,380
-- -- -- -- -- -- --
----- ------ ------ ----- ----- ----- -----
1,873 20,859 12,871 9,895 3,430 5,584 2,380
===== ====== ====== ===== ===== ===== =====
<CAPTION>
JANUS ASPEN SERIES
- --- ------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
200
74
1,182
------
1,456
------
3,853
10,206
(445)
------
13,614
------
15,070
2,588
------
17,658
======
</TABLE>
B-29
<PAGE> 310
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. Kemper Corporation
was acquired by an investor group led by Zurich Insurance Company ("Zurich") on
January 4, 1996. Effective February 27, 1998, KILICO and Kemper Corporation
became wholly-owned subsidiaries of Zurich.
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
a total of twenty-eight subaccounts with various subaccount options available to
Contract Owners depending upon their respective Contracts. A total of only
seventeen subaccount options are presented in the accompanying financial
statements, (the Kemper Money Market Subaccounts represent only one subaccount),
as available subaccount options to Contract Owners. Each subaccount invests
exclusively in the shares of a corresponding portfolio of one of the underlying
investment funds; the Investors Fund Series or the Janus Aspen Series (the
"Fund"), both of which are open-end diversified management investment companies.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent amounts at the date of the financial statements. As a
result, actual results reported as income and expenses could differ from the
estimates reported in the accompanying financial statements.
SECURITY VALUATION
The investments are stated at current value which is based on the closing bid
price, net asset value, at December 31, 1997.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Dividends and capital gains distributions are recorded as
income on the ex-dividend date. Realized gains and losses from security
transactions are reported on a first in, first out ("FIFO") cost basis.
ACCUMULATION UNIT VALUATION
On each day the New York Stock Exchange (the "Exchange") is open for trading,
the accumulation unit value is determined as of the earlier of 3:00 p.m.
(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.
In early 1998, the Clinton Administration's Fiscal Year 1999 Budget was released
and contained certain proposals to change the taxation of non-qualified fixed
and variable annuities. It is currently unknown whether such proposals will be
adopted, amended or omitted in the final 1999 budget approved by Congress.
B-30
<PAGE> 311
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------ ----
<S> <C> <C>
INVESTMENTS
INVESTORS FUND SERIES:
Kemper Money Market Subaccount (Money Market and Money
Market #2 Subaccounts).................................... 80,133 $ 80,133
Kemper Total Return Subaccount.............................. 263,494 593,891
Kemper High Yield Subaccount................................ 236,229 285,587
Kemper Growth Subaccount.................................... 175,849 452,327
Kemper Government Securities Subaccount..................... 60,389 71,636
Kemper International Subaccount............................. 99,620 133,520
Kemper Small Cap Growth Subaccount.......................... 57,375 90,592
Kemper Investment Grade Bond Subaccount..................... 4,886 5,185
Kemper Contrarian Value Subaccount.......................... 51,507 67,332
Kemper Small Cap Value Subaccount........................... 27,124 29,482
Kemper Value+Growth Subaccount.............................. 19,616 24,184
Kemper Horizon 20+ Subaccount............................... 4,700 5,439
Kemper Horizon 10+ Subaccount............................... 7,114 7,857
Kemper Horizon 5 Subaccount................................. 4,006 4,457
Kemper Global Income Subaccount............................. 316 321
Kemper Blue Chip Subaccount................................. 1,864 2,026
JANUS ASPEN SERIES FUND:
Growth Subaccount........................................... 1,605 25,315
----------
TOTAL INVESTMENTS................................. $1,879,284
==========
</TABLE>
The underlying investments of the Fund's subaccounts are summarized below.
INVESTORS FUND SERIES
KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests primarily in short-term
obligations of major banks and corporations. The Kemper Money Market Subaccount
represents the ADVANTAGE III Kemper Money Market Subaccount and the PASSPORT
Kemper Money Market Subaccount #1. Kemper Money Market Subaccount #2 represents
funds allocated by the owner of a contract to the dollar cost averaging program.
Under the dollar cost averaging 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.
KEMPER TOTAL RETURN SUBACCOUNT: This subaccount'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 subaccount may also make private
placement investments (which are normally restricted securities).
KEMPER HIGH YIELD SUBACCOUNT: This subaccount 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.
KEMPER GROWTH SUBACCOUNT: This subaccount'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).
B-31
<PAGE> 312
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests primarily in
U.S. Government securities. The subaccount will also invest in fixed-income
securities other than U.S. Government securities and will engage in options and
financial futures transactions.
KEMPER INTERNATIONAL SUBACCOUNT: This subaccount'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.
KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount'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 subaccount'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.
KEMPER INVESTMENT GRADE BOND SUBACCOUNT: This subaccount seeks high current
income by investing primarily in a diversified portfolio of investment grade
debt securities. At least 65% of the subaccount's total assets will be invested
in investment grade corporate debt securities, U.S. Government or Canadian
Government agencies and commercial paper. The subaccount may also invest in
preferred stocks. The subaccount may also invest up to 35% of its total assets
in below investment grade debt and will also engage in options and financial
futures transactions.
KEMPER CONTRARIAN VALUE (FORMERLY VALUE) SUBACCOUNT: This subaccount seeks to
achieve a high rate of total return. The subaccount invests primarily in a
diversified portfolio of the common stocks of larger listed companies, which are
believed to be undervalued.
KEMPER SMALL CAP VALUE SUBACCOUNT: This subaccount seeks long-term capital
appreciation. The subaccount invests primarily in a diversified portfolio of
small company equity securities with market capitalization of $100 million to
$1.0 billion, which are believed to be undervalued.
KEMPER VALUE+GROWTH SUBACCOUNT: This subaccount seeks growth of capital through
professional management of a portfolio of growth and value stocks. These stocks
include stocks of large established companies, as well as stocks of small
companies. The subaccount may also engage in options and financial futures
transactions.
KEMPER HORIZON 20+ SUBACCOUNT: This subaccount is designed for investors with
approximately a 20+ year investment horizon, and seeks growth of capital, with
income as a secondary objective. The subaccount invests approximately 80% of its
total assets in a variety of equity securities and 20% in a variety of fixed
income securities.
KEMPER HORIZON 10+ SUBACCOUNT: This subaccount 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. The subaccount invests
approximately 60% of its total assets in a variety of equity securities and 40%
in a variety of fixed income securities.
KEMPER HORIZON 5 SUBACCOUNT: This subaccount 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. The
subaccount invests approximately 40% of its total assets in a variety of equity
securities and 60% in a variety of fixed income securities.
KEMPER GLOBAL INCOME SUBACCOUNT: This subaccount seeks to provide high current
income consistent with prudent total return asset management. The subaccount
will invest in common stocks of well capitalized, established companies that are
believed to have the potential for growth of capital, earnings and dividends. At
least 65% of the subaccounts total assets in common stocks will be in companies
with a market capitalization of at least $1.0 billion at the time of initial
investment. The subaccount will also engage in options and financial futures
transactions.
KEMPER BLUE CHIP SUBACCOUNT: This subaccount seeks growth of capital and of
income. The subaccount will invest in investment grade foreign and U.S. fixed
income securities, with at least 65% of the subaccounts total assets invested in
securities of issuers located in at least three countries. The subaccount will
also engage in options and financial futures transactions.
B-32
<PAGE> 313
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
JANUS ASPEN SERIES
GROWTH SUBACCOUNT: This subaccount seeks long-term growth of capital by
investing primarily in common stocks with an emphasis on companies with larger
market capitalizations.
(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 Kemper 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. The records maintenance charge
for both ADVANTAGE III and PASSPORT contracts are waived for all individual
contracts whose investment value exceeds $50,000 on the date of assessment.
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Kemper Money Market, Kemper Total Return, Kemper High
Yield, and Kemper Growth Subaccounts whose direct and indirect operating
expenses exceed eighty hundredths of one percent (.80%) of average daily net
assets. In determining reimbursement of direct and indirect operating expenses,
for each subaccount, charges for mortality and expense risks and administrative
expenses, and records maintenance charges are excluded and, for each subaccount,
charges for taxes, extraordinary expenses, and brokerage and transaction costs
are excluded. During the year December 31, 1997, 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.
Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper Investments,
Inc., an affiliated company, is the investment manager of the Investors Fund
Series portfolios.
Janus Capital Corporation, an unaffiliated company, is the investment manager of
the Janus Aspen Series Fund Portfolio.
Investors Brokerage Services, Inc. ("IBS"), a wholly-owned subsidiary of KILICO,
is the principal underwriter for the Separate Account.
(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.
B-33
<PAGE> 314
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) CONTRACT OWNERS' EQUITY
The Contract Owners' equity is affected by the investment results of, and
contract charges to, each subaccount. The accompanying financial statements
include only Contract Owners' payments pertaining to the variable portions of
their contracts and exclude any payments for the market value adjusted or fixed
portions, the latter being included in the general account of KILICO. Contract
Owners may elect to annuitize the contract under one of several annuity options,
as specified in the prospectus.
B-34
<PAGE> 315
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Contract Owners' equity at December 31, 1997, is as follows (in thousands,
except unit value; differences are due to rounding):
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ----- --------
<S> <C> <C> <C>
ADVANTAGE III CONTRACTS
INVESTORS FUND SERIES
KEMPER MONEY MARKET SUBACCOUNT
Flexible Payment, Qualified............................... 633 $2.394 $ 1,514
Flexible Payment, Nonqualified............................ 4,338 2.394 10,385
Periodic Payment, Qualified............................... 11,579 2.285 26,456
Periodic Payment, Nonqualified............................ 4,637 2.285 10,595
----------
48,950
----------
KEMPER TOTAL RETURN SUBACCOUNT
Flexible Payment, Qualified............................... 864 6.501 5,617
Flexible Payment, Nonqualified............................ 4,277 6.019 25,743
Periodic Payment, Qualified............................... 82,149 6.205 509,698
Periodic Payment, Nonqualified............................ 13,699 5.781 79,191
----------
620,249
----------
KEMPER HIGH YIELD SUBACCOUNT
Flexible Payment, Qualified............................... 323 6.341 2,047
Flexible Payment, Nonqualified............................ 2,096 6.071 12,726
Periodic Payment, Qualified............................... 22,729 6.052 137,554
Periodic Payment, Nonqualified............................ 8,934 5.896 52,674
----------
205,001
----------
KEMPER GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 227 6.371 1,449
Flexible Payment, Nonqualified............................ 1,162 6.350 7,374
Periodic Payment, Qualified............................... 54,987 6.112 336,083
Periodic Payment, Nonqualified............................ 11,574 6.103 70,642
----------
415,548
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Flexible Payment, Qualified............................... 149 1.725 257
Flexible Payment, Nonqualified............................ 908 1.725 1,566
Periodic Payment, Qualified............................... 15,434 1.684 25,992
Periodic Payment, Nonqualified............................ 11,033 1.684 18,581
----------
46,396
----------
KEMPER INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified............................... 376 1.723 649
Flexible Payment, Nonqualified............................ 1,006 1.723 1,734
Periodic Payment, Qualified............................... 55,729 1.693 94,356
Periodic Payment, Nonqualified............................ 9,543 1.693 16,157
----------
112,896
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 195 2.240 436
Flexible Payment, Nonqualified............................ 657 2.240 1,471
Periodic Payment, Qualified............................... 33,789 2.216 74,872
Periodic Payment, Nonqualified............................ 4,509 2.216 9,992
----------
86,771
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Flexible Payment, Qualified............................... 13 1.111 15
Flexible Payment, Nonqualified............................ 303 1.111 337
Periodic Payment, Qualified............................... 694 1.105 767
Periodic Payment, Nonqualified............................ 338 1.105 374
----------
1,493
----------
</TABLE>
B-35
<PAGE> 316
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ----- --------
<S> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 59 $1.505 $ 89
Flexible Payment, Nonqualified............................ 95 1.505 143
Periodic Payment, Qualified............................... 18,994 1.498 28,446
Periodic Payment, Nonqualified............................ 9,619 1.498 14,405
----------
43,083
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 3 1.220 4
Flexible Payment, Nonqualified............................ 58 1.220 71
Periodic Payment, Qualified............................... 10,592 1.214 12,855
Periodic Payment, Nonqualified............................ 1,519 1.214 1,843
----------
14,773
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 24 1.414 33
Flexible Payment, Nonqualified............................ 119 1.414 169
Periodic Payment, Qualified............................... 4,889 1.407 6,880
Periodic Payment, Nonqualified............................ 824 1.407 1,160
----------
8,242
----------
KEMPER HORIZON 20+ SUBACCOUNT
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 1,170 1.360 1,592
Periodic Payment, Nonqualified............................ 83 1.360 113
----------
1,705
----------
KEMPER HORIZON 10+ SUBACCOUNT
Flexible Payment, Qualified............................... 10 1.279 12
Flexible Payment, Nonqualified............................ 9 1.279 11
Periodic Payment, Qualified............................... 1,616 1.273 2,057
Periodic Payment, Nonqualified............................ 261 1.273 332
----------
2,412
----------
KEMPER HORIZON 5 SUBACCOUNT
Flexible Payment, Qualified............................... -- 1.215 --
Flexible Payment, Nonqualified............................ 42 1.215 50
Periodic Payment, Qualified............................... 917 1.209 1,108
Periodic Payment, Nonqualified............................ 192 1.209 232
----------
1,390
----------
JANUS ASPEN SERIES FUND
GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 11 19.471 211
Flexible Payment, Nonqualified............................ 7 19.471 144
Periodic Payment, Qualified............................... 1,357 19.338 26,251
Periodic Payment, Nonqualified............................ 157 19.338 3,041
----------
29,647
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY........................................ $1,638,556
==========
</TABLE>
B-36
<PAGE> 317
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ----- --------
<S> <C> <C> <C>
PASSPORT CONTRACTS
INVESTORS FUND SERIES
KEMPER MONEY MARKET #1 SUBACCOUNT
Qualified................................................. 4,222 $ 1.199 $ 5,062
Nonqualified.............................................. 16,465 1.199 19,742
----------
24,804
----------
KEMPER MONEY MARKET #2 SUBACCOUNT
Qualified................................................. 1,654 1.292 2,136
Nonqualified.............................................. 3,297 1.292 4,258
----------
6,394
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified................................................. 17,721 1.685 29,869
Nonqualified.............................................. 54,980 1.685 92,666
----------
122,535
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................. 13,014 1.883 24,501
Nonqualified.............................................. 40,535 1.883 76,319
----------
100,820
----------
KEMPER GROWTH SUBACCOUNT
Qualified................................................. 15,200 2.066 31,410
Nonqualified.............................................. 38,784 2.066 80,142
----------
111,552
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 4,153 1.359 5,644
Nonqualified.............................................. 15,292 1.359 20,781
----------
26,425
----------
KEMPER INTERNATIONAL SUBACCOUNT
Qualified................................................. 7,020 1.698 11,921
Nonqualified.............................................. 21,070 1.698 35,779
----------
47,700
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 3,122 2.220 6,930
Nonqualified.............................................. 8,632 2.220 19,162
----------
26,092
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 918 1.106 1,014
Nonqualified.............................................. 2,668 1.106 2,951
----------
3,965
----------
KEMPER CONTRARIAN VALUE SUBACCOUNT
Qualified................................................. 6,437 1.499 9,650
Nonqualified.............................................. 16,911 1.499 25,349
----------
34,999
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Qualified................................................. 3,943 1.215 4,789
Nonqualified.............................................. 11,269 1.215 13,688
----------
18,477
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Qualified................................................. 3,897 1.408 5,489
Nonqualified.............................................. 10,075 1.408 14,190
----------
19,679
----------
</TABLE>
B-37
<PAGE> 318
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ----- --------
<S> <C> <C> <C>
KEMPER HORIZON 20+ SUBACCOUNT
Qualified................................................. 1,058 $ 1.361 $ 1,440
Nonqualified.............................................. 2,441 1.361 3,323
----------
4,763
----------
KEMPER HORIZON 10+ SUBACCOUNT
Qualified................................................. 1,090 1.274 1,389
Nonqualified.............................................. 4,206 1.274 5,359
----------
6,748
----------
KEMPER HORIZON 5 SUBACCOUNT
Qualified................................................. 276 1.210 334
Nonqualified.............................................. 2,623 1.210 3,174
----------
3,508
----------
KEMPER GLOBAL INCOME SUBACCOUNT
Qualified................................................. 30 1.020 30
Nonqualified.............................................. 290 1.020 296
----------
326
----------
KEMPER BLUE CHIP SUBACCOUNT
Qualified................................................. 220 1.106 243
Nonqualified.............................................. 1,659 1.106 1,835
----------
2,078
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY............. $ 560,865
==========
</TABLE>
B-38
<PAGE> 319
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
------------------------------------
QUALIFIED NON-QUALIFIED
PLANS PLANS
STATE --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Contract Value.
B-39
<PAGE> 320
STATEMENT OF ADDITIONAL INFORMATION
________________ , 1998
[TO BE UPDATED BY AMENDMENT]
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
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 January 4, 1999. The Prospectus may be obtained from
Kemper Investors Life Insurance Company by writing or calling the address or
telephone number listed above.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services to the Separate Account............................ B-1
Performance Information of Subaccounts...................... B-1
State Regulation............................................ B-8
Experts..................................................... B-8
Financial Statements........................................ B-8
</TABLE>
<PAGE> 321
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Fund by
each of the Subaccounts. All expenses incurred in the operations of the Separate
Account, except the charge for mortality and expense risk and administrative
expenses, and records maintenance charge (as described in the Prospectus) are
borne by KILICO.
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the year ended December 31, 1997. The firm performed
the annual audit of the financial statements of the Separate Account and KILICO
for the year ended December 31, 1997.
The independent auditors for the Separate Account prior to 1997 were KPMG 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 and one-quarter percent (6 1/4%)
of Purchase Payments.
PERFORMANCE INFORMATION OF SUBACCOUNTS
As described in the Prospectus, a Subaccount's historical performance may be
shown in the form of standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, the Kemper Government Securities Subaccount, Scudder VLIF Bond
Subaccount, PIMCO Low Duration Bond Subaccount and PIMCO Foreign Bond
Subaccount; and "yield" and "effective yield" information may be provided in the
case of the Scudder VLIF Money Market Subaccount. These various measures of
performance are described below.
A Subaccount's standardized average annual total return quotation is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a
Subaccount for a specific period is found by first taking a hypothetical $1,000
investment in each of the Subaccount's units on the first day of the period at
the maximum offering price, which is the Accumulation Unit value per unit
("initial investment") and computing the ending redeemable value ("redeemable
value") of that investment at the end of the period. The redeemable value
reflects the effect of the applicable Withdrawal Charge that may be imposed at
the end of the period as well as all other recurring charges and fees applicable
under the Contract to all Contract Owner accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. Standardized average annual total return figures
are annualized and, therefore, represent the average annual percentage change in
the value of a Subaccount over the applicable period.
No standard formula has been prescribed for calculating nonstandardized total
return performance. Nonstandardized total return performance for a specific
period is calculated by first taking an investment (assumed to be $40,000 below)
in each Subaccount's units on the first day of the period at the maximum
offering price, which is the Accumulation Unit value per unit ("initial
investment") and computing the ending value ("ending value") of that investment
at the end of the period. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Premium taxes are not
included in the term charges. The nonstandardized total return percentage is
then determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. An assumed investment of $40,000 was chosen because that
approximates the size of a typical account. The account size used affects the
performance figure because the Records Maintenance Charge is a fixed per account
charge. Both annualized and nonannualized
B-1
<PAGE> 322
(cumulative) nonstandardized total return figures may be provided. Annualized
nonstandardized total return figures represent the average annual percentage
charge in the value of a Subaccount over the applicable period while
nonannualized (cumulative) figures represent the actual percentage change over
the applicable period.
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover periods of one, three, five and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in a
Subaccount (life of Subaccount). Nonstandardized total return may cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper High Yield Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount and the Kemper Government
Securities Subaccount is computed in accordance with a standard method
prescribed by rules of the Securities and Exchange Commission. The yields for
the Kemper High Yield Subaccount, and the Kemper Government Securities
Subaccount, based upon the one month period ended December 31, 1997, were 6.12%
and 4.06%, 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:
a - b 6
YIELD = 2[( ------- +1) - 1]
cd
a = net dividends and interest earned during the period by the Fund attributable
to the Subaccount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
Withdrawal Charges or premium taxes.
The Scudder VLIF Money Market Subaccount's yield is computed in accordance with
a standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit value during
the period is divided by the Accumulation Unit value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Separate Account's portfolio are not included in the
calculation. The Scudder VLIF Money Market Subaccount's yield for the seven-day
period ended December 31, 1997 was 3.86% and average portfolio maturity was 33
days.
The Scudder VLIF Money Market Subaccount's effective yield is determined by
taking the base period return (computed as described above) and calculating the
effect of assumed compounding. The formula for the effective yield is: (base
period return +1) (365) / (7) - 1. The Scudder VLIF Money Market Subaccount's
effective yield for the seven day period ended December 31, 1997 was 3.93%.
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
B-2
<PAGE> 323
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 seven years after purchase may be subject
to a Withdrawal Charge that ranges from 7% the first year to 0% after seven
years. Yield, effective yield and total return do not reflect the effect of the
Withdrawal Charge or premium taxes that may be imposed upon the redemption of
units. Standardized average annual total return reflects the effect of the
applicable Withdrawal Charge (but not premium tax) that may be imposed at the
end of the period in question.
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes, including the
Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, the
Consumer Price Index, the CDA Certificate of Deposit Index, the Salomon Brothers
High Grade Corporate Bond Index, the Lehman Brothers Government/Corporate Bond
Index, the Merrill Lynch Government/Corporate Master Index, the Lehman Brothers
Long Government/Corporate Bond Index, the Lehman Brothers Government/Corporate
1-3 Year Bond Index, the Standard & Poor's Midcap 400 Index, the NASDAQ
Composite Index, the Russell 2000 Index and the Morgan Stanley Capital
International Europe, Australia, Far East Index. In addition, the Subaccounts
may provide performance analysis rankings of Lipper Analytical Services, Inc.,
the VARDS Report, MORNINGSTAR, INC., Ibbotson Associates or Micropal. From time
to time, the Separate Account may quote information from publications such as
MORNINGSTAR, INC., THE WALL STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S,
FORTUNE, THE CHICAGO TRIBUNE, USA TODAY, INSTITUTIONAL INVESTOR, NATIONAL
UNDERWRITER, SELLING LIFE INSURANCE, BROKER WORLD, REGISTERED REPRESENTATIVE,
INVESTMENT ADVISOR and VARDS.
The following tables include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1997.
B-3
<PAGE> 324
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
------------------------------- --------------
YEAR TO DATE (%) ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
RETURN(3) VALUE(4) RETURN RETURN RETURN
---------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
SCUDDER VLIF MONEY MARKET SUBACCOUNT....... 3.68%
Life of Subaccount....................... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85)........ 66,670 66.37% 4.17% N/A
Ten Years................................ 59,527 48.52% 4.03% N/A
Five Years............................... 46,401 15.70% 2.96% N/A
Three Years.............................. 44,855 11.84% 3.80% N/A
One Year................................. 41,529 3.52% 3.52% N/A
SCUDDER VLIF BOND SUBACCOUNT............... 7.60%
Life of Subaccount....................... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85)........ 93,437 133.29% 7.03% N/A
Ten Years................................ 79,100 97.45% 7.04% N/A
Five Years............................... 52,937 32.04% 5.72% N/A
Three Years.............................. 50,864 26.86% 8.25% N/A
One Year................................. 43,039 7.30% 7.30% N/A
KEMPER HIGH YIELD SUBACCOUNT(5)............ 10.08%
Life of Subaccount (from 04/06/82)....... 241,465 503.59% 12.11% 11.82%
Life of Portfolio (from 04/06/82)........ 241,465 503.59% 12.11% 11.82%
Ten Years................................ 106,143 165.28% 10.25% 9.96%
Five Years............................... 65,537 63.77% 10.37% 9.27%
Three Years.............................. 57,336 43.26% 12.73% 10.71%
One Year................................. 44,032 10.01% 10.01% 2.75%
KEMPER GOVERNMENT SECURITIES SUBACCOUNT.... 7.46%
Life of Subaccount (from 11/03/89)....... 67,043 67.61% 6.54% 6.26%
Life of Portfolio (from 09/03/87)........ 76,290 90.65% 6.44% N/A
Ten Years................................ 76,075 90.11% 6.64% N/A
Five Years............................... 51,435 28.51% 5.15% 4.10%
Three Years.............................. 51,126 27.74% 8.50% 6.56%
One Year................................. 43,984 7.38% 7.38% .29%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. See page B-6 for additional information.
B-4
<PAGE> 325
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT............... 28.67%
Life of Subaccount (from 05/01/98).................... N/A N/A N/A N/A
Life of Portfolio (from 05/02/94)..................... 83,736 109.27% 22.30% N/A
Three Years........................................... 80,557 101.32% 26.27% N/A
One Year.............................................. 51,469 28.60% 28.60% N/A
KEMPER SMALL CAP GROWTH SUBACCOUNT...................... 32.39%
Life of Subaccount (from 05/02/94).................... $88,491 121.15% 24.15% 22.57%
Life of Portfolio (from 05/02/94)..................... 88,491 121.15% 24.15% 22.57%
Three Years........................................... 85,886 114.64% 28.99% 27.14%
One Year.............................................. 52,954 32.31% 32.31% 24.64%
JANUS ASPEN CAPITAL APPRECIATION SUBACCOUNT(6).......... N/A
Life of Subaccount.................................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/97)..................... 50,173 25.13% N/A N/A
SCUDDER VLIF INTERNATIONAL SUBACCOUNT................... 7.56%
Life of Subaccount (from 05/01/96).................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/87)..................... 93,997 134.92% 8.33% N/A
Ten Years............................................. 106,185 165.39% 10.25% N/A
Five Years............................................ 70,925 77.24% 12.13% N/A
Three Years........................................... 53,364 33.34% 10.06% N/A
One Year.............................................. 43,024 7.49% 7.49% N/A
TEMPLETON DEVELOPING MARKETS SUBACCOUNT(7).............. N/A
Life of Subaccount.................................... N/A N/A N/A N/A
Life of Portfolio (from 03/01/96)(8).................. 26,025 -35.24% -21.08% N/A
Life of Portfolio (Class 2 Shares) (from
05/01/97)(9)........................................ 26,634 -33.72% N/A N/A
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. See page B-6 for additional information.
B-5
<PAGE> 326
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Non standardized Total Return figures quoted are based on a hypothetical
$40,000 initial investment and assumes the deduction of all recurring
charges and fees applicable under the Contract except for the Withdrawal
Charge and any charge for applicable premium taxes which may be imposed in
certain states.
(2) The Standardized Average Annual Total Return figures quoted are based on a
hypothetical $1,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract including the
applicable Withdrawal Charge that may be imposed at the end of the quoted
period. Premium taxes are not reflected.
(3) The Year to Date percentage return figures quoted are based on the change in
unit values.
(4) The Ending Values quoted are based on a $10,000 initial investment and
assumes the deduction of all recurring charges and fees applicable under the
Contract except for the Withdrawal Charge and any charge for applicable
premium taxes which may be imposed in certain states.
(5) The high yield potential offered by these Subaccounts reflect the
substantial risks associated with investments in high-yield bonds.
(6) There is presently no standardized performance data for the Janus Aspen
Capital Appreciation Subaccount because it is newly formed. Standardized
data will be included when it becomes available.
(7) There is presently no standardized performance data for the Templeton
Developing Markets Subaccount because it is newly formed. Standardized data
will be included when it becomes available.
(8) Because Class 2 Shares were not offered until May 1, 1997, performance shown
for periods prior to that date represents the historical results of Class 1
Shares.
(9) Performance of Class 2 Shares for periods after May 1, 1997 reflects Class
2's higher annual fees and expenses resulting from its Rule 12b-1 plan.
B-6
<PAGE> 327
The following tables illustrate an assumed $40,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from the inception date of each Fund to December 31, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCUDDER MONEY MARKET SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C>
1985 ............................... $41,035
1986 ............................... 42,868
1987 ............................... 44,800
1988 ............................... 47,318
1989 ............................... 50,806
1990 ............................... 54,043
1991 ............................... 56,399
1992 ............................... 57,472
1993 ............................... 58,118
1994 ............................... 59,454
1995 ............................... 61,954
1996 ............................... 64,214
1997 ............................... 66,670
</TABLE>
<TABLE>
<CAPTION>
SCUDDER INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C>
1987 ............................... $35,409
1988 ............................... 40,768
1989 ............................... 55,418
1990 ............................... 50,462
1991 ............................... 55,468
1992 ............................... 53,012
1993 ............................... 72,052
1994 ............................... 70,457
1995 ............................... 77,209
1996 ............................... 87,390
1997 ............................... 93,997
</TABLE>
<TABLE>
<CAPTION>
SCUDDER BOND SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C>
1985 ............................... $42,748
1986 ............................... 47,334
1987 ............................... 47,250
1988 ............................... 49,145
1989 ............................... 54,117
1990 ............................... 57,674
1991 ............................... 66,903
1992 ............................... 70,603
1993 ............................... 78,257
1994 ............................... 73,480
1995 ............................... 85,651
1996 ............................... 86,839
1997 ............................... 93,437
</TABLE>
<TABLE>
<CAPTION>
SCUDDER GROWTH AND INCOME
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C>
1994 ............................... $41,578
1995 ............................... 54,021
1996 ............................... 65,077
1997 ............................... 83,736
</TABLE>
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C>
1987 ............................... $40,113
1988 ............................... 40,801
1989 ............................... 46,074
1990 ............................... 49,929
1991 ............................... 56,785
1992 ............................... 59,330
1993 ............................... 62,326
1994 ............................... 59,688
1995 ............................... 70,150
1996 ............................... 70,995
1997 ............................... 76,290
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C>
1982 .............................. $ 49,485
1983 .............................. 56,063
1984 .............................. 62,318
1985 .............................. 74,895
1986 .............................. 87,061
1987 .............................. 90,996
1988 .............................. 104,077
1989 .............................. 101,381
1990 .............................. 84,537
1991 .............................. 126,794
1992 .............................. 147,376
1993 .............................. 174,554
1994 .............................. 168,457
1995 .............................. 195,187
1996 .............................. 219,553
1997 .............................. 241,465
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C>
1994 ............................... $41,213
1995 ............................... 52,892
1996 ............................... 66,844
1997 ............................... 88,491
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN CAPITAL
APPRECIATION SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C>
1997 ............................... $50,173
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON DEVELOPING
MARKETS SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<S> <C>
1997 ............................... $26,634
</TABLE>
B-7
<PAGE> 328
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED
ANNUITY CONVENTIONAL
AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- CONTRIBUTIONS
TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------
<S> <C> <C> <C>
10 Years.......................................... $107,946 $ 86,448 $ 81,693
20 Years.......................................... 233,048 165,137 133,476
30 Years.......................................... 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts. Income on
Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10% tax
penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following annuity charges and
expenses: 1.25% mortality and expense risk; .10% administration charges; 7%
maximum deferred withdrawal charge; and $30 annual records maintenance charge.
The tax-deferred accumulation would be reduced if these charges were reflected.
No implication is intended by the use of these assumptions that the return shown
is guaranteed in any way or that the return shown represents an average or
expected rate of return over the period of the Contracts. [IMPORTANT--THIS IS
NOT AN ILLUSTRATION OF YIELD OR RETURN].
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
EXPERTS
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1997 and the related statements of
operations for the year then ended and the statements of changes in contract
owners' equity for the year then ended has been included herein in reliance upon
the report of PricewaterhouseCoopers LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The statement of changes in contract owners' equity of the Separate Account for
the year ended December 31, 1996 has been included herein in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
FINANCIAL STATEMENTS
This Statement of Additional Information contains financial statements for the
Separate Account which reflect assets attributable to other variable annuity
contracts offered by KILICO through the Separate Account. As of the date of this
Statement of Additional Information, no assets attributable to the Contracts are
reflected as the Contracts were not offered prior to such date. In addition, the
financial statements for the Separate Account reflect Subaccounts that are not
available under the Contracts.
B-8
<PAGE> 329
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS OF
KEMPER INVESTORS LIFE INSURANCE COMPANY AND
CONTRACT OWNERS OF KILICO VARIABLE ANNUITY SEPARATE ACCOUNT:
We have audited the accompanying statements of assets and liabilities and
contract owners' equity of the Kemper Money Market Subaccount, Kemper Money
Market Subaccount #2, Kemper Total Return Subaccount, Kemper High Yield
Subaccount, Kemper Growth Subaccount, Kemper Government Securities Subaccount,
Kemper International Subaccount, Kemper Small Cap Growth Subaccount, Kemper
Investment Grade Bond Subaccount, Kemper Contrarian Value Subaccount, Kemper
Small Cap Value Subaccount, Kemper Value+Growth Subaccount, Kemper Horizon 20+
Subaccount, Kemper Horizon 10+ Subaccount, Kemper Horizon 5 Subaccount, Kemper
Global Income Subaccount and Kemper Blue Chip Subaccount (investment options
within the Investors Fund Series), and the Growth Subaccount (investment option
within Janus Aspen Series), of KILICO Variable Annuity Separate Account as of
December 31, 1997 and the related statements of operations and the statements of
changes in contract owners' equity for the year then ended, except for Kemper
Global Income Subaccount and Kemper Blue Chip Subaccount as to which the period
is May 1, 1997 (commencement of operations) to December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The statement of changes in contract owners' equity for the year
ended December 31, 1996 was audited by other auditors, whose report, dated March
26, 1997, expressed an unqualified opinion on that statement.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments owned at December 31, 1997 by correspondence with
the transfer agent. An audit also includes assessing the accounting principles
used and significant estimates made by management as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the December 31, 1997 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, 1997 and
the results of their operations and changes in their contract owners' equity for
the year then ended, except for Kemper Global Income Subaccount and Kemper Blue
Chip Subaccount as to which the period is May 1, 1997 (commencement of
operations) to December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ PRICEWATERHOUSECOOPERS LLP
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 20, 1998
B-9
<PAGE> 330
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying statement of changes in contract owners' equity
of the Kemper Money Market Subaccount, Kemper Money Market Subaccount #2, Kemper
Total Return Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount,
Kemper Government Securities Subaccount, Kemper International Subaccount, Kemper
Small Cap Growth Subaccount, Kemper Investment Grade Bond Subaccount, Kemper
Contrarian Value Subaccount, Kemper Small Cap Value Subaccount, Kemper
Value+Growth Subaccount, Kemper Horizon 20+ Subaccount, Kemper Horizon 10+
Subaccount, and Kemper Horizon 5 Subaccount (investment options within the
Investors Fund Series), and the Growth Subaccount (investment option within
Janus Aspen Series) of KILICO Variable Annuity Separate Account (the Account)
for the year ended December 31, 1996. This financial statement is the
responsibility of the Account's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the changes in the contract owners' equity of the
subaccounts of KILICO Variable Annuity Separate Account for the year ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
March 26, 1997
B-10
<PAGE> 331
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... $73,754 6,379 743,633 306,171 527,701 72,906
Dividends and other
receivables................ 200 17 142 40 69 5
------- ----- ------- ------- ------- ------
Total assets.......... 73,954 6,396 743,775 306,211 527,770 72,911
------- ----- ------- ------- ------- ------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 82 -- 796 327 564 78
Other payables............. 118 2 195 63 106 12
------- ----- ------- ------- ------- ------
Total liabilities..... 200 2 991 390 670 90
------- ----- ------- ------- ------- ------
Contract owners' equity...... $73,754 6,394 742,784 305,821 527,100 72,821
======= ===== ======= ======= ======= ======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. $ 3,881 5,218 203,480 96,788 187,968 39,559
Accumulated net investment
income (loss).............. 69,873 1,176 301,262 181,924 202,725 30,968
Accumulated net realized gain
on sales of investments.... -- -- 88,300 6,525 61,033 1,024
Unrealized appreciation of
investments................ -- -- 149,742 20,584 75,374 1,270
------- ----- ------- ------- ------- ------
Contract owners' equity...... $73,754 6,394 742,784 305,821 527,100 72,821
======= ===== ======= ======= ======= ======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... 160,865 112,970
Dividends and other
receivables................ 28 25
------- -------
Total assets.......... 160,893 112,995
------- -------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 172 115
Other payables............. 125 17
------- -------
Total liabilities..... 297 132
------- -------
Contract owners' equity...... 160,596 112,863
======= =======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. 107,157 72,054
Accumulated net investment
income (loss).............. 7,987 7,311
Accumulated net realized gain
on sales of investments.... 18,107 11,120
Unrealized appreciation of
investments................ 27,345 22,378
------- -------
Contract owners' equity...... 160,596 112,863
======= =======
</TABLE>
See accompanying notes to financial statements.
B-11
<PAGE> 332
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 GLOBAL INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5,463 78,165 33,296 27,952 6,474 9,169 4,902 326 2,080
1 20 14 21 5 4 3 -- 3
----- ------ ------ ------ ----- ----- ----- --- -----
5,464 78,185 33,310 27,973 6,479 9,173 4,905 326 2,083
----- ------ ------ ------ ----- ----- ----- --- -----
5 68 35 29 7 10 5 -- 2
1 35 25 23 4 3 2 -- 3
----- ------ ------ ------ ----- ----- ----- --- -----
6 103 60 52 11 13 7 -- 5
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
5,144 64,882 28,513 23,759 5,342 7,793 4,402 307 2,017
(37) (395) (220) (224) (86) (83) (47) (7) (20)
73 2,762 1,143 618 177 138 98 21 27
278 10,833 3,814 3,768 1,035 1,312 445 5 54
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
29,665
13
------
29,678
------
31
--
------
31
------
29,647
======
23,713
668
916
4,350
------
29,647
======
</TABLE>
B-12
<PAGE> 333
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL KEMPER KEMPER 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.................... $3,938 374 107,616 23,900 112,090 6,229
Expenses:
Mortality and expense risk and
administrative charges......... 999 1 9,756 3,824 6,893 1,011
------ --- ------- ------ ------- -----
Net investment income (loss)....... 2,939 373 97,860 20,076 105,197 5,218
------ --- ------- ------ ------- -----
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments................. -- -- 21,466 5,634 13,791 (133)
Change in unrealized appreciation
(depreciation) of
investments.................... -- -- 1,837 2,376 (29,191) 284
------ --- ------- ------ ------- -----
Net realized and unrealized gain
(loss) on investments............ -- -- 23,303 8,010 (15,400) 151
------ --- ------- ------ ------- -----
Net increase in contract owners'
equity resulting from
operations....................... $2,939 373 121,163 28,086 89,797 5,369
====== === ======= ====== ======= =====
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Dividends and capital gains
distributions.................... 9,141 8,510
Expenses:
Mortality and expense risk and
administrative charges......... 2,301 1,226
------ ------
Net investment income (loss)....... 6,840 7,284
------ ------
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments................. 9,738 8,226
Change in unrealized appreciation
(depreciation) of
investments.................... (2,788) 8,507
------ ------
Net realized and unrealized gain
(loss) on investments............ 6,950 16,733
------ ------
Net increase in contract owners'
equity resulting from
operations....................... 13,790 24,017
====== ======
</TABLE>
- ---------------
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
1997.
See accompanying notes to financial statements.
B-13
<PAGE> 334
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
- --------------------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER GLOBAL KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ---------- ------------ ----------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
303 181 121 40 60 29 -- --
28
621 357 282 98 113 62 7 20
54
--- ------ ----- ----- --- ----- --- -- ---
(26) (318) (176) (161) (58) (53) (33) (7) (20)
--- ------ ----- ----- --- ----- --- -- ---
71 2,750 1,194 619 161 129 97 21 27
248 9,122 3,077 3,038 777 945 320 5 54
--- ------ ----- ----- --- ----- --- -- ---
319 11,872 4,271 3,657 938 1,074 417 26 81
--- ------ ----- ----- --- ----- --- -- ---
293 11,554 4,095 3,496 880 1,021 384 19 61
=== ====== ===== ===== === ===== === == ===
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
------------------
<S> <C>
741
312
-----
429
-----
842
3,150
-----
3,992
-----
4,421
=====
</TABLE>
B-14
<PAGE> 335
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income
(loss)..................... $ 2,939 373 97,860 20,076 105,197 5,218
Net realized gain (loss) on
sales of investments....... -- -- 21,466 5,634 13,791 (133)
Change in unrealized
appreciation (depreciation)
of investments............. -- -- 1,837 2,376 (29,191) 284
-------- ------- ------- ------- ------- -------
Net increase in contract
owners' equity resulting
from operations.......... 2,939 373 121,163 28,086 89,797 5,369
-------- ------- ------- ------- ------- -------
Account unit transactions:
Proceeds from units sold..... 21,938 7,884 36,774 26,456 32,804 6,125
Net transfers (to) from
affiliated divisions and
subaccounts................ 7,054 (10,145) (30,823) (473) (35,916) (6,847)
Payments for units
redeemed................... (17,525) (213) (75,741) (34,745) (43,779) (11,513)
-------- ------- ------- ------- ------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions............. 11,467 (2,474) (69,790) (8,762) (46,891) (12,235)
-------- ------- ------- ------- ------- -------
Total increase (decrease) in
contract owners' equity...... 14,406 (2,101) 51,373 19,324 42,906 (6,866)
Beginning of period............ 59,348 8,495 691,411 286,497 484,194 79,687
-------- ------- ------- ------- ------- -------
End of period.................. $ 73,754 6,394 742,784 305,821 527,100 72,821
======== ======= ======= ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income
(loss)..................... 6,840 7,284
Net realized gain (loss) on
sales of investments....... 9,738 8,226
Change in unrealized
appreciation (depreciation)
of investments............. (2,788) 8,507
------- -------
Net increase in contract
owners' equity resulting
from operations.......... 13,790 24,017
------- -------
Account unit transactions:
Proceeds from units sold..... 14,396 14,943
Net transfers (to) from
affiliated divisions and
subaccounts................ (14,865) 11,461
Payments for units
redeemed................... (15,633) (6,408)
------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions............. (16,102) 19,996
------- -------
Total increase (decrease) in
contract owners' equity...... (2,312) 44,013
Beginning of period............ 162,908 68,850
------- -------
End of period.................. 160,596 112,863
======= =======
</TABLE>
- ---------------
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
1997.
See accompanying notes to financial statements.
B-15
<PAGE> 336
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 GLOBAL INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(26) (318) (176) (161) (58) (53) (33) (7) (20)
71 2,750 1,194 619 161 129 97 21 27
248 9,122 3,077 3,038 777 945 320 5 54
----- ------ ------ ------ ----- ----- ----- --- -----
293 11,554 4,095 3,496 880 1,021 384 19 61
----- ------ ------ ------ ----- ----- ----- --- -----
1,403 16,729 8,235 8,265 1,223 1,730 1,182 44 1,073
2,113 31,875 9,674 7,531 1,114 1,220 1,152 263 1,027
(224) (2,935) (1,625) (1,266) (179) (395) (200) -- (83)
----- ------ ------ ------ ----- ----- ----- --- -----
3,292 45,669 16,284 14,530 2,158 2,555 2,134 307 2,017
----- ------ ------ ------ ----- ----- ----- --- -----
3,585 57,223 20,379 18,026 3,038 3,576 2,518 326 2,078
1,873 20,859 12,871 9,895 3,430 5,584 2,380 -- --
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
429
842
3,150
------
4,421
------
5,841
2,785
(1,058)
------
7,568
------
11,989
17,658
------
29,647
======
</TABLE>
B-16
<PAGE> 337
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
------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)....... $ 2,493 243 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 affiliated
divisions 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
======== ====== ======= ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income (loss)....... 942 478
Net realized gain (loss) on sales
of investments................... 5,409 2,710
Change in unrealized appreciation
(depreciation) of investments.... 14,729 8,276
------- ------
Net increase in contract owners'
equity resulting from
operations..................... 21,080 11,464
------- ------
Account unit transactions:
Proceeds from units sold........... 20,272 13,879
Net transfers (to) from affiliated
divisions and subaccounts........ 819 11,423
Payments for units redeemed........ (13,606) (3,253)
------- ------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... 7,485 22,049
------- ------
Total increase (decrease) in contract
owners' equity..................... 28,565 33,513
Beginning of period.................. 134,343 35,337
------- ------
End of period........................ 162,908 68,850
======= ======
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-17
<PAGE> 338
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
- -----------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(11) (77) (44) (63) (28) (30) (14)
2 12 (51) (1) 16 9 1
30 1,711 737 730 258 367 125
----- ------ ------ ----- ----- ----- -----
21 1,646 642 666 246 346 112
----- ------ ------ ----- ----- ----- -----
1,262 9,908 6,111 6,223 2,580 4,108 1,453
632 9,522 6,244 3,214 620 1,206 887
(42) (217) (126) (208) (16) (76) (72)
----- ------ ------ ----- ----- ----- -----
1,852 19,213 12,229 9,229 3,184 5,238 2,268
----- ------ ------ ----- ----- ----- -----
1,873 20,859 12,871 9,895 3,430 5,584 2,380
-- -- -- -- -- -- --
----- ------ ------ ----- ----- ----- -----
1,873 20,859 12,871 9,895 3,430 5,584 2,380
===== ====== ====== ===== ===== ===== =====
<CAPTION>
JANUS ASPEN SERIES
- --- ------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
200
74
1,182
------
1,456
------
3,853
10,206
(445)
------
13,614
------
15,070
2,588
------
17,658
======
</TABLE>
B-18
<PAGE> 339
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. Kemper Corporation
was acquired by an investor group led by Zurich Insurance Company ("Zurich") on
January 4, 1996. Effective February 27, 1998, KILICO and Kemper Corporation
became wholly-owned subsidiaries of Zurich.
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
a total of twenty-eight subaccounts with various subaccount options available to
Contract Owners depending upon their respective Contracts. A total of only
seventeen subaccount options are presented in the accompanying financial
statements, (the Kemper Money Market Subaccounts represent only one subaccount),
as available subaccount options to Contract Owners. Each subaccount invests
exclusively in the shares of a corresponding portfolio of one of the underlying
investment funds; the Investors Fund Series or the Janus Aspen Series (the
"Fund"), both of which are open-end diversified management investment companies.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent amounts at the date of the financial statements. As a
result, actual results reported as income and expenses could differ from the
estimates reported in the accompanying financial statements.
SECURITY VALUATION
The investments are stated at current value which is based on the closing bid
price, net asset value, at December 31, 1997.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Dividends and capital gains distributions are recorded as
income on the ex-dividend date. Realized gains and losses from security
transactions are reported on a first in, first out ("FIFO") cost basis.
ACCUMULATION UNIT VALUATION
On each day the New York Stock Exchange (the "Exchange") is open for trading,
the accumulation unit value is determined as of the earlier of 3:00 p.m.
(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.
In early 1998, the Clinton Administration's Fiscal Year 1999 Budget was released
and contained certain proposals to change the taxation of non-qualified fixed
and variable annuities. It is currently unknown whether such proposals will be
adopted, amended or omitted in the final 1999 budget approved by Congress.
B-19
<PAGE> 340
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------ ----
<S> <C> <C>
INVESTMENTS
INVESTORS FUND SERIES:
Kemper Money Market Subaccount (Money Market and Money
Market #2 Subaccounts).................................... 80,133 $ 80,133
Kemper Total Return Subaccount.............................. 263,494 593,891
Kemper High Yield Subaccount................................ 236,229 285,587
Kemper Growth Subaccount.................................... 175,849 452,327
Kemper Government Securities Subaccount..................... 60,389 71,636
Kemper International Subaccount............................. 99,620 133,520
Kemper Small Cap Growth Subaccount.......................... 57,375 90,592
Kemper Investment Grade Bond Subaccount..................... 4,886 5,185
Kemper Contrarian Value Subaccount.......................... 51,507 67,332
Kemper Small Cap Value Subaccount........................... 27,124 29,482
Kemper Value+Growth Subaccount.............................. 19,616 24,184
Kemper Horizon 20+ Subaccount............................... 4,700 5,439
Kemper Horizon 10+ Subaccount............................... 7,114 7,857
Kemper Horizon 5 Subaccount................................. 4,006 4,457
Kemper Global Income Subaccount............................. 316 321
Kemper Blue Chip Subaccount................................. 1,864 2,026
JANUS ASPEN SERIES FUND:
Growth Subaccount........................................... 1,605 25,315
----------
TOTAL INVESTMENTS................................. $1,879,284
==========
</TABLE>
The underlying investments of the Fund's subaccounts are summarized below.
INVESTORS FUND SERIES
KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests primarily in short-term
obligations of major banks and corporations. The Kemper Money Market Subaccount
represents the ADVANTAGE III Kemper Money Market Subaccount and the PASSPORT
Kemper Money Market Subaccount #1. Kemper Money Market Subaccount #2 represents
funds allocated by the owner of a contract to the dollar cost averaging program.
Under the dollar cost averaging 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.
KEMPER TOTAL RETURN SUBACCOUNT: This subaccount'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 subaccount may also make private
placement investments (which are normally restricted securities).
KEMPER HIGH YIELD SUBACCOUNT: This subaccount 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.
KEMPER GROWTH SUBACCOUNT: This subaccount'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).
B-20
<PAGE> 341
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests primarily in
U.S. Government securities. The subaccount will also invest in fixed-income
securities other than U.S. Government securities and will engage in options and
financial futures transactions.
KEMPER INTERNATIONAL SUBACCOUNT: This subaccount'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.
KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount'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 subaccount'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.
KEMPER INVESTMENT GRADE BOND SUBACCOUNT: This subaccount seeks high current
income by investing primarily in a diversified portfolio of investment grade
debt securities. At least 65% of the subaccount's total assets will be invested
in investment grade corporate debt securities, U.S. Government or Canadian
Government agencies and commercial paper. The subaccount may also invest in
preferred stocks. The subaccount may also invest up to 35% of its total assets
in below investment grade debt and will also engage in options and financial
futures transactions.
KEMPER CONTRARIAN VALUE (FORMERLY VALUE) SUBACCOUNT: This subaccount seeks to
achieve a high rate of total return. The subaccount invests primarily in a
diversified portfolio of the common stocks of larger listed companies, which are
believed to be undervalued.
KEMPER SMALL CAP VALUE SUBACCOUNT: This subaccount seeks long-term capital
appreciation. The subaccount invests primarily in a diversified portfolio of
small company equity securities with market capitalization of $100 million to
$1.0 billion, which are believed to be undervalued.
KEMPER VALUE+GROWTH SUBACCOUNT: This subaccount seeks growth of capital through
professional management of a portfolio of growth and value stocks. These stocks
include stocks of large established companies, as well as stocks of small
companies. The subaccount may also engage in options and financial futures
transactions.
KEMPER HORIZON 20+ SUBACCOUNT: This subaccount is designed for investors with
approximately a 20+ year investment horizon, and seeks growth of capital, with
income as a secondary objective. The subaccount invests approximately 80% of its
total assets in a variety of equity securities and 20% in a variety of fixed
income securities.
KEMPER HORIZON 10+ SUBACCOUNT: This subaccount 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. The subaccount invests
approximately 60% of its total assets in a variety of equity securities and 40%
in a variety of fixed income securities.
KEMPER HORIZON 5 SUBACCOUNT: This subaccount 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. The
subaccount invests approximately 40% of its total assets in a variety of equity
securities and 60% in a variety of fixed income securities.
KEMPER GLOBAL INCOME SUBACCOUNT: This subaccount seeks to provide high current
income consistent with prudent total return asset management. The subaccount
will invest in common stocks of well capitalized, established companies that are
believed to have the potential for growth of capital, earnings and dividends. At
least 65% of the subaccounts total assets in common stocks will be in companies
with a market capitalization of at least $1.0 billion at the time of initial
investment. The subaccount will also engage in options and financial futures
transactions.
KEMPER BLUE CHIP SUBACCOUNT: This subaccount seeks growth of capital and of
income. The subaccount will invest in investment grade foreign and U.S. fixed
income securities, with at least 65% of the subaccounts total assets invested in
securities of issuers located in at least three countries. The subaccount will
also engage in options and financial futures transactions.
B-21
<PAGE> 342
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
JANUS ASPEN SERIES
GROWTH SUBACCOUNT: This subaccount seeks long-term growth of capital by
investing primarily in common stocks with an emphasis on companies with larger
market capitalizations.
(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 Kemper 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. The records maintenance charge
for both ADVANTAGE III and PASSPORT contracts are waived for all individual
contracts whose investment value exceeds $50,000 on the date of assessment.
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Kemper Money Market, Kemper Total Return, Kemper High
Yield, and Kemper Growth Subaccounts whose direct and indirect operating
expenses exceed eighty hundredths of one percent (.80%) of average daily net
assets. In determining reimbursement of direct and indirect operating expenses,
for each subaccount, charges for mortality and expense risks and administrative
expenses, and records maintenance charges are excluded and, for each subaccount,
charges for taxes, extraordinary expenses, and brokerage and transaction costs
are excluded. During the year December 31, 1997, 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.
Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper Investments,
Inc., an affiliated company, is the investment manager of the Investors Fund
Series portfolios.
Janus Capital Corporation, an unaffiliated company, is the investment manager of
the Janus Aspen Series Fund Portfolio.
Investors Brokerage Services, Inc. ("IBS"), a wholly-owned subsidiary of KILICO,
is the principal underwriter for the Separate Account.
(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.
B-22
<PAGE> 343
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) CONTRACT OWNERS' EQUITY
The Contract Owners' equity is affected by the investment results of, and
contract charges to, each subaccount. The accompanying financial statements
include only Contract Owners' payments pertaining to the variable portions of
their contracts and exclude any payments for the market value adjusted or fixed
portions, the latter being included in the general account of KILICO. Contract
Owners may elect to annuitize the contract under one of several annuity options,
as specified in the prospectus.
B-23
<PAGE> 344
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Contract Owners' equity at December 31, 1997, is as follows (in thousands,
except unit value; differences are due to rounding):
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ----- --------
<S> <C> <C> <C>
ADVANTAGE III CONTRACTS
INVESTORS FUND SERIES
KEMPER MONEY MARKET SUBACCOUNT
Flexible Payment, Qualified............................... 633 $2.394 $ 1,514
Flexible Payment, Nonqualified............................ 4,338 2.394 10,385
Periodic Payment, Qualified............................... 11,579 2.285 26,456
Periodic Payment, Nonqualified............................ 4,637 2.285 10,595
----------
48,950
----------
KEMPER TOTAL RETURN SUBACCOUNT
Flexible Payment, Qualified............................... 864 6.501 5,617
Flexible Payment, Nonqualified............................ 4,277 6.019 25,743
Periodic Payment, Qualified............................... 82,149 6.205 509,698
Periodic Payment, Nonqualified............................ 13,699 5.781 79,191
----------
620,249
----------
KEMPER HIGH YIELD SUBACCOUNT
Flexible Payment, Qualified............................... 323 6.341 2,047
Flexible Payment, Nonqualified............................ 2,096 6.071 12,726
Periodic Payment, Qualified............................... 22,729 6.052 137,554
Periodic Payment, Nonqualified............................ 8,934 5.896 52,674
----------
205,001
----------
KEMPER GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 227 6.371 1,449
Flexible Payment, Nonqualified............................ 1,162 6.350 7,374
Periodic Payment, Qualified............................... 54,987 6.112 336,083
Periodic Payment, Nonqualified............................ 11,574 6.103 70,642
----------
415,548
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Flexible Payment, Qualified............................... 149 1.725 257
Flexible Payment, Nonqualified............................ 908 1.725 1,566
Periodic Payment, Qualified............................... 15,434 1.684 25,992
Periodic Payment, Nonqualified............................ 11,033 1.684 18,581
----------
46,396
----------
KEMPER INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified............................... 376 1.723 649
Flexible Payment, Nonqualified............................ 1,006 1.723 1,734
Periodic Payment, Qualified............................... 55,729 1.693 94,356
Periodic Payment, Nonqualified............................ 9,543 1.693 16,157
----------
112,896
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 195 2.240 436
Flexible Payment, Nonqualified............................ 657 2.240 1,471
Periodic Payment, Qualified............................... 33,789 2.216 74,872
Periodic Payment, Nonqualified............................ 4,509 2.216 9,992
----------
86,771
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Flexible Payment, Qualified............................... 13 1.111 15
Flexible Payment, Nonqualified............................ 303 1.111 337
Periodic Payment, Qualified............................... 694 1.105 767
Periodic Payment, Nonqualified............................ 338 1.105 374
----------
1,493
----------
</TABLE>
B-24
<PAGE> 345
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ----- --------
<S> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 59 $1.505 $ 89
Flexible Payment, Nonqualified............................ 95 1.505 143
Periodic Payment, Qualified............................... 18,994 1.498 28,446
Periodic Payment, Nonqualified............................ 9,619 1.498 14,405
----------
43,083
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 3 1.220 4
Flexible Payment, Nonqualified............................ 58 1.220 71
Periodic Payment, Qualified............................... 10,592 1.214 12,855
Periodic Payment, Nonqualified............................ 1,519 1.214 1,843
----------
14,773
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 24 1.414 33
Flexible Payment, Nonqualified............................ 119 1.414 169
Periodic Payment, Qualified............................... 4,889 1.407 6,880
Periodic Payment, Nonqualified............................ 824 1.407 1,160
----------
8,242
----------
KEMPER HORIZON 20+ SUBACCOUNT
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 1,170 1.360 1,592
Periodic Payment, Nonqualified............................ 83 1.360 113
----------
1,705
----------
KEMPER HORIZON 10+ SUBACCOUNT
Flexible Payment, Qualified............................... 10 1.279 12
Flexible Payment, Nonqualified............................ 9 1.279 11
Periodic Payment, Qualified............................... 1,616 1.273 2,057
Periodic Payment, Nonqualified............................ 261 1.273 332
----------
2,412
----------
KEMPER HORIZON 5 SUBACCOUNT
Flexible Payment, Qualified............................... -- 1.215 --
Flexible Payment, Nonqualified............................ 42 1.215 50
Periodic Payment, Qualified............................... 917 1.209 1,108
Periodic Payment, Nonqualified............................ 192 1.209 232
----------
1,390
----------
JANUS ASPEN SERIES FUND
GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 11 19.471 211
Flexible Payment, Nonqualified............................ 7 19.471 144
Periodic Payment, Qualified............................... 1,357 19.338 26,251
Periodic Payment, Nonqualified............................ 157 19.338 3,041
----------
29,647
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY........................................ $1,638,556
==========
</TABLE>
B-25
<PAGE> 346
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ----- --------
<S> <C> <C> <C>
PASSPORT CONTRACTS
INVESTORS FUND SERIES
KEMPER MONEY MARKET #1 SUBACCOUNT
Qualified................................................. 4,222 $ 1.199 $ 5,062
Nonqualified.............................................. 16,465 1.199 19,742
----------
24,804
----------
KEMPER MONEY MARKET #2 SUBACCOUNT
Qualified................................................. 1,654 1.292 2,136
Nonqualified.............................................. 3,297 1.292 4,258
----------
6,394
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified................................................. 17,721 1.685 29,869
Nonqualified.............................................. 54,980 1.685 92,666
----------
122,535
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified................................................. 13,014 1.883 24,501
Nonqualified.............................................. 40,535 1.883 76,319
----------
100,820
----------
KEMPER GROWTH SUBACCOUNT
Qualified................................................. 15,200 2.066 31,410
Nonqualified.............................................. 38,784 2.066 80,142
----------
111,552
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified................................................. 4,153 1.359 5,644
Nonqualified.............................................. 15,292 1.359 20,781
----------
26,425
----------
KEMPER INTERNATIONAL SUBACCOUNT
Qualified................................................. 7,020 1.698 11,921
Nonqualified.............................................. 21,070 1.698 35,779
----------
47,700
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified................................................. 3,122 2.220 6,930
Nonqualified.............................................. 8,632 2.220 19,162
----------
26,092
----------
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified................................................. 918 1.106 1,014
Nonqualified.............................................. 2,668 1.106 2,951
----------
3,965
----------
KEMPER CONTRARIAN VALUE SUBACCOUNT
Qualified................................................. 6,437 1.499 9,650
Nonqualified.............................................. 16,911 1.499 25,349
----------
34,999
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Qualified................................................. 3,943 1.215 4,789
Nonqualified.............................................. 11,269 1.215 13,688
----------
18,477
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Qualified................................................. 3,897 1.408 5,489
Nonqualified.............................................. 10,075 1.408 14,190
----------
19,679
----------
</TABLE>
B-26
<PAGE> 347
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ----- --------
<S> <C> <C> <C>
KEMPER HORIZON 20+ SUBACCOUNT
Qualified................................................. 1,058 $ 1.361 $ 1,440
Nonqualified.............................................. 2,441 1.361 3,323
----------
4,763
----------
KEMPER HORIZON 10+ SUBACCOUNT
Qualified................................................. 1,090 1.274 1,389
Nonqualified.............................................. 4,206 1.274 5,359
----------
6,748
----------
KEMPER HORIZON 5 SUBACCOUNT
Qualified................................................. 276 1.210 334
Nonqualified.............................................. 2,623 1.210 3,174
----------
3,508
----------
KEMPER GLOBAL INCOME SUBACCOUNT
Qualified................................................. 30 1.020 30
Nonqualified.............................................. 290 1.020 296
----------
326
----------
KEMPER BLUE CHIP SUBACCOUNT
Qualified................................................. 220 1.106 243
Nonqualified.............................................. 1,659 1.106 1,835
----------
2,078
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY............. $ 560,865
==========
</TABLE>
B-27
<PAGE> 348
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
------------------------------------
QUALIFIED NON-QUALIFIED
PLANS PLANS
STATE --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Contract Value.
B-28
<PAGE> 349
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS: [TO BE UPDATED BY AMENDMENT]
(1) Financial Statements included in Part A of the Registration
Statement:
Kemper Investors Life Insurance Company and Subsidiaries
Reports of Independent Public Accountants
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Balance Sheets, as of December 31, 1997 and 1996
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statements of Operations, years ended December 31, 1997, 1996 and
1995
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statements of Stockholder's Equity, years ended December 31, 1997,
1996 and January 4, 1996, and 1995
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statements of Cash Flows, years ended December 31, 1997, 1996 and
1995
Notes to Consolidated Financial Statements
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Balance Sheets (unaudited), as of June 30, 1998 and December 31,
1997
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statements of Operations (unaudited), six months ended June 30, 1998
and 1997 and three months ended June 30, 1998 and 1997
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statements of Comprehensive Income (unaudited), six months ended
June 30, 1998 and 1997 and three months ended June 30, 1998 and 1997
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statements of Stockholder's Equity (unaudited), six months ended
June 30, 1998 and year ended December 31, 1997
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statements of Cash Flows (unaudited), six months ended June 30, 1998
and 1997
Notes to Consolidated Financial Statements (unaudited)
(2) Financial Statements included in Part B of the Registration
Statement:
KILICO Variable Annuity Separate Account
Reports of Independent Accountants
Statement of Assets and Liabilities and Contract Owners' Equity as
of December 31, 1997
Statement of Operations for the Year Ended December 31, 1997
Statements of Changes in Contract Owners' Equity for the Years
Ended December 31, 1997 and 1996
Notes to Financial Statements
(B) EXHIBITS:
<TABLE>
<C> <S>
(4)1.1 A copy of resolution of the Board of Directors of Kemper
Investors Life Insurance Company dated September 13, 1977.
(4)1.2 A copy of Record of Action of Kemper Investors Life
Insurance Company dated April 15, 1983.
2. Not Applicable.
(3)3.1 Distribution Agreement between Investors Brokerage Services,
Inc. and KILICO.
(1)3.2 Addendum to Selling Group Agreement of Kemper Financial
Services, Inc.
(2)3.3 Selling Group Agreement of Investors Brokerage Services,
Inc.
(7)4.1 Form of Group Variable, Fixed and Market Value Adjusted
Annuity Contract.
(7)4.2 Form of Certificate to Group Variable, Fixed and Market
Value Adjusted Annuity Contract.
</TABLE>
C-1
<PAGE> 350
<TABLE>
<C> <S>
(7)4.3 Form of Individual Variable, Fixed and Market Value Adjusted
Annuity Contract.
(7)5. Form of Application.
(3)6. Kemper Investors Life Insurance Company articles of
incorporation and by-laws.
7. Inapplicable.
(2)8.1(a) Fund Participation Agreement among KILICO, Janus Aspen
Series and Janus Capital Corporation.
(5)8.1(b) Service Agreement between KILICO and Janus Capital
Corporation.
(8)8.2(a) Participation Agreement By and Among Kemper Investors Life
Insurance Company and Warburg, Pincus Trust and Warburg
Pincus Asset Management Inc. (f/k/a Warburg, Pincus
Counsellors, Inc.) and Counsellors Securities, Inc.
(6)8.2(b) Service Agreement between Warburg Pincus Asset Management
Inc. (f/k/a Warburg Pincus Counsellors, Inc.) and Federal
Kemper Life Assurance Company and Kemper Investors Life
Insurance Company.
(8)8.3 Fund Participation Agreement among KILICO, Investors Fund
Series (formerly known as Kemper Investors Fund), Zurich
Kemper Investments, Inc. and Kemper Distributors, Inc.
(12)8.4(a) Form of Participation Agreement between Kemper Investors
Life Insurance Company and Scudder Variable Life Investment
Fund.
(12)8.4(b) Form of Participating Contract and Policy Agreement between
Kemper Investors Life Insurance Company and Scudder Kemper
Investments, Inc.
(12)8.4(c) Form of Indemnification Agreement between Kemper Investors
Life Insurance Company and Scudder Kemper Investments, Inc.
(13)8.5 Form of Participation Agreement Among Kemper Investors Life
Insurance Company, PIMCO Variable Insurance Trust, and PIMCO
Funds Distributors LLC.
(13)8.6 Form of Participation Agreement Among Templeton Variable
Products Series Fund, Franklin Templeton Distributors, Inc.
and Kemper Investors Life Insurance Company.
(7)9. Opinion and Consent of Counsel.
10.1 Consents of PricewaterhouseCoopers LLP, independent
accountants
10.2 Consent of KPMG LLP, independent auditors
11. Inapplicable.
12. Inapplicable.
(4)13. Schedules for Computation of Performance Calculations.
(9)14. Organizational Chart.
(9)17.1 Schedule IV: Reinsurance (year ended December 31, 1997).
(9)17.2 Schedule V: Valuation and qualifying accounts (year ended
December 31, 1997).
(10)17.3 Schedule V: Valuation and qualifying accounts (year ended
December 31, 1996).
(11)17.4 Schedule V: Valuation and qualifying accounts (year ended
December 31, 1995).
</TABLE>
- ---------------
(1) Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-4 filed on or about April 27, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-4 filed on or about September 14, 1995.
(3) Incorporated by reference to Exhibits filed with the Registration Statement
on Form S-1 for KILICO (File No. 333-02491) filed on or about April 12,
1996.
(4) Incorporated by reference to the Registration Statement on Form N-4 for the
Registrant (File No. 333-22375) filed on or about February 26, 1997.
(5) Incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1997.
(6) Incorporated by reference to Post-Effective Amendment No. 4 to the
Registration Statement on Form S-6 (File No. 33-79808) filed on or about
April 30, 1997.
(7) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 (File No. 333-22375) filed on or about
November 3, 1997.
C-2
<PAGE> 351
(8) Incorporated by reference to Amendment No. 3 to the Registration Statement
on Form S-1 (File No. 333-22389) filed on or about April 8, 1998.
(9) Incorporated by reference to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-4 (File No. 33-43501) filed on or about
April 16, 1998.
(10) Incorporated by reference to Amendment No. 2 to the Registration Statement
on Form S-1 for KILICO (File No. 333-02491) filed on or about April 23,
1997.
(11) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-1 for KILICO (File No. 333-02491) filed on or about April 25,
1996.
(12) Incorporated by reference to Pre-Effective Amendment No. 3 to the
Registration Statement on Form N-4 (File Nos. 333-22375 and 811-3199) filed
on or about April 24, 1998.
(13) Incorporated by reference to Post-Effective Amendment No. 3 to the
Registration Statement on Form S-6 (File No. 33-65399) filed on or about
October 28, 1998.
ITEM 25. DIRECTORS AND OFFICERS OF KEMPER INVESTORS LIFE INSURANCE COMPANY
The directors and principal officers of KILICO are listed below
together with their current positions. The address of each officer and
director is 1 Kemper Drive, Long Grove, Illinois 60049.
<TABLE>
<CAPTION>
NAME OFFICE WITH KILICO
---- ------------------
<S> <C>
John B. Scott........................ President, Chief Executive Officer and Director
Frederick L. Blackmon................ Senior Vice President and Chief Financial Officer
James E. Hohmann..................... Senior Vice President and Director
William H. Bolinder.................. Chairman of the Board and Director
David A. Bowers...................... Director
Loren J. Alter....................... Director
Gunther Gose......................... Director
Eliane C. Frye....................... Executive Vice President and Director
Debra P. Rezabek..................... Senior Vice President, General Counsel and Corporate
Secretary
James C. Harkensee................... Senior Vice President
Edward K. Loughridge................. Senior Vice President and Corporate Development Officer
Kenneth M. Sapp...................... Senior Vice President
George Vlaisavljevich................ Senior Vice President
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE
COMPANY OR REGISTRANT
See Exhibit 14 for organizational charts of persons controlled or
under common control with Kemper Investors Life Insurance Company.
Investors Brokerage Services, Inc. and Investors Brokerage Services
Insurance Agency, Inc. are wholly owned subsidiaries of KILICO.
ITEM 27. NUMBER OF CONTRACT OWNERS
At December 31, 1998, the Registrant had approximately 738 qualified
and non-qualified Kemper Destinations Contract Owners.
Not applicable as to the Farmers Variable Annuity I because as of the
date of this Amendment to the Registration Statement, no Contracts have
been sold.
ITEM 28. INDEMNIFICATION
To the extent permitted by law of the State of Illinois and subject to
all applicable requirements thereof, Article VI of the By-Laws of Kemper
Investors Life Insurance Company ("KILICO") provides for the
indemnification of any person against all expenses (including attorneys
fees), judgments, fines, amounts paid in settlement and other costs
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative in which he is a party or is threatened to
be made a party by reason of his being or having been a director, officer,
employee or agent of KILICO, or serving or having served, at the request of
KILICO, as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of his
holding a fiduciary position in connection with the management or
administration of retirement, pension, profit sharing or other benefit
plans including, but not limited to, any fiduciary liability
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under the Employee Retirement Income Security Act of 1974 and any amendment
thereof, if he acted in good faith and in a manner he reasonably believed
to be in and not opposed to the best interests of KILICO, and with respect
to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of NOLO
CONTENDERE or its equivalent, shall not, of itself, create a presumption
that he did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of KILICO, and, with
respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful. No indemnification shall be made in
respect of any claim, issue or matter as to which a director or officer
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the company, unless and only to the extent that
the court in which such action or suit was brought or other court of
competent jurisdiction shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
he is fairly and reasonably entitled to indemnity for such expenses as the
court shall deem proper.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, employees
or agents of KILICO pursuant to the foregoing provisions, or otherwise,
KILICO has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
that Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by KILICO
of expenses incurred or paid by a director, officer, employee of agent of
KILICO in the successful defense of any action, suit or proceeding) is
asserted by such director, officer, employee or agent of KILICO in
connection with variable annuity contracts, KILICO will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by KILICO is against public policy as
expressed in that Act and will be governed by the final adjudication of
such issue.
ITEM 29.(A) PRINCIPAL UNDERWRITER
Investors Brokerage Services, Inc., a wholly owned subsidiary of
Kemper Investors Life Insurance Company, acts as principal underwriter for
KILICO Variable Annuity Separate Account, KILICO Variable Separate Account,
KILICO Variable Separate Account-2, Kemper Investors Life Insurance Company
Variable Annuity Account C and FKLA Variable Separate Account.
ITEM 29.(B) INFORMATION REGARDING PRINCIPAL UNDERWRITER, INVESTORS BROKERAGE
SERVICES, INC.
The address of each officer is 1 Kemper Drive, Long Grove, IL 60049.
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME WITH UNDERWRITER
---- --------------------
<S> <C>
John B. Scott....................................... Chairman and Director
Otis R. Heldman, Jr. ............................... President and Director
Michael A. Kelly.................................... Vice President
David S. Jorgensen.................................. Vice President & Treasurer
Debra P. Rezabek.................................... Secretary
Frank J. Julian..................................... Assistant Secretary
Kenneth M. Sapp..................................... Director
Eliane C. Frye...................................... Director
George Vlaisavljevich............................... Director
</TABLE>
ITEM 29.(C)
Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained by Kemper Investors Life Insurance
Company at its home office at 1 Kemper Drive, Long Grove, Illinois 60049.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
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<PAGE> 353
ITEM 32. UNDERTAKINGS AND REPRESENTATION
a. Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure that
the audited financial statements in the registration statement are never
more than sixteen (16) months old for so long as payment under the variable
annuity contracts may be accepted.
b. Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that
an applicant can check to request a Statement of Additional Information, or
(2) a postcard or similar written communication affixed to or included in
the Prospectus that the applicant can remove to send for a Statement of
Additional Information.
c. Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under
this Form promptly upon written or oral request.
REPRESENTATION REGARDING FEES AND CHARGES PURSUANT TO SECTION 26 OF THE
INVESTMENT COMPANY ACT OF 1940
Kemper Investors Life Insurance Company ("KILICO") represents that the
fees and charges deducted under the Contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by KILICO.
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<PAGE> 354
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, KILICO Variable Annuity Separate Account, has caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Long Grove and State of Illinois on the 29th day of
January, 1999.
KILICO VARIABLE ANNUITY SEPARATE
ACCOUNT
(Registrant)
By: Kemper Investors Life Insurance
Company
BY: /s/ JOHN B. SCOTT
-------------------------------------
John B. Scott, Chief Executive
Officer and President
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Depositor)
BY: /s/ JOHN B. SCOTT
-------------------------------------
John B. Scott, Chief Executive
Officer and President
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following directors and principal
officers of Kemper Investors Life Insurance Company in the capacities indicated
on the 29th day of January, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN B. SCOTT Chief Executive Officer, President and Director
- ----------------------------------------------------- (Principal Executive Officer)
John B. Scott
/s/ W. H. BOLINDER Chairman of the Board and Director
- -----------------------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
Frederick L. Blackmon (Principal Financial Officer and
Principal Accounting Officer)
/s/ LOREN J. ALTER Director
- -----------------------------------------------------
Loren J. Alter
/s/ DAVID A. BOWERS Director
- -----------------------------------------------------
David A. Bowers
/s/ ELIANE C. FRYE Director
- -----------------------------------------------------
Eliane C. Frye
/s/ GUNTHER GOSE Director
- -----------------------------------------------------
Gunther Gose
/s/ JAMES E. HOHMANN Director
- -----------------------------------------------------
James E. Hohmann
</TABLE>
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<PAGE> 355
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER TITLE NUMBER*
- ------- ----- ----------
<C> <S> <C>
10.1 Consents of PricewaterhouseCoopers LLP, independent
accountants.................................................
10.2 Consent of KPMG LLP, independent auditors...................
</TABLE>
<PAGE> 1
EXHIBIT 10.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Individual and Group Variable, Fixed and Market Value
Adjusted Deferred Annuity Contracts
We consent to the inclusion in this registration statement on Form N-4 (File No.
333-22375) of our report dated February 20, 1998, on our audit of the financial
statements of KILICO Variable Annuity Separate Account and to the reference to
our firm under the caption "Experts."
PricewaterhouseCoopers LLP
Chicago, Illinois
January 28, 1999
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Individual and Group Variable, Fixed and Market Value
Adjusted Deferred Annuity Contracts
We consent to the inclusion in this registration statement on Form N-4 (File No.
333-22375) of our report dated March 18, 1998, on our audit of the consolidated
financial statements of Kemper Investors Life Insurance Company and to the
reference to our firm under the caption "Experts."
PricewaterhouseCoopers LLP
Chicago, Illinois
January 28, 1999
<PAGE> 1
EXHIBIT 10.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Kemper Investors Life Insurance Company
We consent to the use of our reports included herein on the consolidated
financial statements of Kemper Investors Life Insurance Company (KILICO) and to
the references to our firm under the headings "Experts" in the prospectuses and
to the use of our reports included herein on the financial statements of the
subaccounts of the KILICO Variable Annuity Separate Account and to the
references to our firm under the headings "Services to the Separate Account"
and "Experts" in the Statements of Additional Information. Our report on
KILICO's financial statements dated March 21, 1997, contains an explanatory
paragraph that states as a result of the acquisition of its parent, Kemper
Corporation, the consolidated financial information for the period after the
acquisition is presented on a different cost basis than that for the period
before the acquisition and, therefore, is not comparable.
KPMG LLP
Chicago, Illinois
January 28, 1999
<PAGE> 2
[Zurich Kemper Life letterhead]
January 29, 1999
VIA EDGAR
Lisa Reid Regan
Chief, Office of Insurance Products
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Kemper Investors Life Insurance Company ("KILICO"); KILICO
Variable Annuity Separate Account ("Registrant" or "Separate
Account"); Registration Statement on Form N-4 (File Nos. 333-
22375 and 811-3199)
Dear Ms. Regan:
Attached for electronic filing, pursuant to Rule 485(a) under the
Securities Act of 1933, as amended, is Post-Effective Amendment No. 2 to the
Registration Statement on Form N-4 for the above-referenced Registrant (the
"Amendment") with respect to certain individual and group variable, fixed and
market value adjusted deferred annuity contracts and related individual
certificates (the "Contracts").
The Amendment is being filed as a plain English "prototype" registration
statement (the "Prototype Registration Statement"). Registrant requests the
Commission Staff's approval to make its other variable annuity product filings,
under File Nos. 2-72671 and 811-3199; 33-43501 and 811-3199 ("Registrant's
Other Filings"), pursuant to Rule 485(b)(1)(vii).
In connection with this request, Registrant represents that the Prototype
Registration Statement and Registrant's Other Filings are sufficiently similar
such that (a) the Template Registration Statement is a fair representation of
Registrant's disclosure overall; (b) Registrant will be able to effectively
revise Registrant's Other Filings in response to Commission staff comments on
the Prototype Registration Statement filing, and Registrant will, in fact,
revise Registrant's Other Filings to reflect those comments; and (c)
Registrant's Other Filings will not contain changes other than those required
by plain English that would make Registrant's Other Filings ineligible to be
filed pursuant to Rule 485(b).
For the convenience of the Commission staff, we are delivering two
conformed paper copies of the complete Amendment, including exhibits. Please
address any question or comment to the undersigned or to Joan E. Boros, Esq.,
at (202) 965-8150.
Very truly yours,
/s/ Juanita M. Thomas
cc: Martha B. Peterson, Esq.
Joan E. Boros, Esq.
