<PAGE>
Financial Statements
Separate Account VUL
of
Integrity Life Insurance Company
DECEMBER 31, 1999
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account VUL
of
Integrity Life Insurance Company
Financial Statements
December 31, 1999
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors................................................1
Audited Financial Statements
Statement of Assets and Liabilities...........................................2
Statement of Operations.......................................................3
Statements of Changes in Net Assets...........................................4
Notes to Financial Statements.................................................6
</TABLE>
<PAGE>
Report of Independent Auditors
Policyholders
Separate Account VUL of Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account VUL of Integrity Life Insurance Company (comprising, respectively, the
Hudson River Trust Common Stock, Hudson River Trust Money Market, Hudson River
Trust Balanced, Hudson River Trust Aggressive Stock, Hudson River Trust High
Yield, Hudson River Trust Global, EQAT Common Stock, EQAT Money Market, EQAT
Balanced, EQAT Aggressive Stock, EQAT High Yield and EQAT Global Divisions) as
of December 31, 1999, and the related statement of operations and statements of
changes in net assets for the periods indicated therein. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 mutual fund shares owned in The EQ Advisors
Trust (the "Trust") as of December 31, 1999, by correspondence with the transfer
agent of the Trust. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
divisions constituting Separate Account VUL of Integrity Life Insurance Company
at December 31, 1999, the results of their operations and changes in their net
assets for each of the periods indicated therein, in conformity with accounting
principles generally accepted in the United States.
Louisville, Kentucky /s/ Ernst & Young LLP
April 12, 2000
1
<PAGE>
Separate Account VUL of Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
HUDSON
HUDSON RIVER TRUST HUDSON RIVER HUDSON RIVER
RIVER TRUST MONEY TRUST TRUST
COMMON STOCK MARKET BALANCED AGGRESSIVE STOCK
DIVISION (1) DIVISION (1) DIVISION (1) DIVISION (1)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in EQ Advisors Trust
at value (aggregate cost of $33,517,528) $ - $ - $ - $ -
Receivable from (payable to) the general
account of Integrity - - - -
-----------------------------------------------------------------------
NET ASSETS $ - $ - $ - $ -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Unit value $ - $ - $ - $ -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Units outstanding - - - -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
<CAPTION>
HUDSON RIVER HUDSON RIVER EQAT EQAT
TRUST TRUST COMMON MONEY
HIGH YIELD GLOBAL STOCK MARKET
DIVISION (1) DIVISION (1) DIVISION DIVISION
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in EQ Advisors Trust
at value (aggregate cost of $33,517,528) $ - $ - $ 19,923,703 $962,468
Receivable from (payable to) the general
account of Integrity - - 65,299 2,833
-----------------------------------------------------------------
NET ASSETS
$ - $ - $ 19,989,002 $965,301
-----------------------------------------------------------------
-----------------------------------------------------------------
Unit value $ - $ - $ 802.61 $ 196.96
-----------------------------------------------------------------
-----------------------------------------------------------------
Units outstanding - - 24,905 4,901
-----------------------------------------------------------------
-----------------------------------------------------------------
<CAPTION>
EQAT
EQAT AGGRESSIVE EQAT HIGH
BALANCED STOCK YIELD EQAT GLOBAL
DIVISION DIVISION DIVISION DIVISION TOTAL
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in EQ Advisors Trust
at value (aggregate cost of $33,517,528) $ 5,930,997 $ 5,696,242 $284,730 $ 1,690,278 $ 34,488,418
Receivable from (payable to) the general
account of Integrity 5,919 16,307 17,229 3,079 110,666
--------------------------------------------------------------------------------------
NET ASSETS $ 5,936,916 $ 5,712,549 $301,959 $ 1,693,357 $ 34,599,084
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Unit value $ 397.73 $ 667.12 $ 274.01 $ 516.74
-------------------------------------------------------------------
-------------------------------------------------------------------
Units outstanding 14,927 8,563 1,102 3,277
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
(1) Effective October 18, 1999, the net assets of the division were transferred
to a new division through a substitution.
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account VUL of Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
HUDSON
HUDSON RIVER TRUST HUDSON RIVER HUDSON RIVER
RIVER TRUST MONEY TRUST TRUST
COMMON STOCK MARKET BALANCED AGGRESSIVE STOCK
DIVISION (1) DIVISION (1) DIVISION (1) DIVISION (1)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from
EQ Advisors Trust $ - $ - $ - $ -
EXPENSES
Mortality and expense risk and
administrative charges 88,830 3,954 27,196 26,401
-------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (88,830) (3,954) (27,196) (26,401)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales of investments 6,352,388 (19,473) (209,378) 965,521
Net unrealized appreciation (depreciation) of investments:
Beginning of period 5,377,215 6,813 536,967 (37,006)
End of period - - - -
-------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (5,377,215) (6,813) (536,967) 37,006
-------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 975,173 (26,286) (746,345) 1,002,527
-------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 886,343 $ (30,240) $ (773,541) $ 976,126
-------------------------------------------------------------------
-------------------------------------------------------------------
<CAPTION>
HUDSON RIVER
TRUST HUDSON RIVER EQAT COMMON EQAT MONEY
HIGH YIELD TRUST GLOBAL STOCK MARKET
DIVISION (1) DIVISION (1) DIVISION (2) DIVISION (2)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from
EQ Advisors Trust $ - $ - $ 2,792,384 $ 38,154
EXPENSES
Mortality and expense risk and
administrative charges 1,453 6,529 29,812 1,386
-----------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (1,453) (6,529) 2,762,572 36,768
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales of investments (60,752) 56,402 1,094,833 7,080
Net unrealized appreciation (depreciation) of investments:
Beginning of period (60,201) 126,111 - -
End of period - - (145,907) (34,737)
-----------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 60,201 (126,111) (145,907) (34,737)
-----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (551) (69,709) 948,926 (27,657)
-----------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (2,004) $ (76,238) $ 3,711,498 $ 9,111
-----------------------------------------------------------------------
-----------------------------------------------------------------------
<CAPTION>
EQAT
EQAT AGGRESSIVE EQAT HIGH EQAT
BALANCED STOCK YIELD GLOBAL
DIVISION (2) DIVISION (2) DIVISION (2) DIVISION (2) TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from
EQ Advisors Trust $ 657,745 $ 339,116 $ 35,209 $ 77,710 $ 3,940,318
EXPENSES
Mortality and expense risk and
administrative charges 9,025 8,438 506 2,415 205,945
------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 648,720 330,678 34,703 75,295 3,734,373
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on sales of investments 125,051 122,725 (13,045) 48,270 8,469,622
Net unrealized appreciation (depreciation) of
investments:
Beginning of period - - - - 5,949,899
End of period 42,920 874,203 (19,264) 253,675 970,890
------------------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 42,920 874,203 (19,264) 253,675 (4,979,009)
------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 167,971 996,928 (32,309) 301,945 3,490,613
------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 816,691 $ 1,327,606 $ 2,394 $ 377,240 $ 7,224,986
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
(1) For the period January 1, 1999 to October 17, 1999 (date of substitution)
(2) For the period October 18, 1999 (commencement of operations) to December 31,
1999
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account VUL of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1999
<TABLE>
<CAPTION>
HUDSON
HUDSON RIVER TRUST HUDSON RIVER HUDSON RIVER
RIVER TRUST MONEY TRUST TRUST
COMMON STOCK MARKET BALANCED AGGRESSIVE STOCK
DIVISION (1) DIVISION (1) DIVISION (1) DIVISION (1)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ (88,830) $ (3,954) $ (27,196) $ (26,401)
Net realized gain (loss) on sales of investments 6,352,388 (19,473) (209,378) 965,521
Change in net unrealized appreciation/
depreciation during the period (5,377,215) (6,813) (536,967) 37,006
---------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 886,343 (30,240) (773,541) 976,126
INCREASE (DECREASE) IN NET ASSETS FROM POLICY
RELATED TRANSACTIONS
Contributions from policyholders 450,101 12,028 234,896 217,987
Policy terminations and benefits (2,069,057) (77,547) (740,449) (660,459)
Net transfers among investment divisions (18,449,440) (731,721) (4,802,716) (6,589,468)
---------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions (20,068,396) (797,240) (5,308,269) (7,031,940)
---------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (19,182,053) (827,480) (6,081,810) (6,055,814)
Net assets, beginning of year 19,182,053 827,480 6,081,810 6,055,814
---------------------------------------------------------------------
NET ASSETS, END OF YEAR $ - $ - $ - $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 606 60 628 345
Terminations and benefits (2,715) (370) (1,617) (883)
Net transfers (27,632) (4,074) (16,915) (10,185)
------------------------------------------------------------------------
Net increase (decrease) in units (29,741) (4,384) (17,904) (10,723)
---------------------------------------------------------------------
---------------------------------------------------------------------
<CAPTION>
HUDSON RIVER HUDSON RIVER EQAT EQAT
TRUST TRUST COMMON MONEY EQAT
YIELD GLOBAL STOCK MARKET BALANCED
DIVISION (1) DIVISION (1) DIVISION (2) DIVISION (2) DIVISION (2)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ (1,453) $ (6,529) $ 2,762,572 $ 36,768 $ 648,720
Net realized gain (loss) on sales of
investments (60,752) 56,402 1,094,833 7,080 125,051
Change in net unrealized appreciation/
depreciation during the period 60,201 (126,111) (145,907) (34,737) 42,920
---------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (2,004) (76,238) 3,711,498 9,111 816,691
INCREASE (DECREASE) IN NET ASSETS FROM POLICY
RELATED TRANSACTIONS
Contributions from policyholders 16,547 52,321 120,798 5,240 59,555
Policy terminations and benefits (12,630) (91,704) (2,208,149) (91,932) (811,788)
Net transfers among investment divisions (381,554) (1,028,358) 18,364,855 1,042,882 5,872,458
---------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions (377,637) (1,067,741) 16,277,504 956,190 5,120,225
---------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (379,641) (1,143,979) 19,989,002 965,301 5,936,916
Net assets, beginning of year 379,641 1,143,979 - - -
---------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ - $ - $19,989,002 $ 965,301 $5,936,916
---------------------------------------------------------------------------
---------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 55 123 167 27 160
Terminations and benefits (40) (174) (2,974) (468) (2,194)
Net transfers (1,346) (3,730) 27,712 5,342 16,961
---------------------------------------------------------------------------
Net increase (decrease) in units (1,331) (3,781) 24,905 4,901 14,927
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<CAPTION>
EQAT EQAT
AGGRESSIVE HIGH
STOCK YIELD EQAT GLOBAL
DIVISION (2) DIVISION (2) DIVISION (2) TOTAL
-----------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ 330,678 $ 34,703 $ 75,295 $ 3,734,373
Net realized gain (loss) on sales of
investments 122,725 (13,045) 48,270 8,469,622
Change in net unrealized appreciation/
depreciation during the period 874,203 (19,264) 253,675 (4,979,009)
-----------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,327,606 2,394 377,240 7,224,986
INCREASE (DECREASE) IN NET ASSETS FROM POLICY
RELATED TRANSACTIONS
Contributions from policyholders 57,609 3,444 13,612 1,244,138
Policy terminations and benefits (823,577) (44,359) (166,656) (7,798,307)
Net transfers among investment divisions 5,150,911 340,480 1,469,161 257,490
-----------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 4,384,943 299,565 1,316,117 (6,296,679)
-----------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 5,712,549 301,959 1,693,357 928,307
Net assets, beginning of year - - - 33,670,777
-----------------------------------------------------------
NET ASSETS, END OF YEAR $5,712,549 $ 301,959 $1,693,357 $34,599,084
-----------------------------------------------------------
-----------------------------------------------------------
UNIT TRANSACTIONS
Contributions 98 13 30
Terminations and benefits (1,371) (162) (364)
Net transfers 9,836 1,251 3,611
-----------------------------------------
Net increase (decrease) in units 8,563 1,102 3,277
-----------------------------------------
-----------------------------------------
</TABLE>
(1) For the period January 1, 1999 to October 17, 1999 (date of substitution)
(2) For the period October 18, 1999 (commencement of operations) to December 31,
1999
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account VUL of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
HUDSON RIVER HUDSON RIVER HUDSON RIVER HUDSON RIVER
TRUST COMMON TRUST MONEY TRUST TRUST
STOCK MARKET BALANCED AGGRESSIVE
DIVISION DIVISION DIVISION STOCK DIVISION
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income $ 2,337,832 $ 35,771 $ 632,428 $ 289,725
Net realized gain on sales of investments 991,427 2,951 32,783 128,944
Change in net unrealized appreciation/
depreciation during the period 1,036,956 116 253,885 (448,746)
--------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 4,366,215 38,838 919,096 (30,077)
INCREASE (DECREASE) IN NET ASSETS FROM POLICY
RELATED TRANSACTIONS
Contributions from policyholders 628,165 21,752 340,974 273,800
Policy terminations and benefits (2,171,915) (250,769) (862,809) (832,067)
Net transfers among investment divisions 3,993 100,085 (7,151) (48,261)
--------------------------------------------------------------------
Net decrease in net assets from
policy related transactions (1,539,757) (128,932) (528,986) (606,528)
--------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2,826,458 (90,094) 390,110 (636,605)
Net assets, beginning of year 16,355,595 917,574 5,691,700 6,692,419
--------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 19,182,053 $ 827,480 $ 6,081,810 $ 6,055,814
--------------------------------------------------------------------
--------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 1,136 118 1,098 492
Terminations and benefits (3,984) (1,366) (2,823) (1,464)
Net transfers (25) 542 (43) (118)
--------------------------------------------------------------------
Net decrease in units (2,873) (706) (1,768) (1,090)
--------------------------------------------------------------------
--------------------------------------------------------------------
<CAPTION>
HUDSON RIVER HUDSON RIVER
TRUST TRUST
HIGH YIELD GLOBAL
DIVISION DIVISION TOTAL
-------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income $ 49,419 $ 97,467 $ 3,442,642
Net realized gain on sales of investments 1,387 52,225 1,209,717
Change in net unrealized appreciation/
depreciation during the period (78,741) 94,697 858,167
-------------------------------------------
Net increase (decrease) in net assets
resulting from operations (27,935) 244,389 5,510,526
INCREASE (DECREASE) IN NET ASSETS FROM POLICY
RELATED TRANSACTIONS
Contributions from policyholders 20,956 75,058 1,360,705
Policy terminations and benefits (99,759) (171,612) (4,388,931)
Net transfers among investment divisions 35,609 (255,515) (171,240)
-------------------------------------------
Net decrease in net assets from
policy related transactions (43,194) (352,069) (3,199,466)
-------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (71,129) (107,680) 2,311,060
Net assets, beginning of year 450,770 1,251,659 31,359,717
-------------------------------------------
NET ASSETS, END OF YEAR $ 379,641 $1,143,979 $33,670,777
-------------------------------------------
-------------------------------------------
UNIT TRANSACTIONS
Contributions 69 224
Terminations and benefits (342) (506)
Net transfers 114 25
--------------------------
Net decrease in units (159) (257)
--------------------------
--------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Separate Account VUL
of
Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Integrity Life Insurance Company ("Integrity") established Separate Account VUL
(the "Separate Account") on May 14, 1986 for the purpose of issuing variable
life insurance policies ("policies"). The Separate Account is a unit investment
trust registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended. Variable life insurance policies
have not been offered by Integrity since 1990, but policies are still
outstanding. Net premiums may be received under existing policies. The
operations of the Separate Account are part of Integrity.
During 1999, Integrity was an indirect wholly owned subsidiary of ARM Financial
Group, Inc. ("ARM"). Effective March 3, 2000, Integrity and its wholly owned
subsidiary, National Integrity Life Insurance Company ("National Integrity"),
were acquired by the Western and Southern Life Insurance Company ("W&S.") (See
Note 4 of Notes to Financial Statements.)
Policyholders may allocate or transfer their account values to one or more of
the Separate Account's investment divisions or to a guaranteed interest division
provided by Integrity, or both. The Separate Account divisions invest in shares
of the corresponding portfolios of EQ Advisors Trust ("EQAT" or the "Trust"), a
mutual fund managed by EQ Financial Consultants, Inc.
On July 1, 1999, National Integrity filed an application with the SEC to approve
the substitution of newly created portfolios of EQAT for each of the Hudson
River Trust portfolios (the "Substitution"). The Substitution involved the
transfer of assets to EQAT Portfolios (the "New Divisions") that have
substantially identical investment objectives, strategies, and policies to those
of the Hudson River Trust Portfolios. The Substitution was approved by the SEC
on September 22, 1999, and was effective on October 18, 1999. The divisions of
the Separate Account affected by the Substitution and the New Divisions that
received the respective assets of each of the Hudson River Trust Portfolios are
as follows:
6
<PAGE>
Separate Account VUL
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Original Division New Division
- ----------------- ------------
Hudson River Common Stock EQAT Common Stock
Hudson River Money Market EQAT Money Market
Hudson River Balanced EQAT Balanced
Hudson River Aggressive Stock EQAT Aggressive Stock
Hudson River High Yield EQAT High Yield
Hudson River Global EQAT Global
Units of each division of the Separate Account affected by the Substitution were
redeemed in-kind and the redemption proceeds were used to purchase units of the
New Division. The costs of the Substitution were borne by Integrity, and no
fees, transfer charges or sales charges to effect the Substitution were imposed
on the Separate Account or the policyholders. Prior to and immediately following
the Substitution, the account values of policyholders were the same. In
addition, the Substitution did not alter the tax or insurance benefits to
policyholders or the contractual obligation of Integrity.
The policyholder's account value in a Separate Account division will vary
depending on the performance of the corresponding portfolio. The Separate
Account currently has six investment divisions available. The investment
objective of each division and its corresponding portfolio are the same. Set
forth below is a summary of the investment objectives of the portfolios of the
Trust.
COMMON STOCK PORTFOLIO seeks to obtain long-term growth of capital and
increasing income. It invests primarily in common and preferred stocks and
other equity type instruments.
7
<PAGE>
Separate Account VUL
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MONEY MARKET PORTFOLIO seeks to obtain as high a level of current income as
is consistent with preserving capital and providing liquidity. It invests
primarily in high quality short-term money market instruments.
BALANCED PORTFOLIO seeks a high return through a combination of current
income and capital appreciation. It invests primarily in common stocks,
publicly-traded debt securities and high quality money market instruments.
AGGRESSIVE STOCK PORTFOLIO seeks to obtain long term growth of capital. It
invests primarily in common stocks and other equity-type securities issued
by medium and smaller sized companies with strong growth potential.
HIGH YIELD PORTFOLIO seeks a high return by maximizing current income and,
to the extent consistent with that objective, capital appreciation. It
invests primarily in a diversified mix of high yield, fixed income
securities involving greater volatility of price and risk of principal and
income than high quality fixed income securities.
GLOBAL PORTFOLIO seeks long term growth of capital as a fundamental
objective. It invests primarily in equity securities of non-United States
as well as United States companies.
The assets of the Separate Account are owned by Integrity. The portion of the
Separate Account's assets supporting the policies may not be used to satisfy
liabilities arising out of any other business of Integrity.
8
<PAGE>
Separate Account VUL
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for unit
investment trusts.
INVESTMENTS
Investments in shares of the Trust are valued at the net asset values of the
respective portfolios, which approximates fair value. The difference between
cost and fair value is reflected as unrealized appreciation and depreciation of
investments.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends and distributions from the Trust portfolios are
reinvested in the respective portfolios and are reflected in the unit value of
the divisions of the Separate Account.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of Trust shares are determined based on the identified cost basis.
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
TAXES
Operations of the Separate Account are included in the income tax return of
Integrity, which is taxed as a life insurance company under the Internal Revenue
Code. The Separate Account will not be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code. Under the provisions of the
policies, Integrity has the right to charge the Separate Account for federal
income tax attributable to the Separate
9
<PAGE>
Separate Account VUL
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Account. No charge is currently being made against the Separate Account for such
tax since, under current tax law, Integrity pays no tax on investment income and
capital gains reflected in variable life insurance policy reserves. However,
Integrity retains the right to charge for any federal income tax incurred which
is attributable to the Separate Account if the law is changed. Charges for state
and local taxes, if any, attributable to the Separate Account may also be made.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1999 and the cost of shares held
at December 31, 1999 for each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hudson River Trust Common Stock $ 361,602 $ 20,519,729 $ -
Hudson River Trust Money Market 190,523 991,772 -
Hudson River Trust Balanced 266,352 5,602,239 -
Hudson River Trust Aggressive Stock 291,474 7,352,969 -
Hudson River Trust High Yield 51,236 430,637 -
Hudson River Trust Global 119,004 1,468,063 -
EQAT Common Stock 21,189,967 2,215,190 20,069,610
EQAT Money Market 1,181,137 191,012 997,205
EQAT Aggressive Stock 5,487,352 788,038 4,822,039
EQAT Balanced 6,501,984 738,958 5,888,077
EQAT High Yield 360,463 43,424 303,994
EQAT Global 1,545,522 157,189 1,436,603
---------------
$33,517,528
---------------
---------------
</TABLE>
10
<PAGE>
Separate Account VUL
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
3. EXPENSES
Integrity assumes mortality and expense risks related to the operations of the
Separate Account and deducts a charge from the assets of the Separate Account at
an annual rate of 0.60% of policyholders' net assets to cover these risks.
Integrity makes deductions for administrative expenses and state premium taxes
from premiums before amounts are allocated to the Separate Account.
4. EVENTS RELATING TO INTEGRITY AND ARM
On July 29, 1999, ARM announced that it was restructuring its institutional
business and positioning its retail business and technology operations for the
sale of ARM or its businesses or its assets. Following the July 29, 1999
announcement, the ratings of ARM and Integrity were significantly lowered
several times by four major rating agencies, materially and adversely affecting
Integrity's ability to market retail products and adversely affecting the
persistency of its existing business during the remainder of 1999.
On December 17, 1999 ARM entered into a Purchase Agreement (the "Purchase
Agreement") with W&S whereby W&S agreed to acquire Integrity and National
Integrity. On March 3, 2000, W&S and ARM closed the transaction contemplated by
the Purchase Agreement. The Company has been assigned a AAA (Extremely Strong)
rating for financial strength by Standard & Poor's, AAA (Highest) for claims
paying ability from Duff & Phelps' and A (Excellent) for financial strength from
A.M. Best. It is expected that Moody's will assign similar ratings to National
Integrity.
W&S is part of the Western-Southern Enterprise, a financial services group which
also includes Western-Southern Life Assurance Company, Columbus Life Insurance
Company, Touchstone Advisors, Inc., Fort Washington Investment Advisors, Inc.,
Todd Investment Advisors, Inc., Countrywide Financial Services, Capital Analysts
Incorporated and Eagle Realty Group, Inc. Assets owned or under management by
the group exceed $20 billion. Western and Southern is rated A++ (Superior) by
A.M. Best, AAA (Highest) by Duff & Phelps, AAA (Extremely Strong) by Standard &
Poor's, and Aa2 (Excellent) by Moody's.
11
<PAGE>
Financial Statements
(Statutory Basis)
Integrity Life
Insurance Company
YEARS ENDED DECEMBER 31, 1999 AND 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Integrity Life Insurance Company
Financial Statements
(Statutory Basis)
Years Ended December 31, 1999 and 1998
CONTENTS
Report of Independent Auditors................................................1
Audited Financial Statements
Balance Sheets (Statutory Basis)..............................................2
Statements of Operations (Statutory Basis)....................................4
Statements of Changes in Capital and Surplus (Statutory Basis)................5
Statements of Cash Flows (Statutory Basis)....................................6
Notes to Financial Statements (Statutory Basis)...............................8
<PAGE>
Report of Independent Auditors
Board of Directors
Integrity Life Insurance Company
We have audited the accompanying statutory basis balance sheets of Integrity
Life Insurance Company as of December 31, 1999 and 1998, and the related
statutory basis statements of operations, changes in capital and surplus, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Ohio Insurance Department, which practices differ from
accounting principles generally accepted in the United States. The variances
between such practices and accounting principles generally accepted in the
United States and the effects on the accompanying financial statements are
described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of Integrity Life Insurance Company at December 31, 1999
and 1998, or the results of its operations or its cash flows for the years then
ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Integrity Life
Insurance Company at December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting practices prescribed or permitted by the Ohio Insurance Department.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 31, 2000
1
<PAGE>
Integrity Life Insurance Company
Balance Sheets (Statutory Basis)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $ 1,363,174 $ 4,562,340
Preferred stocks and non-affiliated common stock 75,828 32,704
Investment in common stock of subsidiary 55,179 59,503
Mortgage loans 8,935 11,719
Policy loans 104,194 102,305
Cash and short-term investments 177,279 412,074
Other invested assets 50,405 53,435
---------------------------------
Total cash and invested assets 1,834,994 5,234,080
Separate account assets 1,657,370 2,124,250
Accrued investment income 35,912 47,091
Reinsurance balances receivable 101 1,048
Other admitted assets 14,769 2,097
---------------------------------
Total admitted assets $ 3,543,146 $ 7,408,566
=================================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 1,712,587 $ 1,512,538
Funding agreement and GIC deposit fund liabilities - 3,508,124
Unpaid claims 120 120
Deposits on policies to be issued, net 766 83
-------------------------------
Total policy and contract liabilities 1,713,473 5,020,865
Separate account liabilities 1,657,370 2,101,750
Accounts payable and accrued expenses 2,009 3,502
Transfers to separate accounts due or (accrued), net (34,299) (59,632)
Reinsurance balances payable 1,561 9,194
Federal income taxes - 64
Asset valuation reserve 24,942 34,578
Interest maintenance reserve 26,706 38,637
Other liabilities 66,772 12,920
-------------------------------
Total liabilities 3,458,534 7,161,878
Capital and surplus:
Common stock, $2 par value, 1,500,000 shares
authorized, issued and outstanding 3,000 3,000
Paid-in surplus 173,506 122,006
Unassigned surplus (deficit) (91,894) 121,682
-------------------------------
Total capital and surplus 84,612 246,688
-------------------------------
Total liabilities and capital and surplus $ 3,543,146 $ 7,408,566
===============================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Integrity Life Insurance Company
Statements of Operations (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
Premiums and other revenues:
Premiums and annuity considerations $ 19,316 $ 7,313
Deposit-type funds 576,356 1,868,553
Net investment income 250,298 321,469
Amortization of the interest maintenance reserve 2,080 2,243
Income from separate account seed money investment 26,600 -
Reserve adjustments on reinsurance ceded 210,442 1,033
Other revenues 39,098 19,376
--------------------------------
Total premiums and other revenues 1,124,190 2,219,987
Benefits paid or provided:
Death benefits 6,588 5,528
Annuity benefits 183,245 240,573
Surrender benefits 1,245,928 297,863
Interest on funds left on deposit 92,441 162,137
Payments on supplementary contracts 13,155 10,982
Increase in reserves and deposit fund liabilities 32,323 1,216,263
--------------------------------
Total benefits paid or provided 1,573,680 1,933,346
Insurance and other expenses:
Commissions 34,299 31,144
General expenses 28,602 23,542
Taxes, licenses and fees 2,627 1,483
Net transfers to (from) separate accounts (511,329) 186,486
Other expenses 192,588 1,710
--------------------------------
Total insurance and other expenses (253,213) 244,365
--------------------------------
Gain (loss) from operations before federal income taxes and
net realized capital gains (196,277) 42,276
Federal income tax expense 2,706 5,456
--------------------------------
Gain (loss) from operations before net realized capital gains (198,983) 36,820
Net realized capital gains, excluding realized capital
gains (losses), net of tax, transferred to the interest
maintenance reserve (1999-$(137,773); 1998-$(1,392)) 8,284 945
--------------------------------
Net income (loss) $ (190,699) $ 37,765
================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Integrity Life Insurance Company
Statements of Changes in Capital and Surplus (Statutory Basis)
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS CAPITAL AND
STOCK SURPLUS (DEFICIT) SURPLUS
----------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $ 3,000 $ 113,109 $ 95,651 $ 211,760
Net income 37,765 37,765
Net change in unrealized gain
of subsidiary 5,475 5,475
Net change in nonadmitted assets
and related items 1 1
Increase in asset valuation reserve (11,210) (11,210)
Capital contribution, net 8,897 8,897
Dividends to shareholder (6,000) (6,000)
-----------------------------------------------------------
Balance, December 31, 1998 3,000 122,006 121,682 246,688
Net loss (190,699) (190,699)
Net change in unrealized gain
of subsidiary (4,324) (4,324)
Net change in nonadmitted
assets and related items (589) (589)
Change in reserve (change
in valuation basis) 3,000 3,000
Decrease in asset valuation reserve 9,636 9,636
Change in surplus in
separate accounts (26,600) (26,600)
Capital contribution 51,500 51,500
Dividends to shareholder (4,000) (4,000)
-----------------------------------------------------------
Balance, December 31, 1999 $ 3,000 $ 173,506 $ (91,894) $ 84,612
===========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
---------------------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATIONS:
Premiums, policy proceeds, and other
considerations received $ 595,672 $ 1,875,866
Net investment income received 261,225 315,760
Commission and expense allowances received
on reinsurance ceded 222,417 904
Benefits paid (1,449,145) (555,176)
Insurance expenses paid (67,022) (55,204)
Other income received net of other expenses paid 2,080 17,100
Net transfers from (to) separate accounts 536,663 (204,091)
Federal income taxes paid (10,689) (1,814)
---------------------------------
Net cash provided by operations 91,201 1,393,345
INVESTMENT ACTIVITIES:
Proceeds from sales, maturities, or repayments
of investments:
Bonds 1,195,883 4,854,879
Preferred stocks 34,428 86,730
Mortgage loans 2,784 1,467
Other invested assets 19,918 63,054
Net gains (losses) on cash and short-term investments 18 580
Profit on sale or maturity of derivative instruments 13,633 -
Miscellaneous proceeds 2,676 1,050
---------------------------------
Total investment proceeds 1,269,340 5,007,760
Benefits recovered (taxes paid) on capital gains 1,077 (3,264)
---------------------------------
Net proceeds from sales, maturities, or repayments
of investments 1,270,417 5,004,496
</TABLE>
6
<PAGE>
Integrity Life Insurance Company
Statements of Cash Flows (Statutory Basis) (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
Cost of investments acquired:
Bonds 1,589,428 5,980,098
Preferred and common stocks 70,728 60,158
Other invested assets 19,112 85,759
Miscellaneous applications 813 2,731
--------------------------------
Total cost of investments acquired 1,680,081 6,128,746
Net increase in policy loans and premium notes 1,889 2,773
--------------------------------
Net cash used in investment activities (411,553) (1,127,023)
FINANCING AND MISCELLANEOUS ACTIVITIES:
Other cash provided:
Capital and surplus paid-in 51,500 8,897
Seed redemption from separate account 22,500 -
Cash from term loans 19,152 -
Other sources 13,263 7,631
--------------------------------
Total other cash provided 106,415 16,528
Other cash applied:
Dividends to shareholder 4,000 6,000
Other applications, net 16,858 66,018
--------------------------------
Total other cash applied 20,858 72,018
--------------------------------
Net cash provided by (used in) financing and
miscellaneous activities 85,557 (55,490)
--------------------------------
Net increase (decrease) in cash and short-term investments (234,795) 210,832
Cash and short-term investments at beginning of year 412,074 201,242
--------------------------------
Cash and short-term investments at end of year $ 177,279 $ 412,074
================================
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis)
December 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION
Integrity Life Insurance Company (the "Company") and its wholly-owned insurance
subsidiary, National Integrity Life Insurance Company ("National Integrity") are
indirect wholly owned subsidiaries of ARM Financial Group, Inc. ("ARM"). The
Company is domiciled in the state of Ohio. The Company is currently licensed in
46 states and the District of Columbia, and National Integrity specialize in the
asset accumulation business with particular emphasis on retirement savings and
investment products.
On December 17, 1999, ARM entered into a Purchase Agreement (the "Purchase
Agreement") with The Western and Southern Life Insurance Company ("W&S") whereby
W&S agreed to acquire ARM's insurance subsidiaries, Integrity and National
Integrity, the ("Insurance Subsidiaries").
On March 3, 2000, ARM closed the transaction contemplated by the Purchase
Agreement (the "Closing"). Under the terms of the Purchase Agreement, the
purchase price of $119.3 million is subject to a number of downward price
adjustments (see below) and was placed in an escrow account. ARM does not expect
any remaining proceeds in the escrow (after any such downward adjustments) to be
distributed from the escrow prior to the 12 month anniversary of the Closing.
The $119.3 million purchase price may be decreased to the extent that the sum of
the Insurance Subsidiaries' statutory surplus and asset valuation reserves set
forth on the Insurance Subsidiaries' final February 29, 2000 balance sheet (less
certain enumerated items) is more than $1 million less than the sum of the
Insurance Subsidiaries' statutory surplus and asset valuation reserves set forth
in the Insurance Subsidiaries September 30, 1999 statutory financial statements
plus $2.2 million. The purchase price may be increased to the extent that the
sum of the Insurance Subsidiaries' statutory surplus and asset valuation
reserves set forth on the Insurance Subsidiaries' final February 29, 2000
balance sheet (less certain enumerated items) is more than $1 million greater
than the sum of the Insurance Subsidiaries' statutory surplus and asset
valuation reserves set forth on the Insurance Subsidiaries' September 30, 1999
statutory financial statements plus $2.2 million.
8
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Subject to certain specified limitations, the purchase price may also be
decreased to the extent of any losses by W&S arising out of any inaccuracy in or
breach of any of ARM's representations, warranties or covenants.
The purchase price may be further decreased to the extent of any "losses" from
the sales or deemed sales of certain securities owned by the Insurance
Subsidiaries (the "Securities"). The Securities, which the parties have agreed
are to be sold, are set forth on a confidential list. "Losses" are calculated as
the aggregate amount by which the "carrying value" of the Securities exceeds the
aggregate net sale proceeds from the sales or deemed sales of the Securities.
The aggregate "carrying value" of the Securities as of February 29, 2000 was
$453.5 million. Losses of $4.7 million have been recognized on securities sold
subsequent to entering into the sale transaction.
BASIS OF PRESENTATION
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the Ohio
Department of Insurance. Such practices vary from accounting principles
generally accepted in the United States ("GAAP"). The more significant variances
from GAAP are as follows:
INVESTMENTS
Investments in bonds and preferred stocks are reported at amortized cost or fair
value based on the National Association of Insurance Commissioners' ("NAIC")
rating; for GAAP, such fixed maturity investments are designated at purchase as
held-to-maturity, trading or available-for-sale. Held-to-maturity fixed
investments are reported at amortized cost, and the remaining fixed maturity
investments are reported at fair value with unrealized holding gains and losses
reported in operations for those designated as trading and as a separate
component of shareholder's equity for those designated as available-for-sale. In
addition, fair values of certain investments in bonds and stocks are based on
values specified by the NAIC, rather than on actual or estimated fair values
used for GAAP.
Realized gains and losses are reported in income net of income tax and transfers
to the interest maintenance reserve. Changes between cost and admitted
investment asset amounts are credited or charged directly to unassigned surplus
rather than to a separate surplus account. The Asset Valuation Reserve is
determined by an NAIC prescribed formula and is reported as
9
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
a liability rather than unassigned surplus. Under a formula prescribed by the
NAIC, the Company defers the portion of realized gains and losses on sales of
fixed income investments, principally bonds and mortgage loans, attributable to
changes in the general level of interest rates and amortizes those deferrals
over the remaining period to maturity of the individual security sold using the
seriatim method. The net deferral is reported as the Interest Maintenance
Reserve in the accompanying balance sheets. Under GAAP, realized gains and
losses are reported in the income statement on a pretax basis in the period that
the asset giving rise to the gain or loss is sold and include provisions when
there has been a decline in asset values deemed other than temporary.
SUBSIDIARY
The accounts and operations of the Company's subsidiary are not consolidated
with the accounts and operations of the Company as would be required under GAAP.
POLICY ACQUISITION COSTS
Costs of acquiring and renewing business are expensed when incurred. Under GAAP,
acquisition costs related to investment-type products, to the extent recoverable
from future gross profits, are amortized generally in proportion to the
emergence of gross profits over the estimated term of the underlying policies.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally receivables greater than
90 days past due, are excluded from the accompanying balance sheets and are
charged directly to unassigned surplus.
PREMIUMS AND BENEFITS
Revenues include premiums and deposits received and benefits include death
benefits paid and the change in policy reserves. Under GAAP, such premiums and
deposits received are accounted for as a deposit liability and therefore not
recognized as premium revenue; benefits paid equal to the policy account value
are accounted for as a return of deposit instead of benefit expense.
10
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
BENEFIT RESERVES
Certain policy reserves are calculated using statutorily prescribed interest and
mortality assumptions rather than on expected experience or actual account
balances as would be required under GAAP.
FEDERAL INCOME TAXES
Deferred federal income taxes are not provided for differences between the
financial statement amounts and tax bases of assets and liabilities.
STATEMENT OF CASH FLOWS
Cash and short-term investments in the statement of cash flows represent cash
balances and investments with initial maturities of one year or less. Under
GAAP, the corresponding captions of cash and cash equivalents include cash
balances and investments with initial maturities of three months or less.
The effects of the foregoing variances from GAAP on the accompanying statutory
basis financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
Net income (loss) as reported in the accompanying
statutory basis financial statements $ (190,699) $ 37,765
Deferred policy acquisition costs, net of amortization 12,357 22,694
Adjustments to customer deposits (10,053) (7,082)
Adjustments to invested asset carrying values at
acquisition date (810) (226)
Amortization of value of insurance in force (5,629) (5,426)
Amortization of interest maintenance reserve (2,080) (2,243)
Adjustments for realized investment losses (79,279) (4,043)
Adjustments for federal income tax expense (45,797) (4,623)
Investment in subsidiary (1,500) 11,561
Eliminate dividend income from subsidiary - (2,771)
Other 36,732 2,237
--------------------------------
Net income (loss), GAAP basis $ (286,758) $ 47,843
================================
</TABLE>
11
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
------------------------------
(IN THOUSANDS)
<S> <C> <C>
Capital and surplus as reported in the accompanying
statutory basis financial statements $ 84,612 $ 246,688
Adjustments to customer deposits (151,448) (165,471)
Adjustments to invested asset carrying values at
acquisition date (25,667) 436
Asset valuation reserve and interest maintenance reserve 51,648 73,215
Value of insurance in force 24,193 27,097
Goodwill - 2,968
Deferred policy acquisition costs 93,762 79,679
Adjustments to investment in subsidiary excluding net
unrealized gains (losses) 28,321 25,497
Net unrealized gains (losses) on available-for-sale
securities (202,554) (123,124)
Other (25,054) 29,517
------------------------------
Shareholder's equity (deficit), GAAP basis $ (122,187) $ 196,502
==============================
Other significant accounting practices are as follows:
</TABLE>
INVESTMENTS
Bonds, preferred stocks, common stocks, and short-term investments are stated at
values prescribed by the NAIC, as follows:
Bonds and short-term investments are reported at cost or amortized cost.
The discount or premium on bonds is amortized using the interest method.
For loan-backed bonds and structured securities, anticipated prepayments
are considered when determining the amortization of discount or premium.
Prepayment assumptions for loan-backed bonds and structured securities are
obtained from broker-dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities.
12
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
Preferred stocks are reported at cost.
The Company's investment in its insurance subsidiary is reported at the
equity in the underlying statutory basis of National Integrity's net
assets. Changes in the admitted asset carrying amount of the investment are
credited or charged directly to unassigned surplus.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
Mortgage loans and policy loans are reported at unpaid principal balances.
Realized capital gains and losses are determined using the average cost method.
BENEFITS
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater
than or equal to the minimum or guaranteed policy cash values or the amounts
required by the Ohio Department of Insurance. The Company waives deduction of
deferred fractional premiums upon the death of life and annuity policy insureds
and does not return any premium beyond the date of death. Surrender values on
policies do not exceed the corresponding benefit reserve. Policies issued
subject to multiple table substandard extra premiums are valued on the standard
reserve basis which recognizes the non-level incidence of the excess mortality
costs. Additional reserves are established when the results of cash flow testing
under various interest rate scenarios indicate the need for such reserves.
Tabular interest, tabular less actual reserve released, and tabular cost have
been determined by formula as prescribed by the NAIC.
Interest on funds left on deposit represents interest credited on funding
agreements and GIC deposit fund liabilities. Interest credited on all other life
and annuity reserves is included as a component of annuity or surrender
benefits.
13
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
1. ORGANIZATION AND ACCOUNTING POLICIES (CONTINUED)
REINSURANCE
Reinsurance premiums, benefits and expenses are accounted for on bases
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. Premiums, benefits and expenses, and the
reserves for policy and contract liabilities are reported net, rather than
gross, of reinsured amounts.
SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying financial
statements represent funds that are separately administered, principally for
variable annuity contracts and institutional funding agreements. Separate
account assets are reported at fair value. Surrender charges collectible by the
general account in the event of variable annuity contract surrenders are
reported as a negative liability rather than an asset pursuant to prescribed
NAIC accounting practices. Policy related activity involving cashflows, such as
premiums and benefits, are reported in the accompanying statements of income in
separate line items combined with related general account amounts. Investment
income and interest credited on deposits held in guaranteed separate accounts
are included in the accompanying statements of income as a net amount included
in net transfers to (from) separate accounts. The Company receives
administrative fees for managing the nonguaranteed separate accounts and other
fees for assuming mortality and certain expense risks. Such fees are included in
other revenues.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
14
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the Ohio Department of
Insurance. "Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. In 1998, both the NAIC and the Ohio Department of
Insurance adopted codified statutory accounting principles ("Codification") with
an effective date of January 1, 2001. Codification will likely change, to some
extent, prescribed statutory accounting practices and may result in changes to
the accounting practices that the Company uses to prepare its statutory basis
financial statements. The Company has not yet determined the impact of
Codification to its statutory basis financial statements.
3. INVESTMENTS
The cost or amortized cost and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1999:
Mortgage-backed securities $ 351,180 $ 382 $ - $ 351,562
Corporate securities 827,300 3,932 47,704 783,529
Asset-backed securities 131,566 - 4,010 127,556
U.S. Treasury securities and
obligations of U.S. government
agencies 41,562 360 1,638 40,284
Foreign governments 7,671 - 371 7,300
States and political
subdivisions 3,895 159 - 4,054
------------------------------------------------------------
Total bonds $1,363,174 $ 4,834 $ 53,723 $1,314,285
============================================================
</TABLE>
15
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1998:
Mortgage-backed securities $1,969,989 $ - $ - $1,969,989
Corporate securities 1,803,209 5,445 53,873 1,754,781
Asset-backed securities 497,116 - - 497,116
U.S. Treasury securities and
obligations of U.S.
government agencies 258,659 206 741 258,124
Foreign governments 29,412 - 999 28,413
States and political
subdivisions 3,955 158 - 4,113
------------------------------------------------------
Total bonds $4,562,340 $ 5,809 $ 55,613 $4,512,536
======================================================
</TABLE>
Fair values are based on published quotations of the Securities Valuation Office
of the NAIC. Fair values generally represent quoted market value prices for
securities traded in the public marketplace, or analytically determined values
using bid or closing prices for securities not traded in the public marketplace.
However, for certain investments for which the NAIC does not provide a value,
the Company uses the amortized cost amount as a substitute for fair value in
accordance with prescribed guidance. As of December 31, 1999 and 1998, the fair
value of investments in bonds includes $0.9 billion and $3.8 billion,
respectively, of bonds that were valued at amortized cost.
16
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of the Company's
investments in bonds at December 31, 1999, by contractual maturity, is as
follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
----------------------------------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less $ - $ -
After one through five 52,155 49,654
After five through ten 140,261 135,928
After ten 688,012 649,584
Asset-backed securities 131,566 127,556
Mortgage-backed securities 351,180 351,563
----------------------------------
Total $1,363,174 $1,314,285
==================================
</TABLE>
The expected maturities in the foregoing table may differ from the contractual
maturities because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties and because
asset-backed and mortgage-backed securities (including floating-rate securities)
provide for periodic payments throughout their life.
Proceeds from the sales of investments in bonds during 1999 and 1998 were $4.6
billion, which includes $3.4 billion of assets recaptured by General American
(see Note 5), and $4.1 billion; gross gains of $6.9 million and $26.5 million,
and gross losses of $202.2 million and $26.8 million were realized on those
sales, respectively.
At December 31, 1999 and 1998, bonds with an admitted asset value of $5,651,000
and $7,521,000, respectively, were on deposit with state insurance departments
to satisfy regulatory requirements.
17
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
Unrealized gains and losses on investment in subsidiary are reported directly in
surplus and do not affect operations. The gross unrealized gains and losses on,
and the cost and fair value of, the investment are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1999:
Subsidiary $ 17,943 $ 37,356 $ - $ 55,299
===========================================================
At December 31, 1998:
Subsidiary $ 17,823 $ 41,680 $ - $ 59,503
===========================================================
</TABLE>
The Company's mortgage loan portfolio is primarily comprised of agricultural
loans. The Company made no new investments in mortgage loans during 1999. The
maximum percentage of any one loan to the value of the security at the time of
the loan exclusive of any purchase money mortgages was 75%. Fire insurance is
required on all properties covered by mortgage loans. As of December 31, 1999,
the Company held no mortgages with interest more than one year past due. During
1999, no interest rates of outstanding mortgage loans were reduced. No amounts
have been advanced by the Company.
18
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
3. INVESTMENTS (CONTINUED)
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------
(IN THOUSANDS)
<S> <C> <C>
Income:
Bonds $ 229,082 $ 299,122
Preferred stocks 5,027 3,226
Dividend from subsidiary - 2,771
Mortgage loans 850 1,100
Policy loans 7,873 7,544
Cash and short-term investments 8,697 15,335
Other investment income 2,760 2,091
----------------------------
Total investment income 254,289 331,189
Investment expenses (2,977) (2,807)
Interest expense on repurchase agreements (1,014) (6,913)
----------------------------
Net investment income $ 250,298 $ 321,469
============================
</TABLE>
4. DERIVATIVE INSTRUMENTS
The Company offers equity-indexed products through its separate accounts that
meet consumer demand for equity investments with downside protection. In
connection with this product the Company has 215 S&P 500 futures contracts
outstanding as of December 31, 1999 from the Chicago Mercantile Exchange. The
Company acquired the futures through the use of a margin account whereby the
Company maintains a minimum cash balance of approximately $10,000 per contract.
Should the S&P 500 fall below the level determined at the acquisition date, the
Company would be required to add additional cash to the margin account based on
the change in the S&P 500's market value. Should the S&P 500 increase from its
level at the inception of the contract, cash would be added by the counterparty
to the margin account. Unrealized market value gains on the futures recorded in
the separate accounts statement of operations to hedge against the Company's
obligation to pay equity-indexed returns to policy holders.
19
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
4. DERIVATIVE INSTRUMENTS (CONTINUED)
During 1998, the Company entered into total yield swap transactions with two
affiliates of the Company, 312 Certificate Company ("312CC") and 212 Certificate
Company ("212CC"). 312CC and 212CC were established as special purpose entities
to offer privately placed institutional face-amount certificates. These swaps
are considered off-balance sheet items.
The swap transactions generally provide that the Company pays an amount that
approximates the interest credited to be paid to certificate holders plus
outside credit enhancement fees and receives the book income of the 312CC and
212CC investment portfolios, less investment advisory expenses. The Company
accounts for the swap activity in its guaranteed separate account. During 1999,
the Company recorded approximately $2.3 million and $1.4 million of net
investment income from 312CC and 212CC, respectively in its separate account
summary of operations.
During 1999, certain events caused the 312CC and 212CC institutional face-amount
certificates to be paid prior to their stated maturity dates. At the payment
dates, the fair value of the 312CC and 212CC investment portfolios were less
than account value, as such, the swap transactions provided that the Company
contribute the difference. Accordingly, expense charges of approximately $13.8
million and $23.7 million were recognized to terminate the swap transactions
with 312CC and 212CC, respectively. As of December 31, 1999, the company had
notes payable outstanding of $7.8 million and $16.4 million for the above
described swap transactions for 312CC and 212CC, respectively. Pursuant to the
sale of the Company, the $7.8 million note will be reduced to $6.0 million and
the $16.4 million note will be reduced to $12 million. The notes accrue interest
at a rate based on LIBOR until paid in full.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to the financial instruments, but does not expect any
counterparties to fail to meet their obligations given their high credit
ratings.
5. REINSURANCE
Consistent with prudent business practices and the general practice of the
insurance industry, the Company reinsures risks under certain of its insurance
products with other insurance companies through reinsurance agreements. Through
these reinsurance agreements, substantially all mortality risks associated with
single premium endowment and variable
20
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
5. REINSURANCE (CONTINUED)
annuity deposits and substantially all risks associated with variable life
business have been reinsured with non-affiliated insurance companies. A
contingent liability exists with respect to insurance ceded which would become a
liability should the reinsurer be unable to meet the obligations assumed under
these reinsurance agreements.
The effect of reinsurance on premiums, annuity considerations and deposit-type
funds is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------
(IN THOUSANDS)
<S> <C> <C>
Direct premiums and amounts assessed
against policyholders $ 562,982 $ 421,637
Reinsurance assumed 271,144 1,474,079
Reinsurance ceded (238,454) (19,850)
----------------------------
Net premiums, annuity considerations and
deposit-type funds $ 595,672 $1,875,866
============================
</TABLE>
In 1999 and 1998, the Company assumed $271.0 million and $1.5 billion,
respectively, in funding agreement and GIC deposits through a 50% coinsurance
agreement with General American Life Insurance Company.
REINSURANCE AND FUNDING AGREEMENT RECAPTURE
As part of an institutional restructuring, on August 3, 1999, the Company and
General American Life Insurance Company ("General American") completed a
transaction whereby General American recaptured approximately $3.4 billion of
assets and related liabilities (GICs and funding agreements) previously ceded
through a reinsurance agreement to the Company (the "Transaction"). The
Transaction, which terminated the reinsurance and related agreements, including
a marketing partnership agreement, was effective as of July 26, 1999. These
assets and related liabilities were part of a joint product development,
marketing and reinsurance relationship with General American involving funding
agreements and GICs.
21
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
5. REINSURANCE (CONTINUED)
As a result of the Transaction, the Company recorded a loss on reinsurance
recapture of approximately $146 million during the third quarter of 1999
primarily due to interest rate related decreases in the fair value of investment
securities recaptured by General American. Surplus was reduced by approximately
$95 million on this transaction as a $51.5 million capital contribution was made
by ARM to the Company as part of the Transaction. In addition, the Company
recorded a loss and reduction in surplus of approximately $40 million to
discharge an institutional liability in its separate accounts. The Company does
not intend to pursue additional institutional spread or institutional fee
business, nor does the Company have any remaining institutional business
outstanding.
6. FEDERAL INCOME TAXES
The Company files a consolidated return with National Integrity. The method of
allocation between the companies is based on separate return calculations with
current benefit being given for the use of National Integrity's losses and
credits in the consolidated return.
Income before income taxes differs from taxable income principally due to value
of insurance in force, interest maintenance reserves, and differences in policy
and contract liabilities and investment income for tax and financial reporting
purposes.
7. SURPLUS
The ability of the Company to pay dividends is limited by state insurance laws.
Under Ohio insurance laws, the Company may pay dividends, without the approval
of the Ohio Director of Insurance, only from earned surplus and those dividends
may not exceed (when added to other dividends paid in the proceeding 12 months)
the greater of (i) 10% of the Company's statutory capital and surplus as of the
preceding December 31, or (ii) the Company's statutory net income for the
preceding year. The Company may not pay any dividends during 2000 without prior
approval.
Under New York insurance laws, National Integrity may pay dividends to the
Company only out of its earnings and surplus, subject to at least thirty days
prior notice to the New York Insurance Superintendent and no disapproval from
the Superintendent prior to the date of such dividend. The Superintendent may
disapprove a proposed dividend if the Superintendent finds that the financial
condition of National Integrity does not warrant such distribution. During 1999,
the Company did not receive any dividends from National Integrity.
22
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
7. SURPLUS (CONTINUED)
The NAIC's Risk-Based Capital ("RBC") requirements attempt to evaluate the
adequacy of a life insurance company's adjusted statutory capital and surplus in
relation to investment, insurance and other business risks. The RBC formula is
used by the states as an early warning tool to identify possible
under-capitalized companies for the purpose of initiating regulatory action and
is not designed to be a basis for ranking the financial strength of insurance
companies. In addition, the formula defines a new minimum capital standard which
supplements the previous system of low fixed minimum capital and surplus
requirements. The RBC requirements provide for four different levels of
regulatory attention depending on the ratio of the company's adjusted capital
and surplus to its RBC. As of December 31, 1999 and 1998, the adjusted capital
and surplus of the Company is in excess of the minimum level of RBC that would
require regulatory response.
8. ANNUITY RESERVES
At December 31, 1999 and 1998, the Company's general and separate account
annuity reserves and deposit fund liabilities that are subject to discretionary
withdrawal (with adjustment), subject to discretionary withdrawal without
adjustment, and not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------------------------------
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1999:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 391,598 12.9%
At book value less surrender charge of 5% or more 444,529 14.7
At market value 1,116,396 36.8
------------------------------
Total with adjustment or at market value 1,952,523 64.4
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 449,887 14.8
Not subject to discretionary withdrawal 629,132 20.8
------------------------------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 3,031,542 100.0%
=============
Less reinsurance ceded (35,631)
--------------
Net annuity reserves and deposit fund liabilities $2,995,911
==============
</TABLE>
23
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
8. ANNUITY RESERVES (CONTINUED)
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------------
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1998:
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 404,623 6.0%
At book value less surrender charge of 5% or more 215,430 3.2
At market value 1,019,880 15.1
---------------------------
Total with adjustment or at market value 1,639,933 24.3
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 4,500,408 66.7
Not subject to discretionary withdrawal 607,460 9.0
---------------------------
Total annuity reserves and deposit fund liabilities (before
reinsurance) 6,747,801 100.0%
==========
Less reinsurance ceded (28,045)
------------
Net annuity reserves and deposit fund liabilities $6,719,756
============
</TABLE>
24
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. SEPARATE ACCOUNTS
The Company's guaranteed separate accounts include indexed products (i.e.,
equity-indexed annuities and an institutional funding agreement) and non-indexed
products and options (i.e., guaranteed rate options and systematic transfer
options). The guaranteed rate options are sold as a fixed annuity product or as
an investment option within the Company's variable annuity products. The
Company's equity-indexed annuities provide participation in the S&P 500 Price
Index.
The Company's nonguaranteed separate accounts primarily include variable
annuities. The net investment experience of variable annuities is credited
directly to the policyholder and can be positive or negative. Assets held in
separate accounts are carried at estimated fair values. Information regarding
the separate accounts of the Company as of and for the year ended December 31,
1999 is as follows:
<TABLE>
<CAPTION>
SEPARATE ACCOUNTS WITH
GUARANTEES
-----------------------------
NONINDEXED NONGUARANTEED
GUARANTEED SEPARATE
INDEXED MORE THAN 4% ACCOUNTS TOTAL
-------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Premiums, deposits and other
considerations $ 9,177 $ 84,662 $ 142,145 $ 235,984
=============================================================
Reserves for separate accounts with
assets at fair value $ 107,197 $ 364,996 $ 1,150,849 $ 1,623,042
=============================================================
Reserves for separate accounts by
withdrawal characteristics:
Subject to discretionary
withdrawal (with adjustment):
With market adjustment $ 58,373 $ 333,225 $ - $ 391,598
At book value without
market value adjustment
and with current surrender
charge of 5% or more - 31,771 - 31,771
At market value - - 1,150,849 1,150,849
-------------------------------------------------------------
Total with adjustment or at
market value 58,373 364,996 1,150,849 1,574,218
Not subject to discretionary
withdrawal 48,824 - - 48,824
-------------------------------------------------------------
Total separate accounts reserves $ 107,197 $ 364,996 $ 1,150,849 $ 1,623,042
=============================================================
</TABLE>
25
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
9. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of the amounts transferred to and from the separate accounts
for the years ended December 31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
-------------------------------
(IN THOUSANDS)
<S> <C> <C>
Transfers as reported in the Summary of Operations of
the Separate Accounts Statement:
Transfers to separate accounts $ 235,977 $ 350,917
Transfers from separate accounts (748,943) (166,508)
--------------------------------
Net transfers to separate accounts (512,966) 184,409
Reconciling adjustments:
Policy deductions and other expense reported as other
revenues 1,637 2,077
-------------------------------
Transfers as reported in the Summary of Operations of
the Life, Accident and Health Annual Statement $ (511,329) $ 186,486
===============================
</TABLE>
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about all financial instruments, including insurance liabilities
classified as investment contracts, unless specifically exempted. The fair value
of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of such instruments. For financial
instruments not separately disclosed below, the carrying amount is a reasonable
estimate of fair value.
26
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Bonds $1,363,174 $1,171,131 $4,562,340 $4,390,941
Preferred stocks 75,828 66,369 32,704 32,643
Mortgage loans 8,935 8,935 11,719 11,719
Cash and short-term investments 177,279 177,279 412,074 412,074
Liabilities:
Life and annuity reserves for
investment-type contracts and
deposit fund liabilities $1,408,722 $1,397,952 $4,705,091 $4,669,365
Separate accounts annuity reserves 1,588,589 1,573,192 2,016,056 2,001,161
</TABLE>
BONDS AND PREFERRED STOCKS
Fair values for bonds and preferred stocks are based on quoted market prices
where available. For bonds and preferred stocks for which a quoted market price
is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable investments.
MORTGAGE LOANS AND CASH AND SHORT-TERM INVESTMENTS
The carrying amount of mortgage loans and cash and short-term investments
approximates their fair value.
LIFE AND ANNUITY RESERVES FOR INVESTMENT-TYPE CONTRACTS AND DEPOSIT FUND
LIABILITIES
The fair value of single premium immediate annuity reserves are based on
discounted cash flow calculations using a market yield rate for assets with
similar durations. The fair value of institutional deposits represents the
estimated present value of cash flows using current market rates and the
duration of the liabilities. The fair value of deposit fund
27
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
liabilities and the remaining annuity reserves are primarily based on the cash
surrender values of the underlying contracts.
SEPARATE ACCOUNTS ANNUITY RESERVES
The fair value of separate accounts annuity reserves for investment-type
products equals the cash surrender values.
11. RELATED PARTY TRANSACTIONS
Effective January 1, 1995, the Company entered into an Administrative Services
and an Investment Services Agreement with ARM. ARM performs certain
administrative and special services for the Company to assist with its business
operations. The services include policyholder services; accounting, tax and
auditing; underwriting; marketing and product development; functional support
services; payroll functions; personnel functions; administrative support
services; and investment functions. During 1999 and 1998, the Company was
charged $32.5 million and $27.2 million, respectively, for these services in
accordance with the requirements of applicable insurance law and regulations. In
conjunction with the Closing, such agreements were terminated.
12. CONCENTRATION OF CREDIT RISK
At December 31, 1999, the Company held unrated or less-than-investment grade
bonds of $157 million with an aggregate fair value of $117 million. Those
holdings amounted to 10% of the Company's investments in bonds and less than 5%
of the Company's total admitted assets. The Company performs periodic
evaluations of the relative credit standing of the issuers of these bonds. These
evaluations are considered by the Company.
28
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
13. DIRECT PREMIUMS WRITTEN BY MANAGING GENERAL AGENTS/THIRD PARTY
ADMINISTRATORS
The Company issued business through the following managing general agents
in 1999:
<TABLE>
<CAPTION>
Total
Exclusive Type of Authority Premiums
Name and Address EIN Contract Business Written Granted Written
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Signature Financial Services
550 Pinetown Rd., Suite 208 ###-##-#### No Fixed Annuities Writing premium $ 79,562,426
Ft. Washington, PA 19034
Ann Arbor Annuity Exchange
2350 Washtenaw, Suite 8
Ann Arbor, MI 48104 ###-##-#### No Fixed Annuities Writing premium 56,774,536
Prideaux Agency Inc.
4930 Lincoln Drive
Edina, MN 55436 ###-##-#### No Fixed Annuities Writing premium 8,672,723
Consumer Insurance Group
232 F Street
Salida, CO 81201 ###-##-#### No Fixed Annuities Writing premium 8,308,482
Platinum
111 W Micheltorena St., #300
Santa Barbara, CA 93101 ###-##-#### No Fixed Annuities Writing premium 4,143,218
Sentry Financial Group
10 W Bergen Place ###-##-#### No Fixed Annuities Writing premium 2,901,395
Red Bank, NJ 07701
</TABLE>
The aggregate remaining premiums written by other managing general agents for
1999 was $2,864,812.
29
<PAGE>
Integrity Life Insurance Company
Notes to Financial Statements (Statutory Basis) (continued)
14. SUPERVISION ORDER
On August 20, 1999, the Ohio Department of Insurance issued a Supervision Order
with respect to the Company. Under the terms of the Supervision Order, the
Company has continued payments of death benefits, previously scheduled
systematic withdrawals, previously scheduled immediate annuity payments, and
agent commissions, but must receive written consent from the Ohio Department of
Insurance for other payments including dividends to ARM. The Supervision Order
also suspended the processing of surrenders of policies except in the cases of
approved hardship. On August 31, 1999, the Supervision Order was amended to
allow the Company to resume processing surrender requests from its variable life
and annuity policyholders. The Supervision Order was automatically extended
until March 2, 2000, when it was released upon the close of the Sale of the
Company.
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
Total admitted assets, net loss and total capital and surplus at December 31,
1999, as reported in the accompanying audited statutory basis financial
statements, differ from the amount reported in the 1999 NAIC Annual Statement
filed with insurance regulatory authorities as follows:
<TABLE>
<CAPTION>
TOTAL
ADMITTED CAPITAL AND
ASSETS NET LOSS SURPLUS
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance as of December 31, 1999 as reported
in the NAIC Annual Statement $ 3,543,146 $ 190,699 $ 84,612
Reduction in federal income tax recoverable (2,211) 2,211 2,211
----------------------------------------
Balance as of December 31, 1999 as reported
in the accompanying audited financial
statements $ 3,545,357 $ 188,488 $ 86,823
========================================
</TABLE>
30
